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Monday, January 4, 2010

Lukewarm About Reinstating Glass/Steagall

I have a slightly different perspective on Glass Steagall than most people. When I was a stock broker back in the late 1990's, suddenly my company, Everen Securities, was bought by a bank, First Union. We became First Union Securities. Suddenly, we were allowed to give checking accounts to our clients. That wasn't such a bad thing.

In fact, in theory, the repeal of the Glass Steagall Act isn't such a bad idea.Why wouldn't we allow banks to perform the functions of investment banks? In fact, only banks are barred from performing other functions. Think about how many different industries General Electric is involved in. No one is demanding a bill to stop their cross over into nearly all industries.

To say that the repeal of Glass Steagall caused the financial crisis is simplistic. At most, it contributed to it. More than that, it wasn't the repeal of Glass Steagall per se. Rather, it was the lack of imagination that followed its repeal that contributed to it. Look at how enormous Citigroup got. Traveller's, Solomon Smith Barney, Primerica, the list is endless of the companies bought by then Citibank to turn itself into a behemoth. If someone was screaming about danger, their voice was muted. Yet, the danger was obvious. Citigroup had its hands in everything and their sheer size meant the company became too big to fail. Only no one called it that during the height of the boom. Instead, it became a beacon for all others to strive for. You could do everything, financially, at Citigroup. That was good. Citigroup had a major stake in every part of the financial world, and that was bad.

It wasn't Glass Steagall's repeal that caused that. It was the regulator's lack of imagination that caused it. All mergers are supposed to be scrutinized so that the new company doesn't create a trust. Well, effectively, Citigroup was a trust. So, in a perfect world, I'd want to keep Glass Steagall repealed and get better regulators. I'm in reality and we won't have better regulators.

According to Politico, there's a growing sentiment to reinstitute it.

The populist angst aimed at Wall Street banks is already spilling into Senate deliberations on regulatory reform, and a powerful new sentiment — big is bad — is being echoed by liberals and conservatives alike.

The anger at the nation’s financial behemoths is taking shape in a variety of ways, most notably in a bill from Sens. Maria Cantwell (D-Wash.) and John McCain (R-Ariz.), who are targeting big financial institutions such as JPMorgan Chase andCitigroup.

The bipartisan duo’s bill would reinstate the Depression-era law that built a wall between commercial banking and the riskier activities of investment banking. The separation — originally set up in the Glass-Steagall Act — was repealed in 1999.

On principle, I'm against this. I don't like government telling private business what business they can and can't engage in. If banks want to engage in mergers and acquisitions, let them. At the same time, I'm a huge believer in free markets. It's clear our regulators have no idea how to create free markets without Glass Steagall. Too big to fail is the antithesis of free markets.

Clearly, our regulators have no idea how to make free markets with financial services companies, so we can't have financial services companies. We need commercial banks and investment banks.

Of course, here we're also living a dream world. We can't simply unring the bell. We now have all sorts of financial services companies that will have to be split into commercial banks and investment banks. The same regulators that couldn't figure out how to keep them competitive in their current state will be in charge of keeping them functional after breaking them up.

The real problem is that big powerful banks have far too cozy a relationship with the politicos. That's what's lead to all of this. Glass Steagall was merely a tool. Though, if we were able to reinstate it, it would take away at least one tool of too big to fail.


Jason Gillman said...

Too big to fail?

I don't believe in that.. Let the big ones fail when they must. They then at least serve as lessons. At the same time the government needs to get the hell out of deciding that banks like Citi are not offering enough credit to certain groups etc.. (what started this mess)

Our president was part of a legal team which sued citi back in 1989 (I think was the year) on behalf of a woman who lived in a "red lined" area where it wasn't profitable to lend. It was called racism, and government was used as a hammer against the lender. Citi caved and changed its lending practices because it saw the writing on the wall with respect to government intervention based on "equality."


The regulatory aspect however needs to be adjusted so that the cronyism on some of the major boards doesn't rob the stockholders of a properly run company.

mike volpe said...

You're making a different argument and a totally absurd one at that. Whether something is too big to fail is one argument. I don't necessarily disagree with you but that doesn't mean that regulators didn't allow Citigroup to grow too big. That the government started this mess by forcing banks to lend to certain groups is stupid, with all due respect, and it's perpetuated by the likes of Hannity, Sowell, et al and they all have no idea what they're talking about. That contributed just more than the lint on my shirt. That's just something conservatives say because it fits their ideology.

The bad loans, sub prime, Alt A, had nothing to do with the government. Nothing. All of that was outside the role of the government. We had too much loose money. That's what started it. Government interference in the way you're talking about is nonsense.

Jason Gillman said...

I must disagree with you.

First.. because of a hannity, or Sowell saying it shouldn't automatically make it not of my own reasoning..
second.. When the natural action of BUSINESS is subverted by "equal outcome" activism through the courts or other government activity it DOES affect the profit making process and the ability for a company to manage its risk factors, no matter the size.

Please don't fall into the David Brooks trap.. that place where cause and effect are completely misinterpreted. He does kind of the same thing.. says "The educated class believes in global warming, so public skepticism about global warming is on the rise. The educated class supports abortion rights, so public opinion is shifting against them. The educated class supports gun control, so opposition to gun control is mounting.

HUH? though not quite the same.. when you assume because some major conservative supports something, I have emptied my skull to parrot their words. No sir. I have a great deal of respect for those two you mentioned, but have no predisposition to blindly believe anything.

Now.. as to the direct effect on business by government ..

Many of the supporting aspects of the CRA have set the stage for banks which were too large to fail. The Fannie Freddie roll up of the crap loans these banks were "forced" to make also rewarded them handsomely.. For a time. Leveraging the incredible inventories that were protected by the Fannie Freddie arrangement IMO, created the balloon that burst in 2008.

I know you have more experience in this business, so if I am factually wrong on the paper swap angle my guess is you will say so. I can accept criticism if I have misread.

But to the absurdity of government causing unnatural market reactions and occurrences.. not a chance. The more the government gets involved the worse it all becomes. There is no reasonable argument to counter that claim. If you do not like my swipe at equal outcome government, then admit as much.

mike volpe said...

Jason, this debate bores me. I've written extensively about it on this site and I'm sure you've read the pieces, however I dealt in depth with the root causes of the crisis here.

To believe that government interference caused the crisis you'd have to believe in something Orwellian. No one in the business heard of any of this while it was happening. Mortgage brokers weren't even regulated by any of them. More than that, these government intrusions happened in the mid to late 1990's and the crisis took another decade. It just didn't happen that way. I don't know or care why you think that government interference caused it because you're wrong either way. It's very simple. Which do you think is more responsible, that which controls the money supply or some obscure law no one's heard of.

That's the piece. If I got anything wrong, let me know.

Jason Gillman said...

Thank you.

I had missed that.