In a private meeting with lawmakers yesterday (April 5), Trump's economic advisor Gary Cohn said he supported a policy that could radically reshape Wall Street.
You see, the former Goldman Sachs Group Inc. (NYSE: GS) exec now supports a re-imposition of the Glass-Steagall Act – an idea that the U.S.' two main political parties support — but that the country's top banks loathe.
This is a change of heart for Cohn. In February, the investment banker voiced his disdain for bank regulation measures when he said it was time to "attack the red tape of Dodd-Frank" in a FOX Business interview. Dodd-Frank is a less onerous regulation than Glass-Steagall. Bank stocks soared as investors considered the prospect of billions of dollars flowing back into their pockets. In fact, Goldman Sachs saw a jump of 1.29%.
However, now the White House National Economic Council director is calling for more bank regulation…
What Is Glass-Steagall?
The Glass-Steagall Act is the Depression-era law that kept brick-and-mortar lending separate from investment banking for more than six decades.
In other words, regular banks – the ones most Americans use to store their money – had to be separate from the banks that performed investing duties like security underwriting and trading. In theory, this kept big banks from gambling with your money.
"Glass-Steagall became the law of the land on the heels of 5,000 banks failing between 1929 and 1933," said Money Morning Capital Wave Strategist – and Wall Street expert — Shah Gilani to Members in December. "Those failures hit depositors with more than $400 million in losses."
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However, the law was repealed in 1999 under former president Bill Clinton. Banks such as Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), and JPMorgan Chase & Co. (NYSE: JPM) gobbled up rivals and expanded into new businesses, becoming "one-stop-shopping financial behemoths," wrote Bloomberg on April 6.
Now, Trump and members of his team – including Cohn – are aiming to bring the act back…
Some Banks Will Fail, Others Will Flourish
Dismantling the nation's banking giants isn't a partisan issue, which is one reason why Wall Street fears the idea could gain traction.
You see, prior to Glass-Steagall, banks were "totally free" to traffic in securities, said Shah. However, Shah pointed out that Wall Street had a "culture of recklessness, cronyism, and fraud in the use of depositor funds and in the promotion of securities for sale to the public" before the act.
Regardless, both political parties — and many voters — still resent that taxpayers had to rescue the industry with a $700 billion bailout during the 2008 financial crisis, according to Bloomberg.
You see, advocates for bringing the law back claim that smaller banks could be allowed to fail without threatening the overall U.S. economy or needing expensive bailouts.
However, Wall Street execs who are against Glass-Steagall counter that it would make U.S. lending less competitive with overseas mega-banks.
Indeed, bringing the law back would have consequences for banks, both large and small…
"A separation of investment and commercial banking would have a potentially bigger impact on global firms that have a big consumer banking unit," Brian Gardner, an analyst at Keefe, Bruyette and Woods said in a research note on April 6.
In fact, Goldman Sachs – Cohn's former employer of over 20 years – is an example of a firm that doesn't do much consumer lending while its peers, such as JPMorgan Chase, would be forced to make more dramatic changes.
"What Trump said on the campaign trail versus what he's saying now – and what his cabinet picks are likely telling him – will have a huge impact on how this goal is achieved, and what – if any – upside there is for investors," said Shah to members in December.
In fact, Shah outlined his own five-step plan – one that included reintroducing Glass-Steagall – for Money Morning Members.