Return to Prudent Banking Act of 2013

IlliniProgrammer:

I think that's a fair trade if Dodd-Frank regulations are lifted on the separated investment banks, who no longer receive FDIC insurance or other implicit government guarantees.

This.

CountryUnderdog:

I do not think it will pass. The joining of separate functions has many benefits, such as cost/revenue efficiencies, increased access to financial functions in rural areas, and offers diversification to banks which reduces their overall risks, among other benefits.

One of the things that we have to accept is that no bank, financial institution, SIFI, etc. is 100% stable, and there will always be mistakes. DC has long recognized that Glass Steagall was a mistake -- the question is will political opportunism and the intentional creation and publication of misinformation continue to win the day? Quite possibly imo.

I agree with you, but I'll point out that Canada has had I believe 1 bank failure since the Great Depression while the United States has had thousands. I'm a conservative Republican and a manager/owner of a branch of a national bank (point is, I'm no pot smoking hippie), but there's got to be some middle ground between Canada and the U.S. Our mortgage culture in the U.S., which has had the flames fanned by government and GSE policy, has directly led to thousands of bank failures. Something needs to give.

I agree with others that Glass Steagall (with modifications) would be a sufficient replacement to Dodd-Frank, which is a simply awful piece of public policy. I think this policy modification with the long-term phasing out of the GSEs and FHA loan programs would put us on a good middle ground between the U.S. today and Canada.

West Coast rainmaker:

I'd be fine with it. The repeal of Glass-Steagall wasn't really instrumental to the crisis - banks still would have been selling mortgage loans to IBanks for securitization.

More importantly, no major commercial banks merged with investment banks in the years leading up to the crisis.

TheKing:

NS - my view is that it would have prevented the level of interconnectedness of the system that we had and all investment banks that were cranking out CDOs would not have been tied to traditional deposit taking commercial banks.

How?? What systemically significant investment banks were tied to traditional deposit-taking commercial banks pre-2008?

TheKing:

Also, NS, within the flawed system of government that we have, I believe that this sort of solution is more realistic than anything else that would be effective. Start here and then move towards getting govt out of things like the mortgage market. Don't let the perfect be the enemy of the good, bruh.

Look, I hear you on this point. But unless we are talking about political dealmaking on this forum, I think what is more relevant is: what is the ideal solution? Sure, we can take baby-steps in between for political expediency, but let's not act like government involvement improves the situation.

TheKing:

Here's the thing. I used to argue hardcore for the "we should've just let all the firms fail and have the chips fall where they may" point of view. But, the issue I have with that is that the gov't and the big banks helped create a monstrous mess that had massive global consequences. Rather than doing nothing or bailing out as we did with no strings attached, there has to have been a better way.

I'm not going to sit here and write a 10 page essay on what the bailout should've looked like, but it's pretty clear that what we ended up doing was a complete disaster that only perpetuates TBTF and continues to prop up shitty firms while the rest of the country eats shit (while helping to subsidize the banks via their tax money.)

There should have been no bailout. I have never read a compelling case contending otherwise. A collapse of bad business models is a necessary element of the free market.

Also, all of this is missing the fact that the government created the problem that led to the collapse. The solution is NOT more government! That much seems so clear!

TheKing:

Saying that BofA, Citi, and JPM were not systemic banks at reasonable risk of collapse is so staggeringly wrong, I am baffled. It literally ignores the entire idea of systemic risk and how the fall of one bank leads to the fall of the other banks.

Once again, you're making no reasonable attempt to argue against my points, and instead turning them into complete mockeries, then easily refuting them.

Let's recap the argument here:

-You say that we should reinstate Glass Steagall to prevent the link between commercial and investment banking practices.

-I say that Glass-Steagall had zero relevance to the credit crisis and would accomplish nothing in the way of preventing another 2008.

So are you arguing that BAC, C, and JPM were at risk of collapse because of the effects of the Glass Steagall repeal? Because your argument suggests otherwise:

1) You mention the merger of Citi and Travelers, which happened in 1998, before the repeal of Glass Steagall:

Citi merged with Travelers (amongst many other firms) to become a behemoth Frankenstein of a bank back in 2000 (right after Glass-Steagall was repealed.)

2) You mention BAC, which was involved in a number of securities business long before the repeal of Glass-Steagall:

Bank of America was also balls-deep in investment banking activities, it wasn't as though they were just some big commercial bank. They weren't the only ones, but they were the biggest.

3) You mention interviewing at "Supermarket Banks", which is a term that was around in the 1980s, long before the repeal of Glass Steagall:

Back when I was interviewing for banking gigs (2006 - early 2007) in undergrad, the "supermarket model" was seen as the strongest model a bank could have. It was seen as a massive strength to have a giant commercial banking balance sheet combined with an investment banking platform.

The New York Times reported in 1998 (before the repeal of Glass Steagall): Banks are "selling stocks and bonds, providing advice on mergers and acquisitions, concocting newfangled financial products and trading."

Jerry Markham writes that before the repeal of Glass Steagall:

COMmErciAL banks were underwriting and distributing loans and bonds, providing mezzanine financing to companies, engaging in foreign exchange trading in the interbank currency market, advising customers on mergers and acquisitions, and offering complex financial instruments.Banks were acting as agents in private placements, sponsoring closed-end investment funds and offering deposit accounts with returns that were tied to stock market performance. Other bank and bank affiliate activities included euro dollar dealings, trust investments, automatic investment services, dividend investment services, dealing in swaps and other OTC derivatives and providing research services.

