Dear President Trump: Breaking Up (Banks) Isn't So Hard to Do

Donald, listen, whatever you've done so far, whatever you've messed up, there's one thing you could do that would make up for a lot. It would be huge! Terrific! It could change our world for the better in a big-league way! It could save us all from economic disaster! And it isn't even hard to grasp or complicated to do. It's simple, in fact. Reinstitute the Glass-Steagall Act. Let me explain.

In the world of romance, if you break up with someone, it's pretty simple (emotional complications aside). You're just not together anymore. In the world of financial regulation, it used to be as simple as that, too. It was like installing a traffic light at a dangerous intersection to avoid deaths. In 1933, when the Glass-Steagall Act was passed, it helped break up the biggest banks of the day and for good reason: they had had a major hand in triggering the most disastrous economic depression our country ever experienced.

Certain divisions of those banks were no longer allowed to coexist with others. The law split the parts of banks that placed bets by creating and trading certain risky securities and those that took deposits and provided loans. In other words, it ensured that the investment bank and the commercial bank would no longer cohabit. Put another way, it separated bankers with a heinous gambling habit from those who only wanted a secure nest egg. It was simplicity itself.

After 1933, the gamblers and savers went their separate ways, which proved a boon for the economy and the financial system for nearly seven decades. Then legislators, lobbyists, bankers, and regulators started to chisel away at the wall separating those two kinds of banks. By November 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act that repealed the Glass-Steagall Act totally. The abusive marriages of gamblers and savers could once again be consummated.

And who doesn't remember the result: the financial crisis of 2007-2008 that led to taxpayer-funded bailouts, subsidies, loans, and sweetheart fraud-settlement deals. Just as the Crash of 1929 had been catalyzed by the manufacturing of shady "trusts" stuffed with shady securities, this crisis was enabled by the big banks that engineered complex assets stuffed with subprime mortgages and other loans that were sold around the world.

Under President Obama, the 2010 Dodd-Frank Act was signed into law. The Act sought to limit the ability of big banks to trade the riskiest types of securities. Through inclusion of something called the "Volcker Rule," Dodd-Frank prohibited the trading of securities (even if with many loopholes). What it didn't do was actually break up the big banks again. That meant another 1933 still awaited its moment.

Then along came the bizarre 2016 presidential election campaign during which, strangely enough, Democrats and Republicans found one issue on which they had some common ground: the banking system. Key figures in both parties agreed that it was time to stop the investment bank and the commercial bank from commingling. Bernie Sanders ran on a campaign to break up the banks -- and so did Donald Trump. At at an October campaign rally in Charlotte, North Carolina, Trump even stated, "It's time for a twenty-first-century Glass-Steagall."

The Democratic National Committee platform offered a similar message. "Banks," it said, "should not be able to gamble with taxpayers' deposits or pose an undue risk to Main Street. Democrats support a variety of ways to stop this from happening, including an updated and modernized version of Glass-Steagall as well as breaking up too-big-to-fail financial institutions that pose a systemic risk to the stability of our economy."

The Republican National Committee wasted even fewer words making the point in their platform: "We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment." And it didn't even suggest that the act should be "modernized" or mention a "twenty-first-century" version that didn't do what the twentieth century one had done.

For the first time since its repeal, in other words, a return to the Glass-Steagall Act had bipartisan support. It couldn't have been simpler, right? Two parties, one idea: split banks into two pieces. But then, as if you hadn't already guessed, it got complicated.

Breaking-up, Republican-Style

In the new administration, two key figures are now offering quite different and conflicting views of what a resurrection of the Glass-Steagall Act might mean. At his Senate confirmation hearings, Steven Mnuchin, former Goldman Sachs partner and Trump's nominee to be secretary of the Treasury, faced Senator Maria Cantwell (D-Wash.) as she bluntly asked "Do you support returning to Glass-Steagall?"

He replied, "I don't support going back to Glass-Steagall as is. What we've talked about with the president-elect is perhaps we need a twenty-first-century Glass-Steagall. But, no, I don't support... taking a very old law and say we should adhere to it as is."

