HARPER: ANOTHER GLASS STEAGALL MOMENT

Two recent developments have put real momentum behind a return to the full separation of commercial and investment banking that existed from 1933-1999 under the Glass Steagall Act; and the prospects of such a long-overdue divorce are moving forward both in the United States and the United Kingdom. 

On July 4, the Financial Times published a lead editorial under the headline "Restoring Trust After Diamond," explicitly calling for the total separation of what in Britain are called retail and merchant banks.  "The clash between retail and investment banking," the editors wrote, "has always been evident.  What is now clear, however, is that the hard-charging, revenue-seeking investment banking culture predominates when they are pushed together.  The more herbivorous retail banking ethos--with its emphasis on patient stewardship--is marginalized.  this seems to lead ineluctably to the proliferation of socially questionable trading activities and abuses such as the Libor scandal... While the FT supported those conclusions [of the Vickers Commission calling for partial separation of the banks--ed.] we are now ready to go further.  For all the diversification benefits, the cultural tensions between investment and retail banking can only be resolved by totally separating the two, on formal Glass-Steagall style line."

The Financial Times embrace of Glass Steagall came in the immediate aftermath of revalations that the British Banking Association, in league with 18 major banks and, perhaps, some officials of the Bank of England, had been rigging the London Interbank Overnight Rate (Libor) to facilitate insider trading on the derivatives market and other serious financial crimes.  Three top officials of Barclays Bank were forced to resign, investigations are now underway in the UK, the United States and Switzerland, and the prospects of bankers being jailed over this scandal is looking more and more likely.  The Libor rate determines more than $350 trillion in mortgage, credit card and other interest rates worldwide.

The second development that produced a flurry of calls for a return to Glass Steagall was the recent Brussels summit meeting of European heads of state, at which German Chancellor Merkel, French President Hollande, Italian Prime Minister Monti, Spanish Prime Minister Rajoy and others took the equivalent of a blood oath to preserve the euro single-currency system at all costs.  Some more experienced bankers in London took this as a signal that continental Europe will be going through months, if not years, of financial turmoil and potential hyperinflation, that will likely spill over into the business of the City of London.  For one thing, British banks have forged extremely close ties to some of the largest and most fragile Spanish banks, as their gateway into South America.

The Financial Times editorial was both preceeded and followed by a number of other strong statements for Glass Steagall coming from very senior voices in the City of London.  Lord Paul Myners, a former Treasury official under Gordon Brown, a former publisher of the Guardian and Observer, and an affiliate of Lord Jacob Rothschild, gave an interview to Britain's Channel 4 TV, echoing the Financial Times.  Paul Hambro, now a Russian gold trader, but a member of one of Britain's oldest merchant banking families, added his name to the chorus promoting the complete separation.

Expect these calls to resonate in the United States, where a bill is already in the House of Representatives, HR 1489, to restore Glass Steagall separation.  The bill was introduced by Rep. Marcy Kaptur (D-Oh.) and now has 70 co-sponsors, including half a dozen Republicans, including several Tea Party Republicans.  Thomas Hoenig, the former President of the Kansas City Federal Reserve Bank, and now the Vice Chairman of the FDIC, gave a recent interview to Bloomberg Radio, in which he made a powerful argument for Glass Steagall.  Hoenig is widely respected among Main Street Republicans in the Congress.

The point is obvious:  The European debt crisis is far from over, and the cries for new bailouts, coming from Spain and (soon) Italy will overwhelm the capacity of the European Central Bank and the not-yet ratified European Stability Mechanism (ESM) to meet the bailout demands.  Spain is being forced to pay nearly 7 percent yields on ten year sovereign debt, Italy is not far behind, and Greece is still in a state of economic and political disintegration.  The prospects for a European turn-around are grim, and the recent JPMorgan Chase losses on the derivatives market of European debt ($9 billion and rising) makes the obvious point that Wall Street is up to its eyeballs in the crisis across the Atlantic. 

