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Cate Long Headshot

Banks with Glass Walls

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We could use some banks with glass walls... Banks that don't operate like black boxes and put the entire economic system at risk with their risky trading ventures.

Congress is hearing the roar coming from the people.

No more bailouts... fair fees... access to credit No predatory lending. No more favored treatment for the giant banks.

Building a stable financial system that helps Main Street thrive is a core requirement for the nations recovery. So, how do we get there?

Senators John McCain (R-Ariz.) and Maria Cantwell (D-Wash.) have unveiled legislation that aims to restore Glass-Steagall, a banking law repealed in 1999 that required banks that take deposits to be separate from banks that perform Wall Street trading and have insurance operations.

In simple terms the Glass-Steagall Act says don't put all your eggs in one basket.

Sen. Cantwell said:

With big banks using depositor money to gamble on Wall Street, it's only a matter of time. Banks need to be lending to small businesses and homeowners, not fueling risky Wall Street investment schemes. We must return stability, security and confidence to commercial banking for the American public. The first step is this bill.

Now this matter belongs in the balliwick of the Senate Banking Committee . I haven't even heard one statement from the Committee that they would take up the legislation. Hopefully they will hold some hearings on the issue.

Now of course the well paid inside the beltway types are lining up to defend the status quo. here is my favorite former bank regulator in charge, Eugene Ludwig, on Bloomberg declaring how the financial institutions that imploded last year (Bear, Lehman, AIG) would not be affected by restoring Glass Steagall.

In a "through the looking glass" world the former regulator is correct.

But it was the high levels of leverage and the very deep interconnectedness between our "too big to fail" institutions that wreaked havoc.

We do know that Goldman Sachs and Morgan Stanley, who are now technically "commercial banks" were saved only by a miraculous late Sunday night conversion to bank holding companies.

Rep. Glass Steagall would make interconnections like the insurance written by AIG on risky structured finance products of Goldman Sachs unlikely. Those insurance contracts that AIG wrote for Goldman brought it near to collapse and shook the whole system.

This was the bailout by the Federal Reserve and the US Treasury of $182 billion that went to Goldman Sachs and foreign banks. To put that number in perspective the whole state budget for California for 2009-2010 was $119 billion.

Wall Street activities are so distant from Main Street that we shouldn't call them "banking." We should call them "gambling," and it's time to stop gambling with the stability of the nation.

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See Sen. Cantwell discuss her vision of a stable financial system here.

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In the House a similar measure was offered on Wednesday by seven Democrats, including Judiciary Committee Chairman John Conyers and Maurice Hinchey.... and House Majority Leader Steny Hoyer says it's under discussion.

Rep. Maurice Hinchey, a New York Democrat, talks to Bloomberg (news video) about the U.S. House's consideration of the Glass-Steagall Act.

The Glass-Steagall law, which barred bank holding companies from owning other financial companies, was repealed in 1999 to help pave the way for the formation of Citigroup Inc. by the $46 billion merger of Citicorp and Travelers Group Inc.