Cantwell then pressed him further: "And so, is that the position of what the Republican platform was? Because I thought it was Glass-Steagall?"

To this, Mnuchin responded, "Again, the Republican platform did pass at the convention Glass-Steagall and... [when] we talked about policy with the president-elect, our view is we need a twenty-first-century Glass-Steagall."

The skepticism in the room was thick enough to cut with a knife. Here, after all, was a man who had made windfall profits on the fallout from the 2007-2008 "too big to fail" financial crisis by organizing a cadre of hedge-fund billionaires to buy the collapsed IndyMac Bank at a discount. He then proceeded to foreclose on some of its mortgages and resellit for a $2.5 billion profit. Why should such a man want to restrict banking activity, Glass-Steagall-style, when his loan practices had allowed him to make a fortune off the taxpayer bailouts that were the result of not doing so? What would the point be when a crisis, as history had just shown, forced the federal government to subsidize risk and failure?

The only problem he faced: the Republican platform said he should.

Last month, testifying before the Senate Banking Committee and under questioning from Senator Elizabeth Warren, he backtracked even further: "The president said we do support a 'twenty-first-century Glass-Steagall,' that means there are aspects of it that we think may make sense. But we never said before we support a full separation of banks and investment banking."

Warren responded incredulously, "Tell me what twenty-first-century Glass-Steagall means if it doesn't mean breaking up those two parts. It's an easy question."

Mnuchin replied, "It's actually a complicated question... We never said we were in favor of Glass-Steagall. We said we were in favor of a twenty-first-century Glass-Steagall. It couldn't be clearer." Which, of course, couldn't have been murkier.

And then there's that other former Goldman Sachs man, Gary Cohn, Trump's director of the National Economic Council. He had quite a different Glass-Steagall tale to tell Senator Warren. According to Bloomberg News, he insisted that he "generally favors banking going back to how it was when firms like Goldman focused on trading and underwriting securities, and companies such as Citigroup Inc. primarily issued loans." That sounds a lot like breaking up the banks.

This division and the as-yet unresolved nature of the Trump administration response to the Glass-Steagall question could, in the face of another financial crisis, come back to haunt us all, if it translates into more bailouts and systemic failures.

The Democrats' Dilemma

As with the proverbial difficulty of chewing gum and walking at the same time, certain Democrats seem to find the very idea of supporting both Dodd-Frank and a new Glass-Steagall Act perplexing. Many of them have promoted the idea that no big bank actually failed in the Great Recession moment (which was true only because those banks got huge infusions of federal aid to remain solvent). As a result, they avoided all responsibility for the way the repeal of Glass-Steagall allowed too-big-to-fail banks to come into existence in the first place.

In the process, they also conveniently ignored the way the big banks lent money to, or funded, the investment banks that did fail like both of my former employers, Bear Stearns and Lehman Brothers. Without those loans or that funding, those outfits couldn't have purchased the overload of toxic assets that, in the end, imploded the whole system.

President Obama summed up this position when he told Rolling Stone in 2012, "I've looked at some of Rolling Stone's articles that say, 'This didn't go far enough, we didn't institute Glass-Steagall' and so forth, and I pushed my economic team very hard on some of those questions. But there is not evidence that having Glass-Steagall in place would somehow change the dynamic. Lehman Brothers wasn't a commercial bank; it was an investment bank. AIG wasn't an FDIC-insured bank; it was an insurance institution. So the problem in today's financial sector can't be solved simply by re-imposing models that were created in the 1930s." He needed a more astute team.

Hillary Clinton took a similar tack in her campaign and it may have contributed to her devastating election loss. The continued promotion of such fallacies does not bode well for the future of the party if it continues to adopt that view. A return to a safer system on the other hand, would be more populist -- and far more popular.

