Elizabeth Warren has joined fellow senators John McCain, Maria Cantwell, and Angus King in sponsoring legislation that would reenact key parts of the Glass-Steagall Act that was overturned in 1999, Bloomberg’s Carter Dougherty reports.
The legislation would separate depository banks that are insured by the Federal Deposit Insurance Corp (FDIC) from investment banking and other high-risk financial operations including hedge funds, insurance companies, and private equity. Warren discussed the legislation while testifying on the implementation of the Dodd-Frank Act, regulation that was meant to reign in Wall Street following the 2008 banking crisis.
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“Based on what the regulators did to Glass-Steagall over the last 30 years, I don’t expect anyone on this panel will jump and endorse the new Glass-Steagall bill […] even so we’re going to keep pushing for it,” said Warren.
Opponents of Glass-Steagall change their position
Although previous attempts to separate deposit and investment banks, or to limit the size of banks, have failed in the past, this bill has garnered bipartisan support including sponsor John McCain, who voted to repeal Glass-Steagall in 1999.
Even some Wall Street leaders who led the charge against Glass Steagall have changed their position. In 1998 Sanford Weill was one of the key players in the merger of Traveler’s Group and Citigroup Inc. (NYSE:C), a deal which created the world’s largest lender, CitiGroup, and was one of the major factors behind the Gramm-Leach-Bliley Act that overturned Glass-Steagall. But now even Weill believes that investment banking and depository banking should be separated to protect taxpayers from banks that are too big to fail and must be bailed out during a crisis.
Former Citibank CEO John Reed has said that banks as large as Citigroup Inc. (NYSE:C) should be broken up and that his role in the creation of Citigroup was a mistake, while former Citigroup board member Richard Parsons has acknowledged that the repeal of Glass-Steagall made the financial more complex and harder to manage. Citigroup received a $45 billion bailout from the government in 2008 in order to avoid bankruptcy.
History of Glass-Steagall
The Glass-Steagall Act is the informal name for the Banking Act of 1933, and usually refers specifically to four sections that tightly regulated the relationship between commercial banks and securities and prohibited many types of financial transactions. The law was passed in the after math of the Great Depression to prevent similar occurrences from happening, but in the 1990s the law fell out of favor.
President Clinton said the law was “no longer appropriate,” at the time. Many financial experts believe that the repeal of Glass-Steagall is one of the root causes of the 2008 banking crisis and that similar provisions should be put into effect, though this view is not universally held.