Repeal of Dodd-Frank, Reinstatement of Glass-Steagall a Risky Prospect
By Steve Viuker
As the race for the presidency rages on, much has been said about the Dodd-Frank Act and its predecessors, particularly the Glass-Steagall Act. But as is often the case in American politics, no consensus has been reached, and there are strong feelings on all sides of the issue.
“Glass-Steagall is dumb politics and dumb economics … returning to Glass-Steagall would be destructive and unworkable,” said Tony Fratto, managing partner in Washington at Hamilton Place Strategies, a lobbying firm that represents large banks.
In a recent column for CNBC, Fratto said “reverting to Glass-Steagall restrictions would have done nothing to prevent the 2008 financial crisis, and, in fact, easily could have worsened it. It’s not just dumb economic policy, it’s also really dumb politics.”
The Gramm-Leach-Bliley Act in 1999 undid much of Glass-Steagall, liberating banks like Citigroup and others to form what they called “financial supermarkets,” all-in-one financial services shops. Fratto said that instability in the financial system didn’t originate at universal banks, but rather originated from institutions like Countrywide, Washington Mutual and IndyMac Bank, which didn’t do investment banking or trading. He said diversification actually enabled the largest banks to survive better, and take steps that helped to stabilize the rest of the financial system.
Hillary Clinton, whose husband signed the Gramm-Leach Act into law in 1999, has come out strongly against Glass-Steagall. House Speaker Paul Ryan’s economic-reform plan declined to include Glass-Steagall. And only three Republican members of Congress have signed onto either version of Sen. Elizabeth Warren’s proposed legislation.
“The movement to bring back Glass Steagall is as much political as legal,” said Walter Van Dorn, partner with BakerHostetler, with a focus on corporate securities law. Van Dorn, who spent seven years at the Security and Exchange Commission in the 1990s, told Banking New York that Trump is more in step with Elizabeth Warren and Bernie Sanders than he is with the Republican party. “But even if Trump is elected, it is hard to believe the GOP leadership in Congress would would support Glass-Steagall legislation,” he added.
Van Dorn pointed out the same paragraph in the GOP platform calling for reinstating Glass-Steagall as a call for dismantling Dodd-Frank. Simultaneously advancing Glass-Steagall and relaxing Dodd-Frank is strategically odd, he said.
When the investment banks went under during the 2008 crisis, many were acquired by the more traditional banks. Bank of America acquired Merrill Lynch; Wells Fargo acquired Wachovia; JPMorgan Chase gobbled up Bear Steans and Barclays did the same with Lehman. The return of Glass-Steagall would force the breakup of these acquisitions.
Urging support of Glass-Steagall is David Stockman, former director of the Office of Management and Budget in the Reagan administration. “By embracing Super Glass-Steagall, Donald Trump could instantly leap to the left of Hillary on the cutting issue of Wall Street and the one percenters,” he wrote on his website. “Super Glass-Steagall would consign today’s handful of giant financial services conglomerates to the arena of pure free enterprise, where they would live or die at the hands of competition and their value to customers.”
On the Financial Services Roundtable website, Robert Hatch, director and counsel of regulatory affairs, said “policymakers would do well to remember that President Obama noted, “‘Glass-Steagall is not well-tailored to the issues of the current day.’” Hatch said any changes to financial regulations need to acknowledge the thousands of pages of reforms that were ushered in by Dodd-Frank Act.
There is an argument that it would put the United States banking industry at a competitive disadvantage relative to international peers, some of which face fewer restrictions. But if the goal is to jumpstart the United States economy, reinstating Glass-Steagall will most likely hinder, not help.
“While lawmakers remain unlikely to re-enact the Glass-Steagall Act, we believe the big-bank bashing from both parties will eventually lead to targeted policies aimed at lessening the relative regulatory burden for regional and community banks,” Isaac Boltansky, an analyst at Compass Point Research & Trading, wrote in a note to investors. In addition, “Trump’s actions will likely force Clinton to compensate by reiterating and expanding her calls for increased scrutiny of the shadow banking system, which could pose additional headline risk for asset managers, global insurers and nonbank lenders.”
Summed up Russ Grote, managing director of Hamilton Place Strategies, “Dodd-Frank made things safer. The quality of capital is better, liquidity is up as is transparency and stress testing every year is helpful. We have seen significant improvements in safety and soundness. Repealing Dodd and replacing it with Glass-Steagall is a lot to undo.” ■