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Glass-Steagall
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Glass-Steagall

  #1 (permalink)
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Glass-Steagall

Should Glass-Steagall be brought back into law?

Why, why not?

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It seems to be being discussed and sometimes recommended by both Democratic and Republican potential Presidential candidates, at the moment?

If you take the view that the financial crisis of 2008-ish was largely "a failure of regulation", then there would certainly seem to be arguments in its favour, perhaps the main one being the objective of "making future regulation easier and more practicable" by avoiding some potential/future regulatory problems in the first place?

Over here, it was in the 2010 election manifesto of the Lib Dems (minor coalition partners in the last government), and a Lib Dem cabinet minister was indeed "Business Secretary" ("finance minister") for most of that period from 2010 to 2015, but comparatively little was really done about it.

Quite a hot political potato, over here. The current government is funded hugely by hedge-funds, investment banks and the like, who are (of course) on the side of avoiding this kind of legislation. The public, on the other hand (in spite of having just elected them) remains broadly in favour of as much separation between "retail banking" and "casino banking" as possible.

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  #3 (permalink)
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As banking industry is currently core of economy, we should strive to build "idiot proof system". You can't prevent shit from hitting the fan, so you should build system that can handle crisis.

Compartmentalization of the system (dividing into smaller, not so connected parts) builds system that is more resilient to shocks. I believe analogy to big oil tanker and sloshing oil in it was used in this matter.

Breaking Glass-Steagall allowed big merges, big all under one roof banks. They tend not to be effective, as they have huge overhead, and very complicated technology systems. They are too big to fail and therefore are risk to economy.
On the other hand, they provide all services under one roof, provide lower costs to customer (economies of scale). And they provide huge bonuses for management (big bank, big overhead)

Regulations after 2008 aimed on regulation, not simplification. I believe Dott-Frank act has around 2000 pages. Some loopholes, some contradicting statements, accounting of derivatives... Some improvements were made, less leverage, better tracking of derivatives, but we are still sitting on keg of gun powder. In combination with algorithmic trading, and strong correlation of all assets these days, we are still in trouble if something goes south.

I would prefer Glass-Steagall or other similar law to current situation. Something that would break big banks, decrease risk for small client of the bank, and overall risk to economy if bank goes bankrupt.

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From wikipedia:


Quoting 
1999 The Gramm–Leach–Bliley Act (GLB Act), also known as the Financial Services Modernization Act of 1999, repealed part of the Glass–Steagall Act (GS Act) of 1933. The GS Act had prohibited any one financial institution from acting as any combination of an investment/security firm, a commercial bank and an insurance brokerage; therefore, the GLB Act removed the barriers which the GS Act had established upon the financial institutions in the 1930s for acting as any combination of an investment/ security firm, a commercial bank and an insurance brokerage: Thus, with the passage of the GLB Act, any one financial institution—after combining any of the following:

1. an investment/ security firm,
2. a commercial bank and
3. an insurance brokerage

Could act as the combination of those financial entities. That is to say, these three separate, financial entities no longer had to be separate with the passage of the GLB Act. The legislation was signed into law by President Bill Clinton.

Interesting fact:


Quoting 
A year before the law was passed, Citicorp, a commercial bank holding company, merged with the insurance company Travelers Group in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica, and Travelers.

Because this merger was a violation of the Glass–Steagall Act and the Bank Holding Company Act of 1956, the Federal Reserve gave Citigroup a temporary waiver in September 1998.[2] Less than a year later, GLBA was passed to legalize these types of mergers on a permanent basis. The law also repealed Glass–Steagall's conflict of interest prohibitions "against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank".[3]

I find the timing quite interesting, don't you? I wonder just how connected Citigroup was, and how they lobbied, to get their way and what ultimately lead to what most people cite as a primary reason of the 2007-08 collapse.

BTW, the act was said to:

"An Act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes."

Do you really think that was accomplished? Enhancement of competition? Is there more banking competition now than there was 20 years ago in the US?

Mike

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Big Mike View Post
From wikipedia:


Interesting fact:


I find the timing quite interesting, don't you? I wonder just how connected Citigroup was, and how they lobbied, to get their way and what ultimately lead to what most people cite as a primary reason of the 2007-08 collapse.

Yes, they broke law, and they got pass on it. (BTW, this merger was approved by FED, despite being against the law ) Yes there was ton of lobbying. Look anywhere around internet, I believe I never encountered anyone stating opposite.


Big Mike View Post
BTW, the act was said to:

"An Act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes."

Do you really think that was accomplished? Enhancement of competition? Is there more banking competition now than there was 20 years ago in the US?

Mike

First you have mergers and buyouts = less banks. Then 506 banks went bankrupt in US 2008-2014. Most of them as direct impact of crisis. Less banks/brokerages/security firms = less competition.
Banking industry is oligopoly, and they lobby for prohibitive regulations on new banks. It is very difficult to start a new bank. Big banks therefore enjoy by state granted oligopoly.
But I do not live in US, and do not have exp with US banking. This is theory statement.

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This chart shows Bank Consolidation over time.

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Is there more banking competition now than there was 20 years ago in the US?

I think it is a tough question to answer though. In 1995 you had to conduct all your business inside a branch.
Back in the dark ages we actually had to take a check to the bank on a regular basis and have it converted into money. I can't even remember the last time I have been in a branch at this point. At this point that idea seems almost ludicrous but it wasn't that long ago at all.

I would actually say we do have better competition today. Having thousands of local hardware stores was not better competition than Lowes vs. Home Depot just because there were more participants in the first option.

Citi is connected enough to get the legislation through, get the government to actually take an equity position when it didn't work and then come out the other side like nothing happened. It is an astounding job lobbying for the bank's self interest. .


Last edited by justrandom; November 7th, 2015 at 09:39 AM.
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