Yesterday Senators John McCain (R-Arizona) and Maria Cantwell (D-Washington) proposed reinstating Glass Steagall, the Depression-era body of financial regulations that, among other things, kept traditional banking activities like deposits and lending separate from more sophisticated activities like securities trading and insurance. Glass Steagall was repealed by the Gramm Leach Bliley Act in 1999, which enabled the megabank structure we have now where firms like BofA, JP Morgan Chase, and Citigroup to have traditional banking, investment banking/trading, and insurance under one roof.
Not that McCain’s new proposal isn’t worth consideration, but McCain voted for Gramm Leach Bliley. That’s why the title of this post is continuing a bit of fun we had during the 2008 presidential election tracking McCain’s back-and-forth economic stances—it all started in April 2008 when he laid out his strategy to George Stephanopoulos by saying: “I have an economic plan, it’s good.”
But again, reinstating Glass Steagall (or building in similar concepts to whatever regulatory overhauls are being constructed) is something that lawmakers must consider. It’s just a very tough debate. On the one hand: enabling banking, trading and insurance under one roof feeds the “too big to fail” model that led to massive government bailouts using taxpayer dollars. On the other hand: giant corporate clients do push banks to offer banking, securities and insurance services under one global roof, and letting this market demand lead the way is the essence of capitalism in our globally-linked era.
In the wake of the crisis, the bias among lawmakers looks to be with the taxpayers and not big companies who influence banks (hence McCain’s latest position on the matter). But it’s not just about breaking these firms up. There was another key deregulatory effort—also sponsored by Gramm Leach Bliley’s lead sponsor—called the CFTC Modernization Act that was passed in late-2000. It enabled energy derivatives to be traded without regulation which led to Enron’s demise, then the same for insurance derivatives like the credit default swaps which were a critical piece of the too-big-to-fail puzzle. Here’s more about that.
Work has been done on creating open and transparent clearing for previously blind CDS markets, and that seems like it should be front and center in the imminent regulatory overhaul.
So here’s to hoping that Great Recession era regulatory reform will be as relevant and long-lasting as the Depression era regs were. And to the Gentleman from Arizona: keep those hits coming.