Glass-Steagall's Bipartisan Past

Fortunately, current legislation is circulating in Congress that would promote the long-term stability of the financial system by restoring Glass-Steagall for real. H.R. 790 ("Return to the Prudent Banking Act of 2017") is one of two reinstatement bills in the House of Representatives. It has 50 co-sponsors from both parties and its passage is being spearheaded by Marcy Kaptur (D-Ohio) and Walter Jones (R-N.C.). The second bill, H.R. 2585, sponsored by Mike Capuano (D-Mass.), bears a close relationship to Senate bill S.881 (the "Twenty-First-Century Glass-Steagall Act of 2017"), sponsored by Elizabeth Warren (D-Mass.) and nine cosponsors including John McCain (R-Ariz.), Maria Cantwell, and Angus King (I-Maine). Either of the bills, if enacted, would do the same thing: break up the banks.

In order to understand just why passage is so crucial, a little history is in order. Glass-Steagall, or the Banking Act of 1933, was signed into law by President Franklin Roosevelt. It represented a bipartisan effort and was even -- perhaps not surprisingly given the devastating nature of the collapse of 1929 and the Great Depression that followed -- actively promoted by some of Wall Street's most powerful bankers. In its 66 years as law, it effectively prevented systemic banking and economic collapse.

Even before Roosevelt began his first term, congressional Republicans had initiated an investigation into bankers' practices. In early 1933, as Roosevelt was preparing to take office with an incoming Democratic Senate, outgoing Senate Banking and Currency Committee chairman Peter Norbeck, a Republican from South Dakota, hired former New York Deputy District Attorney Ferdinand Pecora to lead the Senate Banking Committee in a new investigation.

Later known as the Pecora hearings, they would shed light on the kinds of financial manipulations by unscrupulous bankers that had led to the crash of 1929. They would also provide the new president with the necessary populist political capital to enact America's most sweeping financial reforms. No less crucial was the way banking leaders aligned themselves with Roosevelt's new program. Duty to country over balance sheets seemed then to be the order of the day, even on Wall Street. (It's not an attitude that lasted into the twenty-first century.)

Two days after his inauguration, for instance, Roosevelt invited incoming National City Bank Chairman James Perkins to the White House for a secret meeting. The next day, under Perkins' direction, his bank board passed a resolution splitting apart its trading and deposit-taking divisions. Chase National Bank chairman Winthrop Aldrich, a major financial power player, lent a hand as well. Both Perkins and he would back the new Glass-Steagall bill. (Lest you think that all was sweetness and light, they were also convinced that it would diminish the strength of their main competitor, the Morgan Bank.)

Three days after Roosevelt called Perkins to the White House, Aldrich's views on breaking up the banks hit the front page of the New York Times when he announced that Chase National Bank and Chase Securities Corporation would become separate entities, effectively enforcing the bill before it even became law. It wasn't simple -- the Chase Securities Corporation was the biggest of its kind in the world -- but it happened.

Aldrich then took part in a series of private meetings with the president at the White House about the pending legislation. Without the support of Aldrich and Perkins, it's possible that the bill wouldn't have passed. After all, a far weaker version proposed during the previous administration of Herbert Hoover hadn't.

The Glass-Steagall Act also created the Federal Deposit Insurance Corporation to insure citizens' bank deposits. This left commercial banks with a choice to make. If they took deposits and made loans, they could not speculate with depositors' money. If they wanted to create and speculate, they were on their own. There's much to be said for protecting hard-working Americans in this fashion.

How the Walls Came Tumbling Down

In the 1980s, the walls between investment and commercial banking first began to crumble. The deregulation of the financial sector that followed would prove to be as bipartisan as the passage of Glass-Steagall had been. In 1982, as the Republican presidency of Ronald Reagan began, Congress passed the Garn-St. Germain Act, deregulating the kinds of investments that savings and loan banks could make to include riskier real estate loans. This had the effect of exacerbating the savings and loan debacle, which hit its pinnacle in the late 1980s. By 1989, more than 1,000 S&L banks in the U.S. would crash and burn. In total, the crisis wound up costing about $160 billion, $132 billion of which was footed by taxpayers. And the suppliers of risky S&L securities tended to be the big banks.

In 1987, still in the age of Reagan, Federal Reserve Chairman Alan Greenspan, a past board member of JPMorgan, said that non-bank subsidiaries of bank holding companies could sell or hold "bank ineligible securities" -- that is, securities prohibited by Glass-Steagall, including mortgage securities, asset-backed securities, junk bonds, and other derivative products. The move exacerbated the S&L crisis, but it also offered an avenue for commercial banks to stock up on some of the securities at the heart of that crisis.

