Glass-Steagall Act

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Here's Proof a New Glass-Steagall Act Could Rein in the Big Banks

insider trading

The Too-Big-to-Fail banks have a notorious track record of avoiding, evading or eliminating nearly all of Washington's attempts to bring them to heel.

So skeptics can be forgiven for thinking that the recently proposed new Glass-Steagall Act won't change anything on Wall Street.

As the moniker "Too-Big-to Fail" implies, such banks are not easy to push around.

"No bank will ever get out of a profitable line of business, unless they're forced to, or there's a huge loss that threatens the perception of the banks' risk management, or some scandal forces a mea culpa and an exit," said Money Morning Capital Wave Strategist Shah Gilani, who as a former hedge fund trader understands how Wall Street thinks.

Yet the Too-Big-to-Fail banks have recently pulled back in one area - physical commodities trading - as a result of regulatory pressure from several directions.

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Why Doesn't Jack Lew Support the New Glass-Steagall Act?

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.

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If A New Glass-Steagall Act Can Protect Us, Why Is There Opposition?

There has been a huge outpouring of support for Senators John McCain and Elizabeth Warren's idea to reinstate some form of the Glass-Steagall Act, which drew a clear separation between investment banking and commercial banking.

The enthusiasm has managed to vault a wall that many thought impossible: broad bipartisan support.

In fact, from McCain and Warren on down to the right and left, strange bedfellows are signing on.

Whether it's the various Tea Party groups, or MoveOn.Org. Whether it's the Huffington Post or Breitbart, or Bill Clinton, there is plenty of common ground between all of these divergent groups.

Even in Congress itself, there is significant bipartisan support for at least the idea behind Glass-Steagall - that big banks should be broken up, and that those who remain should be absolutely prohibited from, frankly, gambling with our money.

It's perfectly clear that, among the people of this country, there is a real desire to bring banks to heel.

Professor William K. Black, veteran warrior of the Savings & Loan Crisis, put it well when he said that "it violates the core principles of conservatism and libertarianism to extend the federal subsidy (to)... commercial banks via deposit insurance to allow that subsidy to extend to non-banking operations," meaning that we, the taxpayers, shouldn't be forced to subsidize a bank's gambling habit.

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Senators Move to Create 21st Century Glass-Steagall Act

Warren, John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus Kin (I-Maine) introduced legislation that would again separate bank's traditional activities (like deposits currently backed by the Federal Deposit Insurance Corp.) from riskier activities like investment banking, insurance underwriting, swap dealing, and hedge funds.

Glass-Steagall was repealed by Congress back in 1999.

When the news broke of Warren’s determined attempt to bring back Glass-Steagall last week, it covered front pages across the country and instigated a firestorm of commentary on the future of the U.S. economy.

The problem, of course, is the ability to cut through the hype and understand if financial reform is necessary to fix the U.S. economy.

Rarely do I find myself championing regulatory efforts by the Federal Government, but the financial sector is an entirely different beast from energy, agriculture, and other resource sectors.

But reinstituting key elements of the Glass-Steagall Act is just one step on a long return to sanity for the economy.

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Money Morning Mailbag: Wall Street Expects Money to Arbitrate Financial Reform

Financial regulation overhaul cleared another hurdle last week when the Senate approved its financial reform bill. However, the inclusion of a derivatives trading restriction left Wall Street wondering why its political contributions weren't doing the talking.

The financial industry was surprised when a provision created by Sen. Blanche Lincoln, D-AR, requiring banks to spin off their derivatives trading arms remained in the Senate's proposal. Wall Street lobbyists are now reaching out to the members of the Senate and House conference committee who will reconcile the two bills. The Senate named its committee appointees Tuesday, which included Lincoln.

The Financial Services Roundtable, a lobbying group representing financial companies, has already started meeting with House members who it believes will be involved in the final process and could help cut the provision.

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Will the Financial Reform Bill Really Rein In Wall Street?

