Bring Back Glass-Steagall Laws

Today’s Courier Herald Column:

Late last week, JP Morgan Chase announced to investors that the company would be taking an unexpected loss of about $2 Billion because of unexpected trading losses in derivatives.  The company’s London investment office created an insurance product as a hedge against the credit default of 125 large North American based companies.

JP Morgan bet big that an improving economy would increase the value of their hedge.  Instead, they flooded the market with too much of the product, with the hedge becoming significantly larger than the underlying index which they were attempting to mitigate risk.  Unwinding the positions will cost the bank dearly, not only with a large amount of the bank’s capital but by shaking the institution’s squeaky clean image.  JP Morgan Chase had been one of the few large institutions that emerged fairly unscathed from the financial meltdown of 2008.

The problems for JP Morgan have more to do with public perception than financial realities.  It claimed roughly $175 Billion of equity on its balance sheet at the end of last year and is earning about $5 Billion per quarter.  It can handle the financial loss.

The fact that a large bank can continue to have internal controls that allow investment units to create investment instruments with unknown risks and lose billions demonstrates that the problems that caused the 2008 financial crisis may not have been fully mitigated.  The fact that it occurred at a bank with JP Morgan’s image and on the watch of its CEO Jamie Diamon reminds a nervous financial community that unexpected financial losses can happen anywhere, and under any management team.

The question remains are there policy changes that need to be made.

A Republican friend’s Facebook status is currently posted as “JP Morgan loses $2 Billion of investors money and President Obama says the industry needs more regulation. Obama loses $500 Million of taxpayers’ money in Solyndra and says that’s the risk of investing.”  President Obama made remarks calling for additional unspecified regulations Tuesday on the same day he conducted a fundraiser at the New York home of the Wall Street firm The Blackstone Group LP’s President Tony James.

There is common ground in the two opposing partisan responses.  Private money, not taxpayers’ money, should be used to take risks.  Risk involves the possibility of loss which is an essential part of the free market capitalist system.  Taxpayer money should not be used to take investment risk, and the financial system should be insulated from the perception (and since 2008 the reality) that taxpayers are the backstop to risky financial transactions.

From a policy perception, this equates to the return of Glass-Steagall laws.  Glass-Steagall was passed in 1933 to separate the U.S. commercial banking system from investment banking.  The FDIC insured banking sector used primarily by consumers and small business was firewalled from the unlimited risk taking highly unregulated world of Wall Street bankers.  In 1999, the law was repealed.

It was the repeal of that law that allowed institutions such as JP Morgan to merge with commercial banking powerhouses like Chase Manhattan.  Mixing the two systems has had more consequences than just increasing the amount of the financial sector exposed to unlimited risk.  Investment banks now use their commercial bank subsidiaries as a conduit to move FDIC insured bank deposits into more risky highly leveraged investment vehicles on which the investment banks thrive – during good times anyway.

The opportunity cost of this funds transfer is that is less money available for the commercial banks to loan back to small businesses and consumer customers that would otherwise expand the economies where they work and live.   Capital has been removed from local communities, shipped to Wall Street to be repackaged, and then sold off on world markets.  All of which is fine, or at least legal, until taxpayers have to settle the risk.

Taxpayers back FDIC institutions.  They are highly regulated for a reason.  Risk is minimized to ensure a stable financial system.

Taxpayers should not back Wall Street investment banks.  When they do, as was done in the aftermath of 2008, the consequences trickle back down to other banks.  Georgia now has lost 25% of its small banks mainly due to the real estate bubble created by the largest few.

There needs to be a separation between taxpayer insured commercial banks and risk taking Wall Street firms.  Neither is inherently bad, but both are inherently different.  As such, they should be quite separate.

To make that happen, Glass-Steagall should be re-instated.


  1. xdog says:

    Wow. I thought it was an article faith of all right-thinking gopers that government should let biz be biz. Socializing risk is just icing on the cake for corporate personhood.

    “Georgia now has lost 25% of its small banks mainly due to the real estate bubble created by the largest few.”

    I wonder how many of those failed banks should never have been chartered at all. Yes, they served mainly as conduits to developers and builders, but that’s not unique to Georgia. No other state matched Georgia’s rate of failure. I put a lot of the blame on the people running the failed banks and on the people who said those people were qualified to run banks.

