Regulators Should Bring Back Glass-Steagall
And there on the TV is the umpteenth financial ‘˜talking head’ stating the grim obvious, such as ‘œwe are going to be well into next year’ before the housing market settles down, and banks re-start to lend. This is the financial economic guru from one of the biggest investment banks in the world. He’s just another face on the same breed of cat – the very same know it alls MBA’s and Ivy League graduates / mathematical geniuses, who with sophisticated computer models and algorithms, attempt to set up a portfolio that doesn’t lose money, but in a whisper – takes some risk. Go figure’¦ The very premise behind risk is that you very well might lose money. That’s why commercial banks don’t belong in the securities industry in the first place.
I would ask our esteemed members of Congress and the regulatory authorities to consider putting Glass Steagall (or some evolved form of it), back in force. Glass Steagall was a law enacted in 1933 that did not permit commercial banks from being involved in investment banking pr brokerage operations. This would have meant that a bank like Citibank and Citibank Securities would have to be two separate and distinct companies with separate balance sheets and types of risk exposure.
If Glass Steagall were in place during this sub prime lending mess, big banks would have been prohibited from overly investing in the sub prime securities ‘“ or any part of an investment bank (aka brokerage firm) that was cooking these things up, in the first place.
1999 – Glass Steagall Gutted:
Enactment of the Gramm-Leach-Bliley Act (GLBA) in November 1999 effectively repealed the long-standing prohibitions on the mixing of banking with securities or insurance businesses and thus permits broad banking. (James Barth, Dan Brumbaigh, James Wilcox The Repeal of Glass Steagall and the Advent of Broad Banking ‘“ April 2000).
What is the Glass Steagall Act and what was its intention?
The Glass-Steagall Act was intended to protect banks from certain of the risks inherent in particular securities activities (FDIC Statement Of Policy on the Applicability of the Glass-Steagalll act to Securities Activities of Subsidiaries of Insured Nonmember Banks ‘“ September 1982)
So as anyone can see, America’s banking institutions ‘“ became mixed up in high risk securities transactions either through their directly owned subsidiaries, or by direct lending to those securities firms. It is my belief that were Glass-Steagall in force, then the likes of Citibank, Bank of America, Wachovia, and all other commercial banks that have been stung because of their involvement in this sub prime business would have not been allowed to have been involved in these Securities. And thus the damage would have been limited to those securities firms. And thus the damage would have been far less of a problem because these firms don’t have the capital alone to have extended themselves out to the same degree that they did with the help of commercial banks.
OK’¦ That’s my clarion call. Congress and the regulators should bring back some form of Glass-Steagall ‘“ a hybrid form which would allow commercial banks to own a minority stake in the securities operations, and limit the amount of capital that the bank can lend to that subsidiary. Say 4-1. For every 1 dollar that the securities firm has in capital, the bank can lend up to $4. But not one penny more.
Doing this, the next time the whiz kids from MIT come up with a new computer model that supposedly ‘œlimits the risk’ of a certain type of hybrid / derivative / structured / hedged / security, they will only be able to play the game with a fixed amount ‘“ this means ‘œlimited’ amount of money.
In my opinion, the lesson in this whole mess is: You can like a trade, a stock, an option, but you don’t need to bet your farm, and your neighbors, and the neighbor’s farm down the street to make a nice profit.
Greed ‘“ like speed ‘“ KILLS!
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Walter Schubert, a third generation member of the New York Stock Exchange is the Founder and CEO of GFN.com: The Gay Financial Network.
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