The Senate on Thursday approved an extensive financial reform bill that would give Washington broad new powers over Wall Street. However, there's still a question over whether the bill will really be able to rein in Wall Street, or if it will simply become another broken barrier tripping up the free market. The legislation is […]

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Money Morning Mailbag: Readers Eager For Effective Financial Regulation

The Money Morning mailbag continues to overflow with reader thoughts and concerns regarding financial reform – which is finally making slow progress in Washington. After three failed attempts to bring a financial regulation bill to the floor this week, the Senate on Wednesday finally agreed to start debate.

Following is a collection of this week’s Money Morning reader comments on our articles regarding reform, inspired also by more news from the Securities and Exchange Commission case against Goldman Sachs Group, Inc. (NYSE: GS) as executives faced a Senate committee hearing.

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JPMorgan Posts Big Gains but Financial Reform Threatens Profitability

JPMorgan Chase & Co. (NYSE: JPM) posted a 55% rise in first-quarter net income led by fixed-income trading and investment banking. But to ensure its profits remain in tact, the bank continues to fight against proposed financial reform.

JPMorgan, the second-largest U.S. bank by assets, beat analysts' estimates with net income of $3.33 billion, or 74 cents a share. Estimates averaged 64 cents a share.

Investment banking brought in $2.47 billion, 74% of total net income. The area is usually a strong contributor to profits, kicking in 57% in the previous quarter and 75% in the first quarter of 2009.

JPMorgan claims the results are a strong indication of global financial economic improvement.

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Money Morning Mailbag: How the Demise of Glass-Steagall Helped Spawn the Credit Crisis

Question: Please address why the removal of the Glass-Steagall Act in 1999 caused the financial meltdown of 2007 and why its reinstatement is the only way to stop the financially risky behavior allowed after it's removal. Address why we will very likely have another meltdown (probably in 2010) unless reinstated.

Answer: Mr. Scott: While the overturning of what remained of Glass-Steagall did not cause the meltdown, it certainly contributed mightily to the systemic nature of the crisis.

Allowing commercial banks and investment banks to marry created giant operations that became too big to fail and too profitable to break up. Everyone was making money. The overriding problem was not the integration of commercial (deposit-taking and loan-making) banks with investment (capital-markets trading) banks, but the extraordinary migration of all banks into the same products, trading, and risk-taking businesses. I am definitely including the ubiquitous game of mortgage origination, securitization, sales and trading.

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Goldman's Earnings Call Overshadowed by Obama's Glass-Steagall Revival

Goldman Sachs Group Inc. (NYSE: GS) yesterday (Thursday) reported blowout fourth-quarter earnings after dramatically reducing compensation. However, that earnings call was overshadowed by U.S. President Barack Obama's announcement that he will effectively restore some provisions of the Depression-era Glass-Steagall Act.

Obama's plan would prohibit banks from running proprietary trading operations solely for their own profit and sponsoring hedge funds and private equity funds. It also proposes expanding a 10% market-share cap on deposits to include other liabilities such as non-deposit funding to restrict growth and consolidation.

"While the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse," Obama said at the White House. "Never again will the American taxpayer be held hostage by a bank that is too big to fail."

However, many analysts believe the new regulations will have an adverse effect.

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Investment News Briefs

With our investment news briefs, Money Morning provides investors with a quick overview of the most important investing news stories from all around the world.

House Rethinks Glass-Steagall; Boeing's Dreamliner Finally Lifts Off; Manufacturing, Wholesale Prices Both Rise; Best Buy Beats Street; GE Sees Flat Revenue; Wells Fargo to Pay Back TARP

  • The Glass-Steagall Act, which barred banks that took deposits from underwriting securities, is under consideration for reinstatement by the U.S. House of Representatives, according to Majority Leader Steny Hoyer, D-MD. A renewal of the 1933 law “is certainly under discussion” by House members, Hoyer told Bloomberg News in Washington. The Glass-Steagall law was repealed in 1999 to help pave the way for the formation of Citigroup Inc. (NYSE: C) with the $46 billion merger of Citicorp and Travelers Group Inc. Enactment of the law has generated debate about whether it helped spawn reckless lending practices and financial speculation that led to the meltdown of credit markets last year and the $700 billion U.S. bailout of troubled banks, including Citigroup. “As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” Hoyer said.

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