  2. Calypso says:

    Charlie, you said, “Private money, not taxpayers’ money, should be used to take risks. Risk involves the possibility of loss which is an essential part of the free market capitalist system. Taxpayer money should not be used to take investment risk…”

    I’m not disagreeing with your comments and realize my question does not pertain directly to the type of taxpayer obligation you mention above, however, how do investments of taxpayer monies such as the state employee and teachers retirement funds fit into this mix?

    • Charlie says:

      I don’t think those are taxpayers’ monies, in that they belong to the employee/retiree.

      As such, they’re managed according to the rules of pension funds, with the state acting as a fiduciary but (I believe) through an agent who is supposed to keep the retiree’s interest first and foremost. There’s a big difference between managing a future retiree’s pension funds according to plan guidelines than committing taxpayer money to speculative (and often dubious) projects or unlimited guarantees of private enterprises where taxpayers get none of the gain and backstop all of the risk.

      • saltycracker says:


        Good article but must disagree with your remarks on the public pension, taxpayers guarantee the market risks, returns and payouts in those programs. Without wearing this out, the public pension programs take a lot of liberties with their acturian and management assumptions. There are many very smart folks writing on this regularly.

        If we are so certain of their viability then do not require that the public guarantee the market investments made by these funds. It won’t happen as politicians will overestimate the returns, plan for a growing base of employees, fail to properly fund, expand the programs and spend the money.

        The public pension programs are the greatest future threat to adequate public services. Some states are closer to major problems while others like Georgia can kick the can down the road for a while. It is a big, big problem the private world has been addressing theirs for years by putting folks on fully funded 401k’s.

        In closing, many public programs are forecasting an 8% return in their retirement accounts (and that will not be adequate) these are supposed to be conservative investments – let’s open that up to the public – they’ll get a few billion in GA pretty quick !

  3. peachstealth says:

    Another law that need repealing is the Securities Modernization act of 2000. That’s what made trading derivatives legal. Like Gramm-Leach-Bliley ( Glass Stegal repeal), it was written primarily by Phil Gramm and are what Democrats point to as Republican deregulation.
    In reality they are about as bi-partisan as you can get. They were written by Republicans, passed by huge majorities of both parties and signed by a Democrat President (Clinton).
    FWIW Phil Gramm is a native of Columbus, holds a PhD in Economics from UGA and moved to Texas to teach at Texas A&M.

    • xdog says:

      Phil was an army brat as well. Glad to see him on the corporate think tank dole after a lifetime of drawing checks from Uncle Sam. He remains one of my least favorite hypocrites.

  4. SallyForth says:

    YES!!! Charlie, I’ve been singing this song ever since the big financial house of cards started folding as a result of deregulation, turning banks into insurance companies and investment brokers!

    Those who don’t learn from history (in this case the 30’s) are doomed to repeat it. Bring back Glass-Steagall NOW!

  5. Jimmie says:

    It’s sinister how the master plan was hatched. The Documentary Inside Job lays it out very nicely. The Dems think it is the GOP that started this whole House of Cards. All the while it was the Clinton Admin. Rubin, Summers, Greenspan. All should be in prison. Anyone remember the smart ass that says “Give it your best shot!” ? Glenn Hubbard The Professor. Major advocate of deregulation of derivatives. Yeah He’s Mitt Romney’s Chief Economic Adviser. We’re screwed with Obamney.

      • saltycracker says:

        Prof. Hubbard should connect his dots from cutting taxes to cutting expenditures to overhauling the tax laws.

        The repeal of Glass Stegal had only eight opposing votes as Republicans and Democrats jumped on the “global” banking competition train.

        Keep in mind G/S only put us from the frying pan of a burnt housing market into the fire of the too big to fails. Investment houses years before started coming up with financial innovations to make money like securitizing of mortgages, interest rate arbitrage, derivatives…that were so complex – weapons of mass destruction – they had to train the ratings agenicies on how to rate them ! Can you say, oligarchy…or is it corporatocracy….?

        If we won ‘t unravel it then why not change the F.D.I.C. rules and only guarantee deposits in institutions that stick to taking deposits and loaning money within specific boundaries.

