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From Banking and Finance Law Daily, April 7, 2017

Bipartisan group of senators tries once again to restore Glass-Steagall

By Stephanie K. Mann, J.D.

Senators Elizabeth Warren (D-Mass), John McCain (R-Ariz), Maria Cantwell (D-Wash), and Angus King (I-Maine) have re-introduced the 21st Century Glass-Steagall Act, a modern version of the Banking Act of 1933 that, according to the legislators, would protect American taxpayers, help community banks and credit unions compete, and decrease the likelihood of future financial crises. Reinstating Glass-Steagall has received support from both Democratic and Republican parties, President Trump, and Treasury Secretary Steve Mnuchin.

The legislation, previously introduced in 2013 and 2015 (see Banking and Finance Law DailyJuly 11, 2013, and July 8, 2015), would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. In addition, the legislation would clarify regulatory interpretations of banking law provisions and make "Too Big to Fail" institutions smaller and safer, minimizing the likelihood of a government bailout.

According to the legislators, the original Glass-Steagall legislation was introduced in response to the financial crash of 1929 and separated depository banks from investment banks. The idea was to divide the risky activities of investment banks from the core depository functions that consumers rely upon every day, said the senators. In 1999, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Steagall.

Wary of Cohn support. In response to National Economic Council Chair Gary Cohn’s stated support for the bill, two trade organizations expressed their skepticism over his support. Public Citizen notes that Cohn formerly worked for Goldman Sachs, which would benefit from the separation of commercial and investment banking. "If Cohn envisions a law that allows his former firm to return to abusive practices such as selling flawed securities to unwary investors, then this offer is toxic."

Dennis Kelleher, President and CEO of Better Markets, stated that "with the White House being referred to as ‘Goldman Sachs South,’ people need to be mindful that there are numerous ways that a Glass-Steagall-like change could be done that would increase systemic risk, create unregulated too big to fail firms and put taxpayers on the hook for much bigger bailouts in the future." Kelleher points to the shadow banking system, incentivized "unacceptable" risk taking, and moral hazards as specific concerns.

Companies: Better Markets; Goldman Sachs; Public Citizen

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