Firms Hinder Progress on Bank Reform

By: Matthew Arndt, CFA, CPA, CFP | November 12, 2009 | The Politicians, The Regulators, Wall Street Ethics

Ten years ago President Clinton signed the Gramm-Leach-Bliley Act which repealed the Glass-Steagall Act giving rise to financial conglomerates that apparently are considered too big to fail, and therefore turn to taxpayer handouts when they find themselves in financial trouble. This latest round of bailouts is already putting trillions of dollars of taxpayer funds at risk.

Congress passed Glass-Steagall in 1933 after speculative activities by large US banks brought the financial system close to collapse. Sound familiar? The intent of the act was to separate investment-banking from lending and deposit-taking. The idea is that investment banking involves more speculative and complex undertakings than commercial banking, and therefore deposit taking institutions should be limited in the amount and types of risks they assume to safekeep depositors’ funds. The repeal of Glass-Steagall allowed the creation of megabanks like Citigroup; look how wonderful that experiment turned out.

The latest round of bank failures has forced mergers that have made banks larger and more concentrated in their risks. We have moved away from a diversified banking system with varied lending practices, to a more concentrated, homogeneous structure where all banks resemble one another. We are living in an economy with fewer but larger banks which constitutes a non-diversified financial ecology ripe for another crisis. Most banks are now so interrelated that when one falls, they all fall. Our banking system is now more vulnerable than ever to even the slightest hiccup.

Congress is now considering the reinstatement of Glass-Steagall. Representative Paul Kanjorski plans to offer the legislation as early as next week. Certainly the banking industry is fighting this. Rob Nichols, president of the Financial Services Forum whose lobbyists represent the largest financial institutions contends that “the U.S. needs big financial firms.” He said he’ll be “vocal and persistent in the halls of Congress.” I believe Mr. Nichols has underestimated the anger that Americans harbor for the shenanigans that have gone on in our banks. If we don’t take the opportunity to properly fix our banking system now, large US financial institutions will undoubtedly once again be laughing all the way to the bank.

5 Responses to “Firms Hinder Progress on Bank Reform”

Jimmy the Greek

November 12th, 2009 at 1:06 pm

I am all for free markets but the big banks cannot have their cake and eat it too. If they do not want to be regulated, they should be allowed to fail. Why burden generations of taxpayers with bailouts??

Lou C

November 12th, 2009 at 5:33 pm

You explain Glass-Steagall very well. I am embarrassed to say but I did not know what the Glass-Steagall act represented and don’t think many people know what it means either. I am surprised we don’t hear more about the Glass-Steagall on the news. Thank you for the education and look forward to reading more of your articles. Do you speak publicly? You should.

lil’ Billy

November 12th, 2009 at 7:21 pm

Mr. Arndt brings us another thoughtful article. If Washington’s actions ten years ago paved the road we are driving on today, let us pay heed to the action (or lack of action) of Washington today. A PBS Frontline documentary “The Warning” takes us back to the very time Mr. Arndt referred to in this article. It will introduce you to someone you most certainly have never heard of, Brooksley Born. Mrs. Born was the head of the obscure federal regulatory agency CFTC. In 1998 she had wondered why 100 trillion dollars worth of private derivative contracts (like the credit-default swaps and collateralized debt obligations) transacted over the counter went unregulated. As she and her staff began to question this dark unregulated market they received great pressure from then Treasury Secretary Robert Rubin and his asst. Larry Summers, then Fed Chair Alen Greenspan, former SEC Chairman Arthur Levitt and congress. Born declared that the unregulated contracts pose grave dangers to our economy. Soon after she resigned. Then soon after Glass-Steagall was repealed Congress exempted these contracts from U.S. oversight and the market grew to about 700 trillion dollars by 2008. Do not give Washington a pass, Congress is complicit and their hypocricy knows no bounds. You can still find this Frontline documentary online… its chilling.

Matthew Arndt, CFA, CPA, CFP

November 13th, 2009 at 8:28 am

lil’Billy,

I viewed the Frontline documentary on PBS you speak of. I would strongly encourage everyone to take an hour and watch that program. It’s quite enlightening. It sheds light on the intimidation, recklessness, and negligence that took place among the US regulators and at financial institutions.

What I have the most difficulty with is I can’t understand why there is no accountability for what has happened. A 17 year old male can hold up a convenience store and receive a sentence of 10-15 years. What is the impact to society as a whole of such a crime? In contrast, several slow-thinking bureaucrats and banking executives can cause the crisis of the century causing trillions of dollars in losses that have a sweeping massive impact to society and no one is held responsible. Instead of letting the insolvent banks go under and allowing capitalism to work, we the U.S. taxpayers bail them out and in return these banking executives take record bonuses. Now that’s audacity! I am all for large bonuses… when they are deserved. These bankers would’ve never had the opportunity to receive this latest round of bonuses if the taxpayers would not have bailed out their sorry backsides.

Jack A

November 14th, 2009 at 8:52 am

Right om Matt. I thought repealing G.S. was a bad idea at the time, having lived through the time when it was thought necessary. Are we living through a time “when those who ignore history anr doomed to repeat it?”