Henry B. Steagall (Photo credit: Wikipedia)
Remember when bankers enjoyed regular two martini lunches and played golf a couple of afternoons every work week? If not, it’s probably because you’re too young.
But, those were the good old days under Glass-Steagall, the Depression-era law that separated commercial banks and investment banks.
If you’re too young to remember, you may not know that banks playing speculative games on the securities playground crushed depositors and themselves, triggered The Crash that undermined confidence in all banks, and ushered in the Great Depression.
Glass-Steagall was the legislative reaction to too many playground accidents.
And for over fifty years the separation of deposit-taking and depositor-protected (thanks to the establishment of the FDIC) commercial banks from their swing-for-the-fences investment banking, swashbuckling securities slinging brethren forced banks to lend money and let investment bank broker-dealers go-for-broke with their private pools of capital.
It’s not part of this story that Glass-Steagall was overturned in 1999 because a lot of legislators were paid off in an effort led by the then head of the U.S. Treasury, the then Federal Reserve Board Chairman, the then most powerful Senator on the most powerful banking committee on the planet and the usual greedy pimping and pandering suspects, so that an illegal merger between a commercial bank called Citicorp and a little firm called Travelers, that just happened to own a giant investment bank which by chance had the baddest trading shop on the Street, could get past Glass-Steagall by having it overturned. Now that’s power folks!
But, I digress.
Of course, everything turned out fine. After 1999 bigger and bigger banks took on bigger and bigger trading positions and leveraged up simpleton home-buyers with toxic mortgages.
The game was straightforward enough. Banking folks had to have customers to lend to and their bank trading folks packaged the loans so they had clean-tidy, high yielding securities to trade with other folks. Some of whom they offered prime brokerage services to, which included lending those hedge fund clients money to leverage themselves to buy the packaged products the banks were vomiting up.
Like I said, it all turned out fine.
How’s that you ask? Well, according to the President and CEO of the American Bankers Association, Mr. Frank Keating, thankfully because we didn’t have Glass-Steagall when the “crisis” hit in 2008, the likes of JPMorgan Chase and Bank of America were able to “absorb” the likes of Bear Stearns and Merrill Lynch, respectively.
Further, in Mr. Keating’s brief op-ed piece in the Wall Street Journal on June 18th, and as a kind of summation about how too-big-to-fail isn’t really the problem we think it is, or was, he says, “the way to drive a stake into the heart of such an implied policy (that too-big-to-fail is supported by taxpayer bailouts) is to explicitly demonstrate that all institutions, no matter how large, will be allowed to fail.”
Okay, that’s a sensible policy articulated by someone the banks pay to speak for them, it’s an association you know, who want us all to feel that the banking sector is, well, not-too-big-to-fail, and therefore safe enough to let one of them fail to prove it.
That’s kind of like the guy in the ice cream truck that stops on my block telling me the sundae he wants to sell me isn’t fattening, and so I should get two and prove it to myself.
The difference is if I get fat, I’m doing it alone. If a big bank fails it’s going to take down the whole system folks. They’re all interconnected in terms of crossover portfolio holdings, interbank lending mechanisms, counterparty exposure and a ton of other things that makes the big banks, all bigger now since 2008, and all too-big-to-fail.
So we delude ourselves into thinking that there are now mechanisms to detect massive problems (yeah right, didn’t we all see what was happening at the CIO over in London at that little bank, I forget its name) and unwind big banks if they fail, which, of course, they won’t because we’ll see that coming, right? Poppycock.
The ratings agencies are dopes, but it doesn’t mean that because they’ve been doped in the past that they still don’t have something of a legitimate message to deliver. The bank downgrades are a warning. JPMorgan’s trading losses (in your face Paul Volcker) are a warning.
There was never a need for Glass-Steagall and there’s certainly no need for a “new” Glass-half-empty--Steagall now. And if you believe that, I know a guy who wants to sell you some ice cream, or some neat, tidy little mortgage-backed securities that are still just a little underwater.
