You'd think that in the wake of the Great Collapse of 2008, reviving the Glass-Steagall Act would be a no-brainer.
As it happens, there are quite a few powerful members of government who oppose it, including Treasury Secretary Jack Lew, who seems to be pushing Dodd-Frank and the Volcker Rule a little too hard as the only regulation that's needed to keep the banks from making bad bets in toxic derivatives again.
But a little history lesson will show why his plan won't work.
In the wake of the Great Collapse of 2008, it was clear that we needed legislation that tightly regulates the big banks and their investments while encouraging economic growth.
Until the late 1990s, the Glass-Steagall Act of 1933 worked well in maintaining financial stability for decades by placing a wall between commercial and investment banking.
But when Glass-Steagall was repealed in 1999, it freed the big banks to start taking bigger and bigger risks with more and more federally-insured depositor money.
The banks' growth accelerated. When those bets went bad starting in 2007, and in the absence of a wall, the resulting losses spread throughout the U.S. and global financial systems.
After the Great Collapse, Congress enacted Dodd-Frank to forestall future financial catastrophes and eliminate the regulatory creed of bailing out Too-Big-to-Fail banks.
We've had Dodd-Frank on the books now, in one way or another, for two years. Over this period, banks have once again begun to ramp up their risky behavior and have grown even larger than they were when taxpayers bailed them out five years ago.
All this has happened despite Dodd-Frank and the Volcker Rule, which says, "Banks ought not to take risks with depositors' money."
Fortunately, some in Congress realize more needs to be done to protect taxpayers from the banks. Sens. Elizabeth Warren, D-MA and John McCain, R-AZ, recently introduced the 21st Century Glass-Steagall Act. The new legislation doesn't depend on anything like Scouts' Honor to make sure banks don't make big bad bets that they can't cover.
This proposed legislation would rebuild the wall between commercial and investment banking that existed while the original legislation was in place, and should in theory bring the same levels of financial stability that we enjoyed more or less from the end of World War II through the 1990s.
Sounds great, right? So what's the problem? In an administration as "progressive" as the Obama White House, who could possibly be against regulations like this?
Lew's Past Sheds Light on Why He's Cool Toward Glass-Steagall Act 2013
That brings us back to Jack Lew, who somehow has found the idea of a Glass-Steagall 2013 objectionable.
Lew has a longhistory in government finance. He worked in budget management for the city of Boston, and for the Clinton administration. He headed up the Office of Management and Budget under President Obama before moving up to Treasury.
But in between his government stints, like many who serve in federal budget and finance positions, Lew left government for a few years to make some money. In the middle of the last decade, he worked for Citigroup's Alternative Investment unit, which was its proprietary trading unit, dealing with hedge funds that actually bet on the collapse of the housing market.
At Citi, Lew invested large sums in funds based in the Cayman Islands - specifically in companies listed as residing in Ugland House, an office building in the capital city, George Town. Ugland House is the registered office for 18,857 business entities. President Obama himself referred to Ugland House as "either the biggest building in the world or the biggest tax scam in the world."
But, when pressed on the question of Lew's Ugland House history, President Obama said he wasn't "concerned" with the past financial dealings of his Treasury Secretary nominee.
At the same time, Lew has danced around the edges of the proposed new Glass-Steagall 2013 legislation, saying that Dodd-Frank, with all of its loopholes and problems, is sufficient for tackling the Too Big to Fail problem.
What's more, he's said that the "problems of the financial industry preceded deregulation," and that repealing the original Glass-Steagall "wasn't the proximate cause" of the Great Collapse.
We Should All Know Where Our Bread Is Buttered
In other words, Lew is claiming that the deregulated environment of the first decade of this century wasn't when the Great Collapse was born. In light of the fact that Lew himself was turning a profit in the deregulated market, this shouldn't be a surprise.
That he was actively betting against the housing market, just before it imploded, should be a red flag, and that this was all done at one of the biggest of the Too Big To Fail banks - a recipient of $45 billion in TARP bailout funds - should be taken as a warning that Jack Lew's relationship with regulation needs to be closely and publicly examined.
The fact is that the Jack Lews, the Tim Geithners, the Penny Pritzkers... all of them are industry insiders, all with links to the very institutions they purport to regulate and oversee. This "progressive" administration is really setting us up for more of the same, it would seem.
The Foxes Really Are Guarding the Henhouse
What Secretary Lew presents us with is a "fox guarding the henhouse" scenario, in which someone with a vested interest in seeing banks continue as they are and have been is also in a position to act as a regulator of those banks. How this obvious conflict of interest has been brushed aside is baffling.
We would do well to be wary of the support that Lew is throwing behind Dodd-Frank and its Volcker Rule. Lew is pushing hard for Dodd-Frank to be fully codified into law by the July deadline, and has said that the Volcker Rule will be sufficient to keep a wall between investment and commercial banking, as well as preventing Too Big to Fail banks from failing at taxpayer expense.
Lew has darkly claimed that there will be "other options" if the parties concerned with writing the regulations for Dodd-Frank are unable to meet the deadline. He has made statements saying that further delay raises the threat of bailouts. He has come just short of saying the sky itself will fall... unless Dodd-Frank is set in stone.
Building a wall between investment and commercial banking is absolutely necessary - vital, even -- to restoring this country's financial health. But building a brick wall between the President, his Cabinet, and the special interests of Wall Street - our financial undoing - is a priority no one in the Obama administration seems to be paying attention to.
For more on Glass-Steagall 2013, and everything at stake in this debate, click here.
- Wall Street Journal:
From the Citi to the Caymans
- Huffington Post:
Jack Lew: Delaying Dodd-Frank Rules Raises Threat of Bailouts