And so commercial banks began investing in hedge funds, whose very purpose in life is to gamble on securities, stocks, and commodities. In 1998, in an early warning of what the future might hold, one of them, Long Term Capital Management, crashed and nearly brought down the whole financial system with it. Fifty-five commercial banks had invested in it using depositors' money to back their bets. Only an emergency meeting of the presidents of the major banks at the Federal Reserve averted a larger economic meltdown, but because Glass-Steagall was still in place, they had to figure out how to save themselves. No government bailouts were forthcoming.

Having narrowly avoided disaster, Wall Street only plunged deeper into financial deregulation. In 1999, Glass-Steagall itself was repealed. On December 21, 2000, Congress passed the Commodity Futures Modernization Act deregulating derivatives trading. The big commercial banks then merged with investment banks, insurance companies, and brokerage firms. By 2007, the assets of those big banks had tripled. The four largest -- Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo -- by then controlled (and still control) more than half the assets of the banking system.

In the fall of 2007, that system finally started buckling because of the problems of Citigroup, not because of the investment banks, which would not have been covered by Glass-Steagall. The catastrophe that hit Citigroup makes it clear just how crucial the repeal of that act was to the financial meltdown to come. Citigroup would "require" a taxpayer-financed bailout of $45 billion, $340 billion in asset guarantees, and $2 trillion in near-0% Federal Reserve loans between the fall of 2007 and 2010. That in itself was staggering and Citigroup wasn't alone. Federal Reserve Chairman Ben Bernanke would later testify that, by 2008, 11 out of the 12 biggest commercial banks were "insolvent" and had to be bailed out. The entire banking system was rotten to the core and the massive buildup of bad paper, high leverage, and speculative bets (derivatives) that made disaster inevitable can be traced directly back to the repeal of Glass-Steagall.

Today, a fresh bubble is inflating. This time, it's not U.S. subprime mortgages at the heart of a budding banking crisis, but $51 trillion in corporate debt in the form of bonds, loans, and related derivatives. The credit ratings agency S&P Global Ratings has predicted that such debt could rise to $75 trillion by 2020 and the defaults on it are starting to increase in pace. Banks have profited by the short-term creation and trading of this corporate debt, propagating even greater risk.Should that bubble burst, it could make the subprime mortgage bubble of 2007 look like a relatively small-scale event.

What Will the President Do?

On the positive side, there's a growing bipartisan alliance in Congress and outside it on restoring Glass-Steagall. This increasingly wide-ranging consensus reaches from the AFL-CIO to the libertarian Mises Institute, in the Senate from John McCain to Elizabeth Warren and Maria Cantwell, and in the House of Representatives from Republicans Walter Jones and Mike Coffman to Democrats Marcy Kaptur, Bernie Sanders, and Tulsi Gabbard. In fact, just this week, Kaptur and Jones announced an amendment to the pending Financial Choice Act in the House of Representives, that would represent the first genuine attempt to bring to a vote the possibility of resurrecting the Glass-Steagall Act since its repeal.

So, Donald, here's the question: Where do you -- the man who, in the course of a few weeks, embracedMiddle Eastern autocrats, turned relations with key NATO allies upside down, and to the astonishment of much of the world, withdrew the U.S. from the Paris climate agreement -- stand? In just a few months in office, you've turned the White House into an outpost for your family business, but when it comes to the financial well-being of the rest of us, what will you do? Will you, in fact, protect us from another future meltdown of the financial system? It wouldn't be that hard and you were clear enough on this issue in your election campaign, but does that even matter to you today? I noticed that recently, in an Oval Office interview with Bloomberg News, when asked about breaking up the banks, you said, "I'm looking at that right now. There's some people that want to go back to the old system, right? So we're going to look at that."

Your party and your own appointees are split on the subject. Where will you fall? You could still commit yourself to securing the financial well-being of our nation for generations to come. You could commit yourself to Glass-Steagall. The question is: Will you?