Glass Steagall will not solve all the problems, but it is a long-overdue first step towards at least protecting commercial banking from the wild leveraged gambling activities of the investment bankers and hedge fund managers, who were reckless because they believed that they would be bailed out by American and European taxpayers, no matter what they did.   Harper

Comments

[Lars]

I would be all for a separation between retail banking and the casinos. I would also institute a transaction tax on the casinos. I know that we are not allowed to hang the operators (and the political enablers) of those casinos but it would be satisfying if we could.

[zanzibar]

Harper

Glass-Steagall is important legislation that needs to return. Let's not forget that it was Bill Clinton and his neo-liberal Treasury of Bob Rubin and Larry Summers along with Alan Greenspan and the Republican's in Congress led by Phil Gramm that repealed it.

But since it is clear that regulators are by and large captured more regulations aint gonna solve too much. We instead need more capitalism not less.

I suggest we return to the double liability of stockholders of financial institutions as enshrined in the National Banking Act of 1863. And do what the Brazilians have done and put the net worth of officers and board members of banks in the first loss position. Additionally, we should return investment banks to partnerships with partners on the hook for losses. When I began my career as an investment banker on Wall Street they were partnerships. Nothing better to concentrate the mind. Finally, we need to get politicians and governments out of the market manipulation business and the policy to insert the taxpayer ahead of bank bondholders in taking losses should be thrown where it belongs in the dustbin of history. Of course anti-trust laws should be vigorously enforced to prevent a few banks from controlling the majority of total banking assets nationwide. TBTF as an acronym should be able to be retired and a significantly more competitive banking environment created.

Simple straightforward reforms returning to prudence not the monstrosity of Dodd-Frank with all it's exemptions and loopholes big enough to drive a truck by the TBTF banks.

[r whitman]

I fail to see where separation of commercial from investment banking would have prevented the crash of 2007.

Bear Stearns. Lehman Bros, Merrill Lynch, Fannie , Freddie and AIG who were major perpetrators were not engaged in commercial banking. Their actions were able to drag down a number of commercial bank counterparties.

How are you going to keep investment banks from doing business with commercial banks after the separation. You still have the same problems.

[Fred]

"The Libor rate determines more than $350 trillion in mortgage, credit card and other interest rates worldwide."

The taxpayers of Greece, Spain, France, etc get to pay higher taxes for years to come. Along with taxpayers in the US. Working families across the Earth will receive lower pay and benefits for years to come. All the while we are told we can not 'burden' the financial sector with higher taxes or 'onerous' legislation. My, my, but poor Mr. Diamond loses his 'bonus' and future income. All the other millions he and the others behind this criminal conspiracy waged against the people of this Earth? Well, they get to keep all that money.

Meanwhile Senators Schumer and Menendez are bloviating on Morning Joe about the overburdened 'millionaires'? No wonder the Afghans continue to rip us off.

I must disagree with Lars' comment, however. Hanging is too good for this crowd. They caused this problem, they should fix it - a nice flat 99% tax on all assets they posses would go a long way towards solving it - and preventing a recurrence.

[Medicine Man]

The rigging of Libor is a gut-punch to the core credibility of the global banking system. It is also a fix that requires collusion amongst a large number of the largest merchant banks to pull off. So yet again, evidence of the unchecked and unchastened corruption in the global banking system.

[Babak Makkinejad]

Harper:

I do not believe that the restoration of Glass-Stegall Act in the United States, or any analogous legislation in EU, is going to materially effect anything.

The horses left the barn back in mid 1990s; this is too little and too late.

The $ 350 trillion that you have mentioned is less than half the total amount - of mostly worthless - paper out there.

A conservatively estimated $ 500 trillion worth of paper wealth must be considered unredeemable and written off.

In practice that means pension funds, retirement accounts, bond-holders (sovereign or corporate or government) must all suffer massive losses.

That is why this Crisis will not end anytime soon; not when you compare $ 500 trillion with the GDP of the entire planet which is about $ 42 trillion.

The best approach, perhaps utopian, is to try to divide the losses - sort of like when an insurance company goes belly-up - and then try to write them down over several decades.

As is, every country and region is acting on its own; trying to dump on the next one.

And teh danger here is that this crisis could suffocate the actual working economy of the world.

