Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

New Glass-Steagall Act Key to Ending Too Big to Fail Banks

Politics / Market Regulation Jul 19, 2013 - 01:22 PM GMT

By: Money_Morning

Politics

Garrett Baldwin writes: Last week, four senators that include Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) introduced a bill to reinstate the Glass-Steagall Act.

The 21st Century Glass-Steagall Act, as it's called, would bring back many of the provisions of the former law and strengthen language to limit financial speculation by the big banks, reduce risk, and attempt to end "Too Big to Fail" once and for all.


The original legislation, called The Banking Act of 1933 but commonly referred to as Glass-Steagall, was partly repealed by Congress in 1999 and signed into law by President Bill Clinton. But by the time Glass-Steagall was repealed, the law had already been watered down and full of loopholes that left the U.S. economy highly vulnerable to a financial crisis.

Many economists believe that the partial repeal of this law was responsible for the recent financial crisis.

But the reintroduction of a Glass-Steagall law would do one critical thing that should provide comfort to any American.

It would make it impossible for the Big Banks to access FDIC-insured savings and deposits, and then speculate with ordinary Americans' money. In addition, it would aim to end Too Big to Fail and reduce the size of the mega-banks, in essence break them up.

The History of Glass-Steagall Act and its Benefits

Following the stock market Crash of 1929, Congress sought in 1933 to reduce risk in the financial sector.

Four key provisions were central to the Depression-era law. Here is what each of them did for more than 60 years:

  • Section 16 made it illegal for national commercial banks (banks overseen by the Office of the Comptroller of the Currency) from engaging in securities trading. It would be illegal for a company like Bank of America to engage in speculation of commodities and derivatives.
  • Section 20 banned state-chartered or national banks that are Federal Reserve members from being engaging in operations with investment banks that were engaged in securities dealing.
  • Section 21 banned investment banks from accepting deposits. It would be illegal for a company like Goldman Sachs to allow customers to open a savings or checking account.
  • Section 32 made it illegal for Federal Reserve member banks from sharing corporate board members with investment banks.

Sections 20 and 32 are the primary firewalls that many mention when speaking of this law.

From the 1980s until its repeal, numerous loopholes were chiseled out.

As financial institutions became publicl- traded companies, the interest in short-term profits overcame the desire for long-term stability. The creation of exotic securitization products and widespread subprime lending became critical parts of the banking industry's profits from the late 1970s on.

And we know how well that went.

The banks' ability to engage in insurance and credit default swap trading was, at the time, far more controversial than the movement to replace this law. But the emphasis on share prices drove banking leaders to eye Glass-Steagall as a significant limitation on their profit potential using taxpayer insured deposits.

And there was big potential for profits in their line of business.

Commercial banks wanted to be able to take increased risks with the money they had in their vaults, while investment banks, the real risk takers, wanted access to the deposits of traditional banks in order to maximize their profits.

At the time, a number of loopholes were discovered in the law, which corporate lawyers and banks exploited, and the banks increased lobbying to weaken the legislation.

While the impact of the law's repeal is hotly debated among economists, it's hard to argue against one thing: The investment banking culture significantly overtook the conservative models of commercial banking.

A New Firewall

The proposed bill is only 30 pages long and is rather explicit in its language that would reinstate these core provisions and seek to increase oversight of financial instruments like credit default swaps, which were not part of the financial industry in the 1930s.

Re-implementing this famous firewall between the banking divisions would likely lead companies like Citigroup and JPMorgan to spinning off portions of their businesses, and reduce communication between commercial banks and companies that engage in securities trading like investment banks and hedge funds.

The war drums for Glass-Steagall have been booming since the $6 billion-plus loss reported by JPMorgan caused by the trades of the "London Whale" in 2012.

But Glass-Steagall wouldn't have prevented this loss, as the problems actually occurred on the commercial side of the bank. In addition, companies that collapsed in 2008, Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, and the American International Group (AIG) would not have been regulated by Glass-Steagall, as they have no commercial banking arms to regulate.

While Glass-Steagall would reduce companies like Citigroup, JPMorgan, Goldman Sachs, among others from getting "Too Big to Fail," the regulators still need to engage in proper regulation to address vulnerabilities in the derivatives markets.

The Dodd-Frank bill in 2010 was supposed to draw greater attention to the Financial "Weapons of Mass Destruction," as termed by investment legend Warren Buffett.

However, Dodd-Frank has been an abysmal failure, a law essentially written by corporate lobbyists. JPMorgan, which convinced Americans through a robust grassroots movement in 2010 that it was innocent in taking part in the faulty derivatives game, has come out far stronger and better poised to capitalize in the commodity derivatives markets.

Ironically, JPMorgan was named Derivatives House of the Year in 2012 by Risk Awards. The company then proceeded to lose $6 billion on derivatives.

Yet a renewed Glass-Steagall will reduce the influence of investment banking speculation on commercial banking. The bill also should seek to increase bank capital requirements and reduce leverage ratios.

Want to know more about this new Glass-Steagall Act will work? Here's the lowdown on the 21st Century Glass-Steagall

Source :http://moneymorning.com/2013/07/19/new-glass-steagall-act-key-to-ending-too-big-to-fail/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules