Three cheers for Elizabeth Warren!
Yesterday she launched a wire-guided Scud missile at the too-big-to-fail banks.
The freshman senator from Massachusetts, formerly a Harvard Law School professor specializing in bankruptcy law, introduced her "21st Century Glass-Steagall Act" co-sponsored with Sens. John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus King (I-Maine).
And it's got the Big Banks shaking in their boots.
The 21st Century Act would separate institutions with savings and checking accounts, in other words FDIC-insured depository commercial banks, from investment and trading "banks" engaged in capital markets activities, most of which are on the border between speculation and manipulation.
The senators noted that, "Under Glass-Steagall, major investment banks such as Drexel Burnham and Salomon Brothers failed without creating serious contagion in the broader economy. But in the post-Glass-Steagall world of the 2008 crisis, the failure of investment banks like Bear Stearns and Lehman threatened the entire economy."
That's right on the money!
Unless, of course, you don't get the connection.
Then you' might say something like, "It's easy to say that if the investment banks are torn away from commercial banking and deposit gathering that the government can simply 'let them all fail' during a time of crisis. But if there is a financial meltdown like we saw in 2008, and one or two investment banks go down, with all of their counterparties, including commercial banks, suffering as a result, it's a fair bet that the government will be back in the bailout business."
Yeah, that's what you'd say if you just don't get it. And that's what Philip van Doorn at TheStreet.com said this morning.
Here's what you don't get.
You used the word "counterparties," Phil. There's the connection. You see, Bear and Lehman threatened the entire system, even though they weren't FDIC-insured depository institutions precisely because their counterparties were FDIC-insured depository institutions. Do you get it now? All the TBTF FDIC-backstopped (that means taxpayers are the drain-plugging tools) banks were doing exactly what Bear and Lehman were doing. Tthat's how they got to be counterparties. If there was separation, they wouldn't be counterparties to troubled speculators because they would jacked-up speculators. I almost want to say… you cementhead!
Or, if you're a shill for crony capitalism on steroids, you might say something like, "Setting the Record Straight: Glass-Steagall Would Not Have Prevented 2008 Crisis."
Yep, that came out of an email yesterday from Hamilton Place Strategies, a crony club that advocates on behalf of banks.
Hey cementheads, get your heads out of your cement mixer. See the above note to Phil.
The only problem with trying to make banking "21st-century safe" is that we live in the new old age of robber barons, and they are the bankers and politicians they've bought.
So, the chance of this bill going anywhere lies precisely between slim and NONE.
P.S. Less than 24 hours ago, I released my biggest, boldest prediction ever. Check it out here.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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