Gramm-Leach-Bliley, Ten Years On

November 12, 2009 3:30 PM

Ten years ago today the government reversed one of the key elements of the Depression-era banking laws, knocking down the firewall between commercial banks, which take deposits and make loans, and investment banks, which underwrite securities. The repeal of the Glass-Steagall Act of 1933 was seen at the time as a way to help American banks grow larger and better compete on the world stage.

But not everybody at the time saw it as a good thing: Senator Byron Dorgan, Democrat of North Dakota, was one of eight senators who stood up to oppose the repeal of Glass-Steagall in 1999, and today many are wondering if re-instating Glass-Steagall or something like it might go a long way towards preventing future financial meltdowns.

What does Dorgan himself advocate today?

"Three things," the senator [says, see "who stood up to oppose" link above]... "One is to separate investment banks and FDIC-insured banks. Second, prohibit FDIC-insured banks from dealing in risky financial instruments on their own proprietary accounts... And third, abolish 'too big to fail.' If you're too big to fail, you're too big. Too big to fail is what I call no-fault capitalism."

posted by HP LaserJet P10006 (22 comments total)

There should also be some sort of ethnically-themed division between securities analysts and securities brokers.

Canadian banks managed to not go up in flames and they don't have this deposit-investment division. All you have to do is raise capital requirements.
posted by GuyZero at 3:51 PM on November 12, 2009

Keep Big Government out of our industry!

Uh, unless we need money.
posted by hamida2242 at 3:52 PM on November 12, 2009 [2 favorites]

Oops.
posted by PenDevil at 3:52 PM on November 12, 2009

Anyway it's too late to re-instate Glass-Steagal, because technically very few investment banks exist now. Goldman Sachs is now a bank holding holding company which means it can borrow money at rates usually reserved for commercial banks underwriting mortgages. But fear not folks that $20 billion bonus pool is making life a little bit better for us all.
posted by PenDevil at 3:57 PM on November 12, 2009

If you're too big to fail, you're too big. Too big to fail is what I call no-fault capitalism.

If a corporation is too big to fail, then essentially the government is insuring against its failure at no cost to the corporation. Instead, the corporation should have to pay insurance to either the government or else an unrelated insuring body that will pay to keep it afloat. This might encourage corporations to voluntarily keep themselves split into reasonably-sized pieces since the smaller pieces would have smaller failure insurance.
posted by esprit de l'escalier at 3:57 PM on November 12, 2009 [13 favorites]

All you have to do is raise capital requirements.

I'm not sure that's all you have to do to keep the banks from imploding again, although it certainly might be part of what needs to be done. In a recent letter to the NYT, the former chairman of Citigroup says:

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.
posted by HP LaserJet P10006 at 4:02 PM on November 12, 2009 [1 favorite]

If a corporation is too big to fail, then essentially the government is insuring against its failure at no cost to the corporation. Instead, the corporation should have to pay insurance to either the government or else an unrelated insuring body that will pay to keep it afloat.

It's such a great idea, but then Congress goes and does stupid things like letting banks skip out on their FDIC payments for nearly a decade, and now that the funds are needed, they aren't there.
posted by hippybear at 4:03 PM on November 12, 2009 [2 favorites]

Hey! No one knows better than banks, that trusting people with a history of losing money, with more money, is a financially sound decision.

Can I has a loan?
posted by yeloson at 4:20 PM on November 12, 2009

and of course members in Congress from both of the two aprites went along with removing the firewall of protection, and yet they will continue to blame each other for our recent financial debacle.
posted by Postroad at 4:28 PM on November 12, 2009

But we have Sarbanes-Oxley so there could never be a disaster the scale of Enron again. Relax folks, the government's got it all under control.
posted by mattholomew at 4:34 PM on November 12, 2009

hippybear: "... then Congress goes and does stupid things like letting banks skip out on their FDIC payments for nearly a decade, and now that the funds are needed, they aren't there."

They frankly own the place.
posted by Joe Beese at 4:35 PM on November 12, 2009

But we have Sarbanes-Oxley so there could never be a disaster the scale of Enron again. Relax folks, the government's got it all under control.

Goodbye Sarbanes, we hardly knew ye
posted by jsavimbi at 4:46 PM on November 12, 2009 [1 favorite]

But we have Sarbanes-Oxley so there could never be a disaster the scale of Enron again

It's my understanding that SOX was accounting reform, which seems largely orthogonal to banking and securities regulation. If your point is that its failed to prevent the recent meltdown shows how ineffective government is, it seems only slightly less of a stretch than arguing that its failure to prevent airplane crashes proves the same point.

Now, perhaps there has been an accounting failure on the scale of Enron since then. If you could point that out, it'd help your case.

