Next week, President Obama will travel to Wall Street to demand that the Glass-Steagall Act be resurrected and big banks be broken up. This move would be politically and economically smart, as it would distinguish Obama from likely Republican nominee Mitt Romney, who epitomizes the pump-and-dump mentality that has infected the financial industry. Romney was CEO of Bain & Company, a private-equity fund that bought up companies, fired employees to save money and boost performance, and then resold the firms at a nice markups.
Despite the Dodd-Frank financial reform law, the largest Wall Street banks are back to many of their old tricks. It is impossible to know the exposure of the Street to European banks in danger of going under, and Morgan Stanley and other big U.S. banks are taking a beating in the market. This suggests that financial reform has not gone far enough. Bank of America recently moved its riskiest derivatives from its Merrill Lynch unit to a retail subsidiary flush with insured deposits, improving its bottom line at the expense of American taxpayers.
President Obama’s move to demand the resurrection of the Glass-Steagall Act and the breakup of big banks would be a politically and economically sound decision, as it would both draw a clear distinction between himself and Mitt Romney and help to ensure that financial reform is effective.
For decades, the principle of keeping risky assets away from insured deposits has been a key part of U.S. regulation, until the repeal of Glass-Steagall. The Volcker rule was introduced to address this issue, but, due to the influence of Wall Street lobbyists, the rule has been reduced to a complex web of exemptions and loopholes. A simpler solution would have been to ban proprietary trading from the outset.
The Lehman Brothers collapse and the subsequent squeeze on other investment banks in 2007 and 2008 were not prevented by Glass-Steagall, so it is also necessary to break up the big banks. Over the past two decades, the ten largest banks on Wall Street have increased their share of America’s total bank assets from 10 percent to 70 percent, and the top four banks have an even larger market share. This suggests that they have been colluding, as evidenced by their coordinated charging of debit card fees.
The banks have also failed to fulfill their fiduciary duties to investors. Last summer, the trio of Goldman Sachs, Morgan Stanley, and Credit Suisse valued Groupon at an inflated $30 billion, despite subsequent accounting and disclosure issues. Citigroup has also been charged with defrauding investors by selling them a package of mortgage-backed securities that they knew were likely to default, but failed to disclose the hazard. They then bet against the package for their own benefit, earning fees of $34 million and net profits of at least $126 million. For this, they are only paying a settlement of $285 million, with their CEO at the time, Charles Prince, not paying a dime.
It is unlikely that the President will publicly condemn the actions of Wall Street or call for a resurrection of Glass-Steagall and a breakup of the biggest banks, due to the reliance of the Democrats on the Street’s campaign money. This is a shame, as it is clear that Wall Street is still out of control and this is a danger to us all.
