Kill Dodd-Frank, But Resurrect Glass-Steagall

Today’s Courier Herald Column:

Two weeks ago, the FDIC seized the 21st and 22nd banks in Georgia this year. The state has the dubious distinction of accounting for one of every four bank failures in 2011, and has had the most failed banks since the housing market crashed in 2008. These are mostly smaller, community based institutions. For many Georgia communities, however, they were the only financial institutions.

Larger troubled banks were rescued by TARP and other Fed actions, as they have been deemed “to big to fail”. Most of these larger banks have resumed somewhat normal operations, including large bonus payouts to senior executives and traders within their investment banking units. The frustration over these banks creating credit default swaps and leveraging FDIC insured deposits against highly speculative financial transactions, ultimately costing taxpayers trillions, has fueled anger behind both TEA Party activists and the Occupy Wall Street crowd.

The response to this anger was an attempt to reign in and regulate the “wild west” parts of Wall Street resulted in Dodd-Frank, a complex and cumbersome bill which continues to distort financial markets without necessarily adding any great degrees of consumer or taxpayer protections. Dodd-Frank should be repealed. At the same time, so should the Gramm-Leach-Bliley Act of 1999.

Gramm-Leech-Bliley repealed the parts of the depression era Glass-Steagall Act which separated investment banking from commercial banking. The bill was designed to ensure American financial institutions were competitive in world financial markets. The result has been to allow large financial institutions a conduit to turn consumers’ safe FDIC insured deposits into more risky financial instruments, which not so coincidentally generate more fee income for the bank.

This is what has also allowed the U.S. financial system to truly morph into one where a small number of financial companies have become so vital to our economic interests that they must be saved at all costs. Their very existence now institutionalizes a system that privatizes profits while socializes losses. This is not capitalism.

Some major Wall Street players are now calling for the too big to fail banks to be broken up. Their problem is not their size, however. Commercial banks are generally highly regulated, and the larger a bank is, the more regulatory scrutiny they receive. The regulatory system served this country well through decades of economic growth until commercial banks morphed into the first rung of the ladder for investment banks.

As I was exiting banking in the mid-1990’s, branch personnel were being trained to call large depositors and ask them to meet with our brokerage representatives. We then became licensed to sell mutual funds directly from the bank. We quite literally were converting bank deposits – funds which are required by bank charter to be loaned within the community the bank serves – into investment vehicles that would deploy capital worldwide.

This phenomenon favors both larger banks and the largest of companies which can tap into Wall Street credit grade financing. Small companies, needing ready capital to grow, were denied capital as banks no longer needed to deploy as much of their deposit base locally.

It took less than 20 years to turn the highly regulated, highly functional United States banking system from the world’s safe haven to one which nearly collapsed most western financial institutions.

We continue to feel the lingering effects with the U.S. housing market still trying to find a bottom and the European banking system continuing to identify and unwind their similar issues.

During the great depression, Glass-Steagall was the solution to take banks which were making speculative loans and reign them in to safe, transparent, and regulated institutions. After the 2008 collapse, Dodd-Frank became the solution. It was unnecessary and overly burdensome, however.

Repealing Dodd-Frank can allow banks, commercial and investment, to return to doing what they do best without bureaucrats making business decisions for them. But repealing Graham-Leech-Bliley would ensure that the part of banks that are insured by taxpayers continue to be highly regulated, but detached from the much riskier transactions undertaken by Wall Street.

Dodd-Frank should be repealed, but in exchange, Glass-Steagall must be restored.

11 comments

  1. rense says:

    Glass-Steagall is an excellent step. Dropping Dodd-Frank is fine with me. We do need to get rid of “too big to fail”, but looking into stuff like this should become a major priority of the Justice Department, especially the U.S. attorneys whose jurisdictions are the major financial centers. Need more Rudy Giulianis and Elliot Spitzers keeping an eye on these folks. Human nature is never going to change. There will always be greed, always be corruption, always be people motivated by ego and power, always people looking to cut corners etc. so a strong, vigorous law enforcement approach for both oversight and deterrence is necessary. Maybe there needs to be less regulation to protect free market principles but more law enforcement to weed out the criminals from the honest capitalists.

