THE HILL

 

Glass-Steagall takes center stage in 2016


A Depression-Era banking law is helping to shape the 2016 presidential field, as Wall Street critics push hard for its return.

The Glass-Steagall Act, the 1933 law that established a firewall between investment and commercial banking, was repealed 16 years ago on Thursday.


Where candidates stand on its possible return has become a litmus test in both parties, with supporters arguing Congress needs to restore it to prevent the next financial collapse.

The debate is leaving the 2016 field, and particularly Hillary Clinton, in a tough spot.

"A lot of people view it as a litmus test," said Dennis Kelleher, president and CEO of the Wall Street reform group Better Markets.

For those who are in favor of restoring the law, a candidate's backing Glass-Steagall says "'I get it, I get it. I will be tough on Wall Street. Trust me,'" Kelleher said.

Calls from the left and right for a return to Glass-Steagall have popped up all over the campaign trail, particularly from feisty populist underdogs.

The calls are more popular on the Democratic side, where both Sen. Bernie Sanders (I-Vt.) and former Maryland Gov. Martin O'Malley have echoed Sen. Elizabeth Warren (D-Mass.) in supporting restoration of the law.

In the Republican field, former Arkansas Gov. Mike Huckabee is the only active candidate who backs putting Glass-Steagall back in place, though former Texas Gov. Rick Perry proposed a new banking firewall as part of his Wall Street overhaul before he dropped out of the race.

Democratic frontrunner Hillary Clinton and many of her potential GOP rivals are trying to find space in the center to tap into public unrest over Wall Street without turning off Wall Street's deep fundraising wells.

An October Washington Post/ABC News poll found that most members of both parties favor tougher rules for the financial sector, with 67 percent of overall Americans in favor of a further crackdown.

During the October Democratic debate on CNN, the former law served as one of the clear fault lines between the candidates. O'Malley and Sanders directly criticized Clinton for her Wall 

Street stance. Meanwhile, Clinton said her plan was more comprehensive and did the job better.

Wednesday's debate on Fox Business opened the door for some more tough bank talk from the GOP field.

While Glass-Steagall was not directly mentioned, Ohio Gov. John Kasich said Wall Street needed an ethics lesson, former Florida Gov. Jeb Bush pushed for even higher capital requirements for banks, and Sen. Ted Cruz (R-Texas) said he would "absolutely" go after law-breaking bankers and would refuse to bail out a bank in trouble.

Several candidates railed against big banks' ability to hire lobbyists and lawyers to navigate complex financial rules.

The debate also gave trouble to moderates seeking a tempered tone.

Cruz and Kasich got into one of the feistier exchanges of the night over bank bailouts, as 

Kasich said he would save a bank to save depositors while Cruz blasted him for favoring Wall Street over "Mom and Pop" operations.

And Bush gave a muddled response to the bank bailout question, saying banks should have higher capital requirements, and seemingly predicting such a move would guarantee no future financial crises. When pressed by the moderator, Bush backed away from that stance. Also, banks have already raised capital significantly since the crisis.

The Democratic frontrunner is in a particularly odd spot when it comes to Glass-Steagall, since her husband President Bill Clinton signed the law repealing it in 1999.
At the time, he touted the new law as "stimulating greater innovation and competition in the financial services industry."

Since the financial crisis, former President Clinton has stuck by his guns, arguing that there is no evidence Glass-Steagall would have prevented the crisis.

Hillary Clinton's campaign has been eager to defend the Dodd-Frank financial reform law, and is pushing higher "risk fees" on large financial institutions and tougher rules on "shadow banks" that fall outside traditional regulatory oversight.

But she has not embraced Glass-Steagall specifically, calling the matter too complicated for a single cure-all bill.


Congress is at Home this week.  Contact your Congress members to sign HR 381 and S. 1709, the Glass Steagall bills in Congress.
  
  

HUFFINGTON POST

5 Reasons Why Glass-Steagall Matters
Glass-Steagall at the Debate
Richard (RJ) Eskow       11/17/2015

The Glass-Steagall Act came up as a major point of disagreement between Bernie Sanders and Hillary Clinton during Saturday's Democratic presidential debate. The Act, which was originally enacted in 1933, separated risky trading and investment from traditional banking activities like business lending and consumer finance.

