Sen. Elizabeth Warren (D-Mass.) and Sen. John McCain (R-Ariz.) are calling for the revival of certain parts of the Glass-Steagall Act to reform the banking industry. The Glass-Steagall were famously and controversially repealed by the Gramm-Leach-Bliley Act of 1999.
The original Glass-Steagall Act (okay, let’s call it GSA for short because I am tired of typing out Glass-Steagall, which I just did again… D’oh!) was instituted in 1933 and created general guidelines between commercial banks (taking deposits and giving loans) and investment banks (which deal primarily in securities), and segregating the two as a way to protect consumers from the risk-taking of securities firms.
The Gramm-Leach-Bliley Act overturned two main clauses of GSA. Section 20, which stated that federal reserve member banks are banned from being affiliated with firms engaging principally in securities or speculation, and Section 32, which stated that such firms cannot share a common board, were overturned specifically.
Let’s think back to 1999 for a moment. Those were the heady days of Wall Street and the Clinton-Greenspan administration was notoriously lax with its regulations. So much so, in fact, that financier Sanford Weill famously (or brazenly?) orchestrated the merger of CitiCorp (a commercial bank) and Travelers (parent of its namesake insurance company and Salomon Brothers investment bank) in 1998. Now, that merger would have violated the GSA, but Weill (amongst others) were so confident that it would be repealed that he went ahead with it anyways.
A lot has happened since then. We’ve been through a dot.com bubble and burst, the wheelin’ and dealin’ mid-aughts, and finally the 2007-2009 financial crisis and stock market crash. The financial crisis led to consolidation in the banking sector, and propelled Bank of America and Merrill Lynch to merge (wouldn’t have been possible under the GSA), and investment banks like Goldman Sachs and Morgan Stanley to convert into bank holding companies (also not possible under the GSA).
The goal of bringing back provisions of the GSA is to get rid of the concept of “Too Big to Fail”. Which brings us to the main question, would bringing back GSA help?
From purely a size perspective, the GSA repeal helped to speed up the process by which banks got too big (and by virtue of that, too big to fail). But we were probably heading to to this direction anyways, it was just a matter of “when” the banks got too big.
But in terms of protecting consumer deposits from risk-taking, there’s some bite. Commercial banks would be barred from engaging in securities trading, issuance, and derivatives, and the chance of them needing a bailout would decrease. Standalone investment banks, on the other hand, would continue as they are.
So yes, I agree with Sen. Warren (despite her past asinine demands for $22 minimum wage) on this one.