Relax folks, the government's got it all under control.

It does seem apparent that there were significant regulatory failures, but those seem to have stemmed from a laissez faire philosophy both in execution and legislation such as what's referred to in the topic of this post. That seems more of an indictment of the philosophy rather than government in general.
posted by weston at 4:59 PM on November 12, 2009 [4 favorites]

I remember hearing on NPR someone in the senate actually did say somethign along the effect that banks that are "too big to fail" should be mandated to buy into some sort of "failure insurance" run by the government so that they can draw from a pool when they screw up so bad they risk taking the whole economy with them.

Then, the Republicans got mad and said that that would institutionalize the bailout culture that they think should not have occurred in the first place (as happened under Bush II). Their solution: change bankrupcy law so that it works better for megacorporations. Never mind that it takes forever to look over all of their assets, and by the time we would know what to do, we'd already be screwed.

And trustbusting banks that are "too big to fail" is apparently Big Government. I get that they don't have a monopoly, but isn't it Econ 101 that economic agents, including banking corporations, should be atomic in power? A manufactured economic entity simply should not be allowed to be that big. It's not like splitting up a big corporation would be that bad for people in the corporation or individual freedom. Just give the shareholders equivalent stock in the new companies, and let the board of directors decide who gets to run which parts of the offspring.

/Layperson who feels like using his populism to argue. Please tell me how I'm wrong, as I know so little beyond the basics about economics that I'd rather learn something than be right.
posted by mccarty.tim at 4:59 PM on November 12, 2009 [1 favorite]

.
posted by Brak at 5:38 PM on November 12, 2009

It's such a great idea, but then Congress goes and does stupid things like letting banks skip out on their FDIC payments for nearly a decade, and now that the funds are needed, they aren't there.

Not to worry, my friend! Those selfsame banks are ready to lend money to the FDIC to cover the shortfall (taking a fee for their trouble, naturally) in a plan that no doubt sounds to me like some Wobbly pamphleteer's caricature of regulatory capture only because I'm not equipped to appreciate the nuances of high finance just how fucking awesome it is to have your own private jet.
posted by enn at 5:41 PM on November 12, 2009

Those selfsame banks are ready to lend money to the FDIC to cover the shortfall

MONETARY OVERFLOW AT LINE 0
posted by benzenedream at 6:26 PM on November 12, 2009

If a corporation is too big to fail, then essentially the government taxpayer is insuring against its failure at no cost to the corporation.

FTFY.
posted by ZenMasterThis at 7:09 PM on November 12, 2009

The American banking system is made up of two (formerly) separate but equally important groups: commercial banks, which take deposits and make loans, and investment banks, which underwrite securities.

These are their stories.

*dunk-dunk*
posted by Sys Rq at 7:56 PM on November 12, 2009 [4 favorites]

If you're too big to fail, you're too big to profit.
posted by chimaera at 11:10 PM on November 12, 2009 [3 favorites]

esprit de l'escalier: "If a corporation is too big to fail, then essentially the government is insuring against its failure at no cost to the corporation. Instead, the corporation should have to pay insurance to either the government or else an unrelated insuring body that will pay to keep it afloat."

I think this is a pretty nice idea and would be an elegant solution to the problem, except that it doesn't seem to do anything about regulatory capture, which seems almost inevitable once you have private entities that are a certain size. (The threshold for this is debatable and I'd love to know if anyone has studied it.) But basically, when you get companies big enough to shove the regulatory apparatus around, it doesn't matter anymore what your intended regulations were.

So unless the taxes were so punitive that they effectively made growing a bank past a certain size impossible, it doesn't seem as safe as a hard limit — someone could grow a company, pay the tax, and then use it to jerrymander the regulatory structure into something that suited them once they were big enough.

We need to give up on and realize the toxicity of the idea of 'big banks' altogether, or else there will be the risk of the exact same thing happening again.
posted by Kadin2048 at 11:37 PM on November 12, 2009 [1 favorite]

Regulatory capture by the financial sector seems unavoidable in the US political system (because they're the richest, because the US has lost most of it's manufacturing industries and hence counterbalance, because lobbying is not only not illegal there, it's actually encouraged/sought/highly regarded).

Hey look, the repeal of Glass-Steagall happened before (and enabled) all those mergers which gave you too-big-to-fail banks, right? I wonder why that is. Maybe because, instead of, say, 4 tbtf banks lobbying and bribing politicians, there were 20 smaller ones, but since they all wanted the same anyway ("to gorge on piles of moneeeeey"!), the result was the same.

I don't see any proposition dealing with regulatory capture out there.

(mine? shoot all the lobbyists. srsly.)
posted by vivelame at 1:02 AM on November 13, 2009