1933 -- Anthony Adverse and Magnificent Obsession were topping the bestseller lists. King Kong and the Marx Brothers were big at the box office. What does a law passed back then have to do with the 21st century economy?

As it turns out, a lot.

Bernie Sanders wants to implement a new version of the Act, which was repealed in 1999 after having been in effect for more than 75 years. Hillary Clinton, on the other hand, is not calling for its reinstatement.

Sen. Sanders is right. Here are five reasons why it is important to reinstate the Glass-Steagall Act.

1. Too-big-to-fail banks are bigger, riskier, and more ungovernable than ever
America's largest banking institutions are even larger now than they were before the 2008 financial crisis. The nation's six largest banks issue more than two-thirds of all credit cards and more than a third of all mortgages. They control 95 percent of all derivatives and hold more than 40 percent of all US bank deposits.

Simon Johnson, former chief economist for the International Monetary Fund, points out that Glass-Steagall is needed as part of a broad effort to make these banks "simpler and more transparent." Johnson also observes that:

In the run-up to the 2008 crisis, the largest US banks had around 4 percent equity relative to their assets. This was not enough to withstand the storm ... Now, under the most generous possible calculation, the surviving megabanks have on average about 5 percent equity ... that is, they are 95 percent financed with debt.

As Johnson makes clear, these banks continue to pose a grave risk to the economy. He also notes that they have continued to engage in sanctions violations and money laundering - behavior which suggests that they are still out of control.

2. The argument that Glass-Steagall didn't cause the 2008 financial crisis is wrong.

Hillary Clinton told the Des Moines Register that "a lot of what caused the risk that led to the collapse came from institutions that were not big banks." This is part of a longstanding pattern, in which she largely absolves the big banks from culpability for the 2008 crisis while emphasizing "shadow banking" in her own Wall Street plan.

Secretary Clinton returned to that theme during Saturday's debate, pointing an accusing finger at non-bank entities like AIG and Lehman Brothers while giving a pass to Wall Street's biggest banks for their role in the crisis.

Robert Reich, Bill Clinton's former Labor Secretary, summarized the anti-Glass-Steagall argument as follows (without naming Hillary Clinton specifically):

To this day some Wall Street apologists argue Glass-Steagall wouldn't have prevented the 2008 crisis because the real culprits were nonbanks like Lehman Brothers and Bear Stearns.

He follows that with a one-word response: "Baloney."

Reich makes an important point: "Shadow banks" like AIG and Lehman, which largely function outside the normal bank regulatory system, are a major problem. But the 2008 financial crisis became a systemic threat specifically because too-big-to-fail banks were underwriting the risky bets these companies made. And why were the big banks able to do that?

Because Glass-Steagall had been repealed.

 3. Repeal of the Act has not worked as promised.

Given the risks associated with the repeal of Glass-Steagall, what about the benefits? Turns out there aren't many.

We were told that repealing Glass-Steagall would lead to more efficiency and lower costs, but neither of these promises has come true. No less an expert than John Reed, former CEO of Citigroup, now says those claims were wrong. Reed wrote in a recent op-ed (behind a firewall) that "there are very few cost efficiencies that come from the merger of functions - indeed, there may be none at all."
In fact, says Reed, it is possible that this combination of functions actually makes banking services more expensive.

 4. The repeal of Glass-Steagall is further corrupting the culture of banking - if such a thing is possible.

Sanders was right when he said on Saturday night that "the business model of Wall Street is fraud." The traditional practice of what Sen. Elizabeth Warren calls "boring" banking - opening savings accounts, reviewing loans, and providing other customer services - has largely been supplanted by high-risk gambling and the aggressive hustling of dubious investments to unwary clients.

The level of fraud unearthed since the 2008 crisis is nothing short of breathtaking. (The fact that no senior banking executive has gone to prison for that fraud is, if anything, even more breathtaking.) How did that happen?

