Bring back Glass-Steagall! John McCain (and Maria Cantwell)’s very good idea

john-mccain

TDB has a piece focusing on one way Sen. John McCain could use his trademark peevishness for good:

The Obama administration is talking tough but acting tame with respect to Wall Street. But a pair of senators is coming out swinging. Today, Senators Maria Cantwell (D-WA) and John McCain (R-AZ) are taking a step towards proactive reconstruction of the banking sector by introducing the Banking Integrity Act of 2009. The bill would reinstate provisions of the Glass-Steagall Act of 1933, the New Deal-era law that built a wall between commercial banks and risky investment banking.

“Federally insured deposits must not be used as fuel for the fire of speculative trading at the expense of lending or investing,” Cantwell said. The Washington state Democrat has been particularly focused on banks’ excessive use of capital for derivatives transactions and is working hard to reduce the risky nature of today’s derivatives environment. “Exactly how much capital that could be used for solid investing has been shifted towards derivatives instead?” Cantwell asks, going straight at one of the most complex issues with the current banking landscape.

The problem is that banks — especially big banks — are using their capital to trade, rather than to lend, deeming the latter to be the bigger risk, even though the former is the equivalent of a bus trip to Atlantic City with the golden girls to blow this month’s Social Security check. The solution: re-erect the wall between investment banks and “bank banks” that existed from the Depression, until the Glass Steagall Act was repealed through the magic of Dick Armey (signed by Bill Clinton) in 1999. The solution?

Specifically, the Banking Integrity Act would separate commercial (depository) and investment banking companies. No member bank (read: any bank that gets federal support of any kind) could be merged with any other firm that creates or trades securities.

The act would forbid investment bank employees from serving on the board—or in any senior capacity, for that matter—at a member bank. And the legislation would prohibit depository institutions from engaging in any kind of insurance business (including reinsurance—and that means you, AIG).

The result? A reduction in systemic risk and greater transparency. An end to the idea that a bank could become too big to fail. Mega-bank bailout recipients (such as Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan Chase and Wells Fargo) would have to spin off their investment and insurance operations from their depository, commercial banking operations. Or, they could choose to exit the public tent altogether, and say good-bye to government life-lines when they screw up (or mega-bonuses the very next year—and that means you, Goldman Sachs).

The McCain-Cantwell bill is being greeted as a “lump of coal” in Wall Street’s Christmas stocking by the WSJ crowd. But since it’s unlikely that something that common sense and advantageous to consumers would pass the current, sorry Senate, I’m not sure what all the worry is about.

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One Response to Bring back Glass-Steagall! John McCain (and Maria Cantwell)’s very good idea

  1. karlub says:

    I think it is worth nothing that:

    1) The ranking GOP senator on the banking committee is the only Republican senator that voted against Glass-Steagall’s repeal: Richard Shelby of AL.

    2) Obama economic star chamber bigwigs Geithner and Summers were against the repeal then, and remain against it now.

    So by vote totals, the Democrats were right on the legislation in 1999, although its eventual adoption was pretty darned bipartisan, and signed by a Democrat president. But, today, it could very well happen that the GOP is on the right side of the issue.

    Not terribly relevant on the rightness or wrongness of the issue, but perhaps relevant as we try and guess how the politics will play out.

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