  2. abella30 says:

    I agree that Glass-Steagall should be reinstated but I don’t know enough about Dodd-Frank to comment one way or the other. Sarbanes-Oxley is a regulation that impacts my working life daily. It is expensive. My company invested in new software to keep up with the requirements and it takes me twice as long to finish my work so that I can document and upload the way that I should. Plus, we had to hire QA people to review our work so that when the real auditors come by, everything is ready for them. That being said, I am not sure that all of our documentation is a bad thing . . . the law has really forced companies to review processes and make sure they know what their employees are actually doing to get their results. Prior to the law, most of my managers only knew what my results were; there wasn’t a lot of concern with how I made my decisions. At this point, I wouldn’t want to change processes again although I am sure that my company would scale back some positions if Sarbanes-Oxley was repealed.

  3. rsmith says:

    Great post. As a bank director from the mid-eighties through 2006, i would add only that there has been too little talk about Sarbanes mark to market requirements, along with the FASB rule. Banks were allowed by the FDIC to count investments in FNMA stock as the equivalent of 80% of Treasuries with respect to their capital requirements. How many banks failed directly because of that?

  4. saltycracker says:

    In lieu of agreeing by rewording I’ll just reread the post.
    Don’t think we can unravel the new order but we can impose some better risk ratios, transparency and lower leverages.

  5. I Miss the 90s says:

    “Their very existence now institutionalizes a system that privatizes profits while socializes losses. This is not capitalism.”

    I beg to disagree with you, Charlie, on this point. The privatization of profits coupled with the socialization of loss (and risk as well) is the crossroad of capitalism, free markets, and “republican” government…but it does not have to be so.

    The US is going through an identity crisis. Occupy and the Tea Party have more in common than the media, and blogosphere, like to pretend…and the similarity stems from the American conceptualization of “representation.” All that brouhaha about the role of government, yadda, yadda, yadda, is really meaningless. With the exception of Bernie Sanders, there are no socialists in Congress, the WH, and SCOTUS, nor are there really any in state governments either. The Tea Party and the Occupy movement are both groups of people that feels that it is being ignored by our government. That our government is elected by us, but has only been serving the elite. This is where the paradoxes begin though. Market fundamentalism and capitalist fanaticism do not lend themselves to popular government and those mythological ideas of representation that are spoon fed to you since childhood. When you allow the political sphere (which can theoretically be separated from the economic sphere, but never has) to act as a free market, rather than an exchange, and on capitalist principles, rather than social principles, you are literally tilting the playing field in such a way as to advantage those with the most resources (capital). This does not benefit the 99%. Take campaign finance as an example. The right wing screams about 1st Amendment protections (even though they seem to forget about this when flag burning and school prayer are the subject of debate) when campaign finance reform comes up on the agenda. Why do you think that those of us wealthy enough to drop $100k and raise another $200k (or more) on campaign donations do so? 1) We are allowed to; 2) It works to our benefit; 3) It establishes a market determined barrier to entry (if you can not pay, you can not play).

    Don’t get me wrong. I am all about lobbying and the right to petition. This radical market fundamentalism and capitalist fanaticism, however, has changed things for the worse. Popularity is no longer the currency of the realm (as it should be in any democratic-republic). Currency is now the currency of congressional action.

    Gramm-Bliley-Leach should probably be repealed, Dodd-Frank should probably be given a little more time. I am not going to make any statement because, frankly, not a soul on the planet has any idea about which course is the best to take (there are a lot of whacko ideologues, but face it: being an ideologue only means that you make decisions with your gut rather than quantitative evidence). I do know that over $4billion will be
    spent on campaigning next year, how valuable do you think your contributions will be compared to the Koch’s or to Soros’s, or to any bundlers?

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