[Patrick D]

Glass Steagall is only part of the answer. The idea that stronger regulation will prevent the kind of disasters we've seen is wishful thinking.

Absolute risk must be chopped up which means the big banks must be chopped up. "Too big to fail" should equal "Too big to exist".

[Walrus]

The repeal of Glass Steagall lit the fuse. It's reinstatement will not put it out and thus avoid the forthcoming explosion.

Libor and other rates are manipulated. The price of gold is manipulated. The currency is debased. Almost all markets are rigged. Virtually all stores of value, both public and private, have been plundered in ways too numerous and subtle even to begin to mention - on both sides of the Atlantic.

The driver for this process has been the very bonus driven culture that Col. Lang refers to in his comments about million dollar salaries.

Let me be clear Col. Lang: a million dollar a year salary in New York was "just getting by" in the mid 1970's when my uncle was part of Salomon Brothers and I occasionally rubbed shoulders with this guy:

http://en.wikipedia.org/wiki/John_Gutfreund

I do not know what the numbers are today in New York, but I would expect anything under Five million a year is a small change starting salary for a Rhodes Scholar or Harvard man with a good MBA.

The depths to which these guys will go in pursuit of that salary are unplumbed. There is nothing they won't stoop to as the poor schmucks who they took to the cleaners in the Muni bond market can attest.

The SEC looks the other way.

What is needed around the world is:

!. All "revolving door" appointments need to be immediately terminated. No former or current employee or partner in a commercial finance operation of any sort should EVER be allowed to participate in the management of public funds nor the setting of economic policy. To put that another way, no "Alumni" of Goldman Sachs should ever again by given a position of public trust of any sort at all. The Two Marios for example (Monti and Draghi) are both former employees or associates of Goldman. Then of course there is Geithner, Paulson, Bernanke and similar criminals.

2. All economic and finance policy decisions handled by career public servants under severe prudential controls.

3. The removal of money from politics.

For the record, my sources tell me none of this will happen and the big American Banks will begin to fail in August, leading to a full blown financial crisis on both sides of the Atlantic by October.

At that point it becomes apparent that:

a) War with Iran seems like an excellent idea to distract attention.

b) The militarization of police forces in America and Britain has another use besides "fighting terrorism".

[VietnamVet]

It is too late for Glass-Stengall. Macao’s casino revenue – the closely watched proxy for the Chinese economy – dropped 11% in June. The world’s economy is heading for the bottom.

Neither presidential candidate nor party is addressing the core issues; wiping out hundreds of trillions of dollars of worthless bets and nationalization of banks to preserve the necessary banking functions; plus, jobs and health care for every American.

[N M salamon]

Methinks it is too late for Glas Steagall or any other measure. Major banks will fail both in Euroland, UK and USA [and perhaps others who are exposed to derivatives]. Stockholders, unsecured creditors, bond holders [pension funds et al] will take a bath. The Sovereigns can not save a 700 TRILLION dollar derivative market - they are all broke.

I do not think that one needs to worry bout TOO BIG TOO FAIL, for they all will fail with in a year, if not sooner.

While I am sure that the CITY and Wall Street wish for the demise of EURO, their dream will not come about.

The greatest danger is the collapse of the petrodollar/reserve currency status of USD. The Pound is dead in the water - they blew their North Sea Wealth on high living.

The greatest fraudsters on setting interesst rates for the world are cosseted in Washington DC, aka the Federal Reserve members.

[JohnH]

Let us not forget who was responsible for the end of Glass-Steagall: Senator Phil Gramm, Bill Clinton, and Clinton's team of economic advisers.

Senator Gramm's wife Wendy gained notoriety for her role at Enron, where she served on the Audit Committee and, together with other directors, was the target of investor lawsuits, some of which have been settled for hundreds of $millions.

Bill Clinton's wife announced her run for the Senate to represent Wall Street weeks after Glass-Steagall was signed.

Clinton's team of economic advisers emerged, unscathed and unrepentant, to serve President Obama.

To date, Obama has prosecuted no one for financial crimes relating to the financial meltdown of 2008.

Washington: what a cesspool on the Potomac.

[scott s.]