Citigroup's Reed wrote that the repeal of Glass-Steagall led to the "very serious" problem of "mixing incompatible cultures" - which, he said, "makes the entire banking industry more fragile." He discussed the relationship-based, sociable culture of traditional banking, emphasizing its incompatibility with the risk-seeking, "short termist" mentality of investment bankers who seek "immediate rewards."

Reed makes a very important point - although he's being overly kind about it. Yes, traditional bankers tend to be risk-averse and customer-focused. That's very different from the high-stakes gambling mentality of investment banking.

But what Reed fails to note - or is too polite to mention - is the extent to which today's culture of investment banking is predicated on outright fraud. That's reflected in polling of the banking community itself, as well as in the industry's appalling record of documented illegality. It is this mentality, which is present in banks from the "C" suite on down, which has given rise to Wall Street's tsunami of misdeeds.

This greed-driven fraud mentality is like a virus, consuming too-big-to-fail banks even as they exert ever-greater control over our economy - and our political system.

 5. Too-big-to-fail banks are a threat to our democracy.

These megabanks aren't just a "systemic threat" to our economy. Through their enormous wealth, and because of the ruthlessness with which they're willing to wield their influence, they are also a systemic threat to democracy itself.

That threat can be seen in the workings of last year's Congress, which saw the successful insertion of a lobbyist-drafted "Citigroup amendment" into a last-minute budget bill.

It can be seen in a political climate where the Republican head of a Congressional Committee can say that "Washington and the regulators are here to serve the banks."

It can be seen in Wall Street political contributions which flow to powerful and familiar names, Republican or Democratic.

Banks have acquired too much power. They must be broken up vertically (by line of business) and horizontally (by size), even as their corrupting influence over our government is ended through a system of fundamental election reform.

In today's environment, reinstating Glass-Steagall is not just the right policy - although it is certainly that. It's also an excellent litmus test for politicians who say they're willing to take on Wall Street.

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Tankers with Oil Stack Up; World Economy Collapse and Oil Glut Would Implode Giant Oil Debt Bubble
By Paul Gallagher, Economics Editor, Executive Intelligence Review

Nov. 15 (EIRNS)-The International Energy Agency reported Nov. 13 that oil
stockpiles worldwide have swollen to an unprecedented 3 billion barrels
worldwide, Bloomberg reported. This is a result of the relentless collapse of the
world economy, as nations consume less oil and petroleum products than they
normally would, slowing the growth of petroleum use.

Accordingly, the price of West Texas Intermediate crude closed at $40.74 a
barrel on Friday, and that of Brent crude oil at $43.60 a barrel, representing a fall
of almost two-thirds for each since July 2014.

A new phenomenon has been given birth to: oil supertankers filled to the
brim with oil, waiting in lines outside major port cities a mile or more long,
because the terminals onshore are full. In Houston, the tanker backlog grew to
41 supertankers stacked up in the Gulf of Mexico. In Iraq, 20 supertankers are
clustered outside Basrah's terminal, forming a line nearly 2 miles long. At
China's Qingdao port, one supertanker has been stuck at anchorage since
August, another since last month. Each supertanker, which can hold between
700,000 and 2 million barrels of oil, costs up to $100,000 per day to rent; the
costs are piling up.
(Graph by Gail Tverberg, November 3, 2015)

The glut is merely an expression that underscores that the oil/commodity
debt bubble is about to explode, a point frantically denied or ignored by leaders
of the G20 nations. Analyst Jim Rickards, in an Oct. 22 article, entitled, "The $5
Trillion Oil Debt Bomb," reported that "there are about $5.4 trillion-that's
trillion-of costs incurred in the last five years for exploration and drilling in the
alternative energy sector [shale oil/fracking]." A good portion of that represents
borrowing through either bank loans or issuing high-yield junk bonds. Rickards
postulates that were conservatively 20% of that total to be written down because
companies fail-this is the percentage of subprime loans that were written down
in the aftermath of 2007-08-then the amount of defaults would be $1 trillion.

Even if Rickards' estimates are high, and the write-off totalled $750 billion, that
would devastate the financial system, especially since there are tens of trillions
of dollars of derivatives piled upon the oil and commodity debt.

Short of a Glass-Steagall reorganization of the financial system, there is no
solution to this problem.
 
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