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Breaking Up the Big Wall Street Banks Is Back in the Headlines

by Pam Martens and Russ Martens, Wall Street On Parade:

In the past two weeks, newspaper headlines have revived the debate on whether the mega Wall Street banks continue to pose a systemic threat to the U.S. banking system and the economy. This is a desperately needed public debate that demands facts – not a revisionist history of what actually caused the 2008-2010 Wall Street collapse and the worst economic downturn since the Great Depression.

This recent attention has been fueled by reports that Gary Cohn, former President of Goldman Sachs who now heads Donald Trump’s National Economic Council, met privately this month with members of the Senate Banking Committee and indicated he would be open to the restoration of a modernized version of the Glass-Steagall Act. (Mr. Cohn did not refute those reports.)

The 1933 Glass-Steagall Act was passed by Congress at the height of the Wall Street collapse and Great Depression. It acccomplished two equally critical tasks. It created Federally-insured deposits at commercial banks to restore the public’s confidence in the U.S. banking system and it barred insured commercial banks from being part of a Wall Street investment bank or securities underwriting operation because their high-risk speculative activities frequently blew up the house. That legislation protected the U.S. banking system for 66 years until its repeal under the Bill Clinton administration in 1999 at the behest of Wall Street power players like Sandy Weill of Citigroup. It took only nine years after its repeal for the U.S. financial system to crash, requiring the largest public bailout in U.S. history.

The problem with the newspaper debate today is that almost no one has their facts straight. On April 13, John Authers correctly wrote at the Financial Times that “The continuing yearning for Glass-Steagall shows that the world (not just the US) has not come to terms with the crisis of 2008. Justice has not been seen to be done; remedies to prevent a repeat have not been seen to be applied. Dodd-Frank has failed to instill confidence.” All that is absolutely true. But Authers also bizarrely states that “Bringing back Glass-Steagall would not alter the scale of today’s financial institutions.”

The Financial Times journalist is apparently not aware that the hundreds of trillions of dollars of derivatives sitting on the books of the biggest Wall Street banks would not exist but for the insured deposits providing the ballast and credit rating.

Next came the Washington Post’s Editorial Board on April 19, which went with the headline: “A Depression-era law could get a new life under Trump. Here’s what it should look like.” But the article made the preposterous claim that “The actual causal link between the repeal of Glass-Steagall and the financial crisis is a matter of great dispute…because the investment firms whose failures triggered the panic, Bear Stearns and Lehman Brothers, had never been subject to the law.”

The multiple errors in the above sentence are symbolic of a general lack of public understanding of the financial crisis. Every Wall Street firm was “subject to the law” until its 1999 repeal. Bear Stearns collapsed in March 2008 – long before the real panic set in during September of that year. Lehman Brothers was not only subject to the Glass-Steagall Act but it benefitted dramatically from its repeal by engaging in insured-deposit banking. As we reported in 2012:

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1 comment to Breaking Up the Big Wall Street Banks Is Back in the Headlines

  • Ed_B

    “That legislation protected the U.S. banking system for 66 years until its repeal under the Bill Clinton administration in 1999…”

    IMO, the REAL value of Glass-Steagall was not that it protected the banking system (from itself) but that it protected the depositors from becoming “unsecured creditors”. One would think that depositing OUR currency into a bank was all the security needed and that we WOULD get that currency returned to us on demand. That it can now be frittered away via financial gambling with no recourse by the depositors is equivalent to the US Gov issuing licenses to steal to the bankers. That’s an irresistible opportunity from their point of view. I don’t know that G-S needs any “updating” but We the People sure need it back in place.

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