None of this even mentions the fact that all of these practices existed long before Glass-Steagall was repealed! I'll let Markham speak for me:

Mortgage-backed securities issued by commercial banks had appeared well before the GLBA repealed the Glass-Steagall Act. “In 1977, Bank of America and Salomon Brothers first issued ‘a security where outstanding loans were held in trust, with investors as beneficiaries.’” National banks were actually encouraged to begin their own private mortgagebacked securitizations after Congress amended the banking laws in 1982 to allow those banks to “make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate,” subject to limitations imposed by the OCC. In addition, Congress passed the Secondary Mortgage Market Enhancement Act (“SMMEA”),seeking to allow “private issuers of mortgage securities to compete effectively with government-related agencies, which had come to dominate the market, by removing some of the legal impediments to issuing private mortgagebacked securities.”

Over $1 trillion of asset-backed securities involving family mortgages were outstanding in 1991. NationsBank (now Bank of America) securitized $1.4 billion of commercial real estate mortgages in 1996 and $800 million in other mortgages. From this analysis, it appears that GLBA was not a factor in commercial banks underwriting CMOS or their successor, the CDO.

Please stop making a straw man of my argument.

IlliniProgrammer:

These transactions were regulated and overseen by treasury. Specifically, they were fixed income rather than equity transactions.

Lehman Brothers was done in by an equity transaction, which was allowed to spread to commercial banks because the firewall of Glass-Steagall was removed.

Do explain what part of the Lehman acquisition of Archstone wouldn't have spread to commercial banks if Glass Steagall were still around in 2008 (it's possible that I'm missing something here).

Also, you stated earlier that "The Lehman Brothers bankruptcy had absolutely nothing to do with GSEs and FHA", yet the Archstone acquisition was partially financed by Fannie and Freddie. I'm lost on your point here.

Singapore is a more regulated country than the United States. Singapore's and Hong Kong's success (as well as the US's success) has a lot more to do with work ethics and the presence of regulated capitalism than laissez-faire Austrianism.

I disagree on all accounts, but this is a debate for another day.

IlliniProgrammer:

Do explain what part of the Lehman acquisition of Archstone wouldn't have spread to commercial banks if Glass Steagall were still around in 2008 (it's possible that I'm missing something here).

Lehman would not have had zillions of CDS, stock future, and CDO transactions outstanding with JPM, Citi, and BAC, because said banks would not have had "prime services" desks or even desks for that matter.

Except for the fact that commercial banks were active in CDSs prior to Glass Steagall's repeal:

The Glass-Steagall Act also proved to be no barrier to banks to enter the over-the-counter derivatives business. As a result of legislation passed in 1992, swaps were exempted from regulation under the Commodity Exchange Act of 1936. Even before the enactment of that exemption, the swap had grown to a notional amount of some $4 trillion by the end of 1991. The top dealers in OTC derivatives in 1993 (six years before the repeal of Glass-Steagall) were commercial banks, including Chemical Bank, Citicorp, Bankers Trust, Société Générale, J.P. Morgan, and the Union Bank of Switzerland. Some seventy percent of Bankers Trust’s first quarter profits in 1994 came from derivative products. In total, commercial banks accounted for a notional amount of as much as $14 trillion in derivatives sales.

The credit default swap was in place before the passage of GLBA. The OCC issued a bulletin in 1996 that set forth supervisory guidelines for a “new set of derivative products” in the form of “credit derivatives” that are “marketed as an efficient way to manage credit exposure.” One such instrument was the CDS, which the bulletin compared to a traditional standby letter of credit, and which would play a large role in the failure of the America International Group, Inc. during the subprime crisis. The OCC bulletin opined that the CDS could provide national banks with substantial benefits, such as allowing them to hedge concentration risks and credit deterioration of an asset and to adjust their credit profiles in a particular industry.

...

The OCC bulletin made clear that CDS were in wide use by banks at least three years before the repeal of Glass-Steagall by GLBA.

And they were active in the CDO market:

Mortgage-backed securities issued by commercial banks had appeared well before the GLBA repealed the Glass-Steagall Act. “In 1977, Bank of America and Salomon Brothers first issued ‘a security where outstanding loans were held in trust, with investors as beneficiaries.’” National banks were actually encouraged to begin their own private mortgagebacked securitizations after Congress amended the banking laws in 1982 to allow those banks to “make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate,” subject to limitations imposed by the OCC. In addition, Congress passed the Secondary Mortgage Market Enhancement Act (“SMMEA”),seeking to allow “private issuers of mortgage securities to compete effectively with government-related agencies, which had come to dominate the market, by removing some of the legal impediments to issuing private mortgage-backed securities.”

Over $1 trillion of asset-backed securities involving family mortgages were outstanding in 1991. NationsBank (now Bank of America) securitized $1.4 billion of commercial real estate mortgages in 1996 and $800 million in other mortgages. From this analysis, it appears that GLBA was not a factor in commercial banks underwriting CMOS or their successor, the CDO.

And they were active in the stock futures markets:

Before the repeal of the Glass-Steagall Act in 1999, commercial banks were “selling stocks and bonds, providing advice on mergers and acquisitions, concocting new fangled financial products[,] and trading.” The result was to turn banks into financial supermarkets.

Banks were underwriting and distributing loans and bonds, providing mezzanine financing to companies, engaging in foreign exchange trading in the interbank currency market, advising customers on mergers and acquisitions, and offering complex financial instruments. Banks were acting as agents in private placements, sponsoring closed-end investment funds and offering deposit accounts with returns that were tied to stock market performance. Other bank and bank affiliate activities included euro dollar dealings, trust investments, automatic investment services, dividend investment services, dealing in swaps and other OTC derivatives and providing research services.