This past Wednesday, in a closed-door meeting between the director of President Trump's National Economic Council and the Senate Banking Committee, the NEC's Gary Cohn and Sen. Elizabeth Warren apparently cozied up on the idea of separating commercial banking from investment banking.
Talk about strange bedfellows.
Gary Cohn, immediately prior to joining the Trump administration, was president and COO of Goldman Sachs, one of the most powerful and profitable investment banks in history. He was, essentially, a general in the mega-bank oligarchy that many Americans believe directs the U.S. government.
Elizabeth Warren, on the other hand, was a Harvard Law professor who served as chair of the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP), assistant to the president, special advisor to the secretary of the Treasury for the Consumer Financial Protection Bureau under President Barack Obama, and was elected senator of Massachusetts in 2012. She has arguably been the most vocal Big Bank basher in the past decade.
These polar opposites joining forces to dismantle the engine room of crony capitalism seems impossible.
So what's really going on here?
Here's what's happening behind the scenes, what stake the major players have, and how you can make some money betting on the winners and losers...
Why We Ditched Glass-Steagall in the First Place
Cats and dogs didn't always sleep together.
The Depression-era Glass-Steagall Act legally separated commercial banking from investment banking.
Deposit-taking institutions, about to be backed by a federal insurance plan in the form of the FDIC (Federal Deposit Insurance Corporation), couldn't underwrite securities or trade them, putting depositors' money at risk.
This was while investment banks, which would generally take the form partnerships, were free to gamble with their partners' and investors' money.
Eventually, after years of whittling away Glass-Steagall safeguards, the core of the 1933 act (the separation of commercial and investment banks) was wiped out in the Financial Services Modernization Act of 1999... This was also known as the Gramm-Leach-Bliley Act.
I've written extensively about Gramm-Leach-Bliley, how it came to pass, and what it created. But the short version is that in April 1998, Travelers Group Inc. and Citicorp agreed to a $70 billion merger that created Citigroup Inc., and at the time it was the biggest financial services company in the world.
It didn't matter that the merger was illegal under Glass-Steagall, since Travelers owned investment banking and brokerage businesses, in the form of Salomon Smith Barney. Citicorp was the holding company of Citibank, an international commercial bank and the largest issuer of credit cards in the world.
The players had their crony capitalist government and shadow-government officials, including then-Secretary of the Treasury Robert Rubin (the former Goldman Sachs CEO), Deputy Treasury Secretary Larry Summers, Chairman of the Federal Reserve Alan Greenspan, and their coterie of paid-off legislators in Congress working on repealing the last vestiges of Glass-Steagall a year later.
Of course, the whole story is fascinating, especially when history reveals how much Robert Rubin made when he left government service for a plum spot in the newly created Citigroup.
The story reveals how mega-mergers created behemoth banks that financed outrageous bets with cheap interest rates courtesy of the Fed, and gambled depositors' money and the global financial system to the edge of extinction.
After the debacle, and once she became a U.S. senator, Democrat Elizabeth Warren (along with co-sponsor Arizona Republican John McCain) introduced the 21st Century Glass-Steagall Act in 2013.
According to govtrack.us:
The 21st Century Glass-Steagall Act (S. 1709, H.R. 3054) would prohibit commercial banks insured by the Federal Deposit Insurance Corporation (FDIC) from acting as or affiliating with investment banks. A commercial bank holds checking and savings accounts and provides loans for customers. These banks are often insured by the FDIC, which provides a safety guarantee for customers of the insured bank called "deposit insurance." Investment banks, on the other hand, offer financial advice and facilitate the trade of financial assets. Currently banks can perform both commercial and investment activities, and this combination is believed by some to have been a cause of the 2008-2009 financial crisis. In a press release, sponsor Sen. Elizabeth Warren (D-MA) explained that the bill would separate commercial banks from financial institutions that offer investment banking, insurance, swaps dealing, and hedge fund and private equity activities. Proponents of the bill, such as cosponsor Sen. John McCain (R-AZ), have argued that this separation will reduce risk of financial crises and the need for federal bailouts. This will be the second version of the bill. The first was introduced in 2013 and never made it past committee. The bill has been introduced in both the House and the Senate.
Not only have there been calls for a new Glass-Steagall, Donald Trump last summer, when he was still a presidential candidate, got behind separating commercial and investment banks, and the idea was included in the Republican political plank in the fall of 2016.
Needless to say, the big banks are going to fight any attempt to break them up with everything in their arsenals.
But with Gary Cohn and Elizabeth Warren working together - and with the support of the president - they could make the impossible possible.
Here's How Goldman Would Benefit from Glass-Steagall's Return
While Elizabeth Warren's position is obvious, it's not obvious why an ex-Goldman Sachs crony capitalist would favor breaking up big banks.
Speculation is that Goldman would actually benefit if its biggest U.S. competitors, principally JPMorgan and Citigroup, were to be torn apart. This makes sense on account of the fact that Goldman is still principally an investment bank and the other mega-banks are almost equal parts commercial and investment banks.
To be clear: Re-enacting some form of Glass-Steagall would be great for the American economy and for American democracy.
Mega-banks have gotten too big and too powerful with their vast war chests bankrolling armies of lobbyists and legislators.
Breaking them up would force commercial banks to make more loans, since they wouldn't be able to gamble with depositors' money. It would also ensure that investment banks and brokerages could be bankrolled by investors willing to gamble their capital on markets controlled by swashbuckling investment banks.
Of course, there will be winners and losers if the big players are broken up. Big bank earnings, which have been flying high in the years since the financial crisis, could take a hit.
There'd be a ton of money to be made shorting some of the mega-banks I mentioned earlier, as their future prospects would be severely dampened from losing big profit centers like trading and investment banking.
We're going to start to play some of these big banks in my subscription trading services.
We'll start by positioning ourselves to the downside as profit-taking hits some of the big banks on the heels of their huge run-up, while they're still reeling from the recent revelation that the impossible is now possible.
We'll also load up on expected winners - some regional banks and some community banks - as soon as we see movement towards the potential breakup of America's worst nightmare.
There will be investment bank winners to come out of any breaking apart of mega-banks. Some will be reorganized and so well-capitalized that they'll become the new leaders in capital markets, and they'll make for great long-term growth investments.
I never thought I'd see this happen, but I also never say never. If this truly comes to pass, then while I'm cheering it on, I want to make a ton of money on what could be an all-around better, safer investing climate in the United States.
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The post Government Sachs May Actually Resurrect Glass-Steagall - Here's Why appeared first on Wall Street Insights & Indictments.
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.
The work he did laid the foundation for what would later become the 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.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.