Glass Steagall is not the solution…

Phillip Wallach of Brookings on the topic.

He says it is fashionable to mention that let us bring back Glass Steagall Act.

In the wake of the recent revelations about trading losses at J.P. Morgan and the manipulation of LIBOR rates, cries for further reform are again rising, with many dismissing the two-year-old Dodd-Frank Act as off-target or insufficiently bold. One particular reform idea has proven surprisingly resilient: “We need a new version of the Glass-Steagall Act.” Of late, characters ranging from former Kansas City Fed President Thomas Hoenig to UK Labour leader Ed Miliband to the ever-eclectic Lyndon LaRouche have called for a revival of Glass-Steagall in some form, warning that the financial sector and taxpayers will not be safe without resurrecting the law that separated commercial and investment banking.1 While most advocates of a new Glass-Steagall seem to be on the left, prominent Republicans have sometimes joined in, including former Speaker Newt Gingrichand current House Budget Chairman and Vice Presidential Nominee Paul Ryan.2 Even Sandy Weill, the architect of the merger between Citi and Traveler’s Group which dealt Glass-Steagall one of its final blows, has penitently endorsed bringing back the wall.

He says it is mainly political posturing. In reality Glass Steagall changed from its original format as time passed. The original act was:

What we now know as Glass-Steagall (§§ 16, 20, 21, 32 of the Banking Act of 1933) was primarily the work of the architect of the Federal Reserve System, Senator Carter Glass (D-VA).23 By separating commercial and investment banking into separate legal structures, the law would purportedly prevent:

1)Banks making risky investments in securities, thereby endangering deposits; 2)Unsound loans made to prop up companies in which a bank was invested; 3)Pushing underwritten securities onto banking customers.
2) The new law satisfied widespread demand for action in the wake of the financial system’s cataclysmic meltdown, but Glass’s ideas were also highly congenial to dedicated securities firms, which would greatly benefit from having a large part of their competition banned. Far from being a regulatory regime that acquisitive bankers were always eager to scrap, throughout its history dedicated investment banks remained the most vocal and active supporters of maintaining a “wall of separation.”

All of this became complex over bank holding companies:

Although most banks were satisfied to maintain symbiotic relationships with separated investment houses until the 1950s, at that point various pressures began to test just what the separation required. A special challenge was how Bank Holding Companies (BHCs), companies that controlled at least one national (commercial) bank, would be treated. After many false starts, Congress set out a fairly clear policy with the Bank Holding Company Act of 1956 and amendments in 1966 and 1970: BHCs would be regulated by the Federal Reserve, and could not control both commercial banks and investment banks.25 Importantly, though, the Act was not meant to prohibit commercial banks from undertaking activities “so closely related to banking as to be a proper incident thereto” and it provided no explicit laundry list of prohibited activities.

Exactly what commercial banks (or their corporate affiliates under the same BHC umbrella) were allowed to do became a source of controversy and protracted litigation over the subsequent decades.27 Glass-Steagall (plus the Bank Holding Company Act) thus meant quite different things in 1950, 1970, and 1990, even if those calling for the Act’s revival never specify which vintage they prefer.

He says Dodd-Frank already has several rules to strengthen the banking system:

Framing the discussion around Glass-Steagall leads us to act as if nothing has changed in banking regulation since 2008, which could hardly be further from the truth. The Dodd-Frank Act made dozens of major changes and hundreds of minor ones, many of which have yet to be implemented but are on their way. Discussions of “breaking up the banks” or “ending TBTF” should begin with what Dodd-Frank did on these fronts, rather than starting from either of the equally oblivious)  premises of “everything in Dodd-Frank is an incoherent disaster” or “Dodd-Frank did nothing to rein in the big banks.

So as per him, energies need to eb elsewhere:

The surge of interest in bringing back Glass-Steagall speaks to the understandable persistence of concerns about the safety and soundness of our banking system. There are ample reasons for these concerns, but I have argued that the focus on Glass-Steagall is largely misguided. Reformers should turn their energies elsewhere.

Nice bit on the famed G-S act. Frankly I was unaware that it changed overtime..