“Breaking up the banks” was a proposal entertained by Sanders and Trump during the 2016 presidential campaign, and even as we pass the 100 day mark of the Trump Presidency, the future of Trump’s financial regulation agenda is still unclear. Sanders’ support of reinstating the Glass-Steagall Act resonated strongly with those feeling betrayed by the recklessness of many large financial institutions during the Financial Crisis. President Trump’s proposal of a “21st-century version” of the 1933 Glass-Steagall Act was part of his ‘drain the swamp’ rhetoric and was already endorsed in the 2016 Republican policy platform. Hillary Clinton, however, opposed such actions. As First Lady when President Bill Clinton signed Glass-Steagall’s repeal into law, and as a candidate with strong ties to Wall Street, Clinton did not intend to separate commercial and investment banks, instead seeking other regulatory measures.
What exactly does a 21st-century version of Glass-Steagall look like?
FDIC vice-chairman Thomas Hoenig’s proposes a system in which bank holding companies retain ownership of both commercial and investment operations, but they would be separated into two distinct parts. The traditional dealings of the bank would continue to receive depository insurance from the FDIC, but the riskier, nontraditional activities such as investment banking and insurance would not be FDIC-insured and therefore be susceptible to failure independent of the traditional component. In his own words, Hoenig’s plan would eliminate the “commingling of very high-risk activities under the deposit insurance system, with the moral hazard that goes with that” in an effort to combat the too-big-to-fail dilemma. While his plan does seem to address much of the moral hazard surrounding the too-big-to-fail issue, it does not eliminate the potential for systemic risk from standalone investment banks, as was the case with Lehman Brothers and Bear Stearns during the Financial Crisis.
Senator Elizabeth Warren introduced 21st Century Glass-Steagall Act in early April to restore Glass-Steagall and “re-establish the wall between commercial and investment banking and make our financial system more stable and secure.” Warren echoed the proposals of Hoenig and broke ground in the reenactment process which has long been much talk with little action. The future of this bill is uncertain, especially as President Trump is awaiting the results of an executive order to review Dodd-Frank. The President vows to give Dodd-Frank a “very major haircut” and when asked about the possibility of returning to Glass-Steagall measures, Trump stated “I’m looking at that right now. There’s some people that want to go back to the old system, right? So we’re going to look at that.” Should he pursue a ‘breaking up of the banks,’ it is unclear if President Trump will be supporting his arch-nemesis Warren’s bipartisan-backed legislation.
” There’s some people that want to go back to the old system, right? So we’re going to look at that.”
Rearranging Deck Chairs on the Titanic
In an article titled “Big Banks Will Always be too Big, Glass-Steagall or Not” Paul Kupiec of American Banker analyzes the effects of Senator Warren’s 21st Century Glass-Steagall Act. Although it will “break up the banks” in terms of commercial vs. investment banking, it will do little to decrease their balance sheets and overall systemic risk. Banks which are primarily investment banks, such as Goldman Sachs and Morgan Stanley, would likely acquire the divested investment operations of primarily commercial banks such as JPMorgan Chase, Bank of America, and Citigroup, which would “increase concentration of investment banking services” and therefore “increase [Goldman Sachs’ and Morgan Stanley’s] systemic importance.” Kupiec likens this shift of assets and activities to rearranging deck chairs on the Titanic, as it fails to address the too-big-to-fail problem.
“It takes a thief to catch a thief.”
Wall Street’s presidential influence is nothing new and not necessarily a bad thing.
With Goldman Sachs veterans Steve Mnuchin (former CIO) and Gary Cohn (former COO) serving as Secretary of the Treasury and Chief Economic Advisor to the President, respectively, there is the concern of misguided financial deregulation being in the interests of economic profitability over the interests of American consumers. President Trump’s ‘Government Sachs’ may not in itself be cause for alarm, however, as Goldman’s commercial banking adds very little to its profits and industry experience provides a welcome insight into financial regulation. President Roosevelt, who signed Glass-Steagall into law, faced similar outcry for appointing his long-time friend and campaign donor Joseph Kennedy as the first Chair of the Securities and Exchange Commission. Kennedy’s shady past included insider trading and market manipulation at a time when the securities industry was largely unregulated, and controversy ensued when President Roosevelt tasked Kennedy with reigning in the industry which he built a fortune on. President Roosevelt is rumored to have defended his choice in saying “It takes a thief to catch a thief.”