My impression is that under national banking, it was considered appropriate separate commercial and investment banking. But that didn't seem to prevent the panics in 1870s and 1890s which were initiated by problems in the railroad bond markets. It seems to have spread into the commercial bank sector, though I suppose it is difficult to know how things would have played out if national banks also did investment banking. I note also in Spain there is a problem in savings banks so it doesn't seem to be just an investment problem.

In the US I believe the creation of the trust form of organization in the late 1800s allowed the combination of commercial and investment banking.

[Fred]

Walrus,

It may be rather difficult to get all those militarized police to stop the lynching of billionaire bankers and their political servants since those government salaries will be of money that is just as worthless as what the rest of us are paid and, like the rest of us, they will be getting the tax bill. Even the Caesars knew they had to pay the legions. Expropriating the wealth of a few senatorial 'enemies of the state' worked wonder in solving payroll problems like that time and time again. Since our equivalent is all those in the WallStreet crowd they should be the ones to be truly worried.

[Redhand]

"Glass-Steagall is important legislation that needs to return. Let's not forget that it was Bill Clinton and his neo-liberal Treasury of Bob Rubin and Larry Summers along with Alan Greenspan and the Republican's in Congress led by Phil Gramm that repealed it."

How true. SO many evils can be traced directly to the repeal of this law because it was, allegedly, "no longer necessary." It is instructive to watch Clinton's announcement of the legislation repealing Glass-Steagall" where he is flanked by Summers and Rubin. The fix was in, and we are now all paying the price for casino banking.

Unhappily, I don't think either party has the guts to take on the financial sector in America, despite all the evidence of the havoc and economic suffering this "reform" has created. It is a sad sign just how corrupted our government has become.

[N M salamon]

Is your first prediction based on the notion that the ruling elite of the USA consist of THE HOLLOW MEN? That these Purchased Politicians with their purchusers will choose to end the HEGEMONY with a bang, rather then meekly as Mr. Gorbachev has acted?
This problem was discussed by David Seaton, and expatriate [of USA] blogging form Spain a few years ago.

[Babak Makkinejad]

Governments have to become the lenders of the last resort since retail bankers are not loaning money to small enterprises.

The larger banks have to be broken up, just like insurance companies.

[Babak Makkinejad]

The size of global retirement accounts is estimated at $ 148 trillion.

Even if all of that is wiped out, there will still remain plenty of worthless paper out there; at least $ 550 trillion.

In US and Europe, where so much of wealth consists of financial assets, wealth will be destroyed - no doubt.

I think the way forward is to freeze payments - and start unwinding the debt by auctioning it off or accept defaults.

It will take a long time to do this and even that could cause a global stagnation.

Used to be that if one made X amount of dollars annually, one could get a mortgage at 3 times that amount over a 30-year period and pay it out safely over that period of time.

Let us apply that to the world economy.

For the world economy of $ 42 trillion dollars, this would mean a “sustainable” debt of $ 126 trillion. But even then assuming a 5% annual interest, the world collectively must make principal and interest payments of $ 8 trillion each year.

Clearly, even $ 126 trillion of debt is impossibility on this planet.

The private creation of debt by bankers in a few countries that exceeded the capacity of the entire planet to sustain– in any realistic manner – should never have been allowed to take place.

But, evidently, there was nothing illegal or immoral about it; just another trip into the fantasy land.

The dissolution of EU will not salvage the situation. What is needed is a conference with a real agenda to address the issues that I have tried to outline.

There is now a world economy and a few tens of thousands of people in US and in Europe cannot be permitted to destroy it.

In the absence of a global agreement on how to deal with this financial crisis, every state and government will try to protect itself.

I think WTO mechanism will fray and could be discarded as states try to survive.

[Andy]

All the regulations in the world won't solve two, more fundamental problems: First is actual enforcement of existing regulations. Second, is the conflict-of-interest caused by the revolving door between industry and regulators.

[Jake]

Anybody got anymore epoxy cement? The ship is sinking and the duck tape is not working too well.....

[Ursa Maior]

This question rather should sound like : Does anyone have a gun to get a seat in the liferaft?