The McCain-Cantwell Act Aims to Restore Glass-Steagall
by Charles Lemos, Tue Dec 15, 2009 at 02:10:26 PM EST
Senator John McCain, Republican of Arizona, and Senator Maria Cantwell, Democrat of Washington, are proposing legislation that would reinstate the Glass-Steagall Act of 1933 that separated commercial banks from investment banks by banning commercial banks from underwriting securities, forcing banks to choose between being a lender or an underwriter but not both. The Glass-Steagall Act was repealed in 1999 during the Clinton Adminstration after enduring 12 attempts in 25 years to weaken its provisions.
Last week five House Democrats - Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts - introduced an amendment that would have given banks one year to choose between being commercial banks or investment banks, thus restoring the spirit of Glass-Steagall but the amendment failed. Sadly, the amendment never got a vote on the House floor.
Now the Senate is taking up the cause. From Newsweek:
More than a year after the election, the Arizona Republican is looking to repair that reputation by joining up with Democratic firebrand Maria Cantwell to propose something that will be anathema to both Wall Street and the Obama administration. According to two congressional sources, the two maverick senators want to reinstate Glass-Steagall Act, the Depression-era law that forced the separation of regular commercial banking from Wall Street investment banking. The senators' proposal echoes a failed amendment introduced in the House last week by Rep. Maurice Hinchey of New York.
The Senate prospects for the success of the McCain-Cantwell bill--which the two plan to announce together on Wednesday morning--seem bleak at best. But McCain and Cantwell join a still small but not insignificant insurgency of chronic doubters, including former Federal Reserve chairman Paul Volcker, who say not nearly enough is being done to change Wall Street and, in particular, to address the "too big to fail" problem. The issue is one of the few in Washington that can unite the left and right sides of the political spectrum. Democrats like Cantwell deplore Wall Street's outsize role in the real economy and its lobbying influence, and conservatives such as McCain are appalled at the way the market system has been undermined--some would say rigged--by the power of the big banks.
Here's why this is important:
The blinding complexity and interconnections created by modern capital markets--especially because of the way nearly half a trillion dollars in derivatives trades linked the firms to each other--demanded that there be strong firewalls and capital buffers between Wall Street institutions and their affiliates, and between banks and nonbanks and insurance companies. Otherwise there would be no islands of safety--no healthy institutions left to come and rescue the day, as commercial banks traditionally had done since the days of J. P. Morgan's famous bailout in 1907. The repeal of Glass-Steagall took things in precisely the opposite direction, eliminating most of the firewalls and inviting staid commercial banks into the buccaneering world of Wall Street trading. Representative Hinchey says it "was a recipe for disaster because these banks were empowered to make large bets with depositors' money, and money they didn't really have. When many of those bets, particularly in the housing sector, didn't pan out, the whole deck of cards came crumbling down and U.S. taxpayers had to come to the rescue."
I'll add one more point. As long as banks can mint money on their trading side, then they are not compelled to seek or even entertain risk on their commercial lending and credit side. Separating commercial banks from investment banks will allow each to focus on their very separate societal functions.
Tags: Glass-Steagall Act of 1933, Paul Volcker, Rep. Jay Inslee, Rep. John Conyers, Rep. John Tierney, Rep. Maurice Hinchey, Rep. Peter DeFazio, Senator John McCain, Senator Maria Cantwell, US Banking Sector (all tags)