  6. saltycracker says:

    Reflecting on this thread –
    Here we have a great example of our problems today – Both parties politicized the idea that to fulfill the American dream we all needed a home and began to fiddle with the system under lobbyist direction – Barney wanted to lighten up on the poor folks and the investment houses cooperated with clever financial innovations for all. Milliions did go to the “disenfranchised” but billions went to the looters.

    Now both parties are doing their best to blame the other party and offer solutions that best reward their view. The air seems to be at both ends of this bell curve…

  7. DavidTC says:

    There’s no reason to have giant banks in the first place. And there’s certainly no reason to combine _investments_ with _savings_. There is supposed to be a very clear line between risk-free ‘money storage’ (Which is, of course, FDIC insured.) and risky investing.

    The only purpose allowing one bank to handle both does is to allow them to futz the line, to somehow recover from their own bad investments, and point how they can’t fail, they have all the money!

    Of course, the entire purpose of savings accounts was for the bank to take our money and loan it out to others. But because banks appear to no longer _make_ loans, and when they do they do not need our money to do so (The government is loaning them money at incredibly low interest rates.) they have no incentive to actually pay us for this, so our interest rates are nothing.

    At this point, we really should just be considering saying:

    You know what? Screw having private industry involved in this. There seems to be literally no purpose _at all_ to have privately owned savings institutions. So let’s just create, nationwise, government-operate ‘money storage’ institutes. You put money in, they hold it, you can get it out later.

    Forget these idiotic banks and the entire universe of gibberish and derivatives and whatnot they created. Keeping our money in them has no purpose at all for _us_, so why do we do it?

    • saltycracker says:

      You are joking ?
      Without a healthly, properly regulated, competitive banking system there is no free market.
      And this is not the goal of the “too bigs” or the administration.

      • Calypso says:

        Salty-The way I read DavidTC’s comments was that he is exasperated with the way things are now being handled and was saying those things as a tongue-in-cheek slap against the shenanigans.

        If I’m wrong, please clarify DavidTC.

        • DavidTC says:

          There used to be certain type of business in town. You could leave your car there, and they’d loan it out to strangers and pay you a small kickback. (In this universe, all cars are fungible.)

          And then these car rental services were bought by other, regional services. Then national services.

          These national services started loaning cars out to everyone because…well, no analogy here, it just somehow happened. A lot of these people did not actually know how to drive, and ending up crashing their cars. A lot of people were loaned cars they couldn’t pay for. Etc, etc. A few banks appear to have started giant flaming cars over the parking lot, and a few of those were dropped on the other cars.

          So the economy blew up. But the car places, after all, had all our cars, and without them we couldn’t drive, so some of them the government saved.

          But those car places would no longer loan people cars at all.

          In response to this, the government started loaning the car rental services great big globs of cars, hoping they’re loan these cars out to people.

          The car places still will not loan out cars, and, as an added bonus, now had exactly no incentive to provide any kickbacks to the owners, because they could just borrow cars from the government. In fact, they continued to add parking fees and whatnot, so that they started charging us for _us_ loaning _them_ our money. I mean, our cars.

          At this point, I am asking: Why the hell isn’t the government going: You know, a parking lot isn’t that hard to build, and not that expensive. I mean, _we_ could build one, and just let people park there.

          But as we all know: FREE MARKET FREE MARKET FREE MARKET.

          Ignoring the fact that banks have _absolutely_ no right to be claiming any sort of ‘free market’ protection at this point. You want a ‘free market’, you let me borrow from the government like the banks are somehow able to.

        • saltycracker says:


          There you go again – trying to be logical – while you are at it – explain banking system 101 to D-TC…..

      • DavidTC says:

        No free market in what? Holding money of other people?

        I’m not sure that what is essentially ‘a parking lot for money’ needs a ‘free market’. The government, I must point out, operates plenty of parking lots.

        It was different back when banks needed our money, of course. They would compete over us. Now they can just walk up to the Fed and say ‘Hey, we need another loan’.

    • elfiii says:

      “Drop the banks and put your money in a safe in the basement, like me. No fees…”

      And when the money becomes worthless due to hyperinflation? What then?

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