Senators John McCain and Maria Cantwell proposed reinstating the Depression-era Glass-Steagall Act that split commercial and investment banking to rein in Wall Street firms in response to the financial crisis.

Not everyone likes the idea: 

"Trying to split them up is crazy," John Douglas, who leads the bank regulatory practice at Davis Polk & Wardwell in New York and a former general counsel at the Federal Deposit Insurance Corp., said in a telephone interview. "The integration of the securities and banking function came about because of the need of large corporate customers to have integrated banking and securities services."

His definition of "crazy" seems to be "causing the slightest inconvenience to those large corporate customers." My definition of crazy is different. I think this guy gets it:

"We cruise along for 80 years without a major calamity infecting the entire financial system and then less than eight years after the repeal of Glass-Steagall we have a financial meltdown in this country," Camden Fine, president of the Washington-based trade group for about 5,000 smaller U.S. banks, said in a telephone interview. "That’s no accident."

Comments

[Jim Caserta]

Is there a single 'large corporate customer' who uses a single firm for their securities and banking functions?
http://baselinescenario.com/2009/11/13/note-to-jamie-dimon-repeating-something-doesnt-make-it-true/#more-5500
"The last time Johnson & Johnson issued debt, it used eleven underwriters. The time before that, it used thirteen."

I respect Sen. McCain, but someone should remind him that even conventional banking involves risk taking and management - no one's mortgage is riskless.

It is not a great sign that one step towards making the system more robust is undoing things that were theoretically done to strengthen the system during the past 2 years.

[Bubba]

"We cruise along for 80 years without a major calamity infecting the entire financial system and then less than eight years after the repeal of Glass-Steagall we have a financial meltdown in this country,"

God help us! They're using global warming "climate change" type fallacies to further this particular point of The Agenda.

As is the case in "climate change", correlation does not establish causation. But it does establish a convenient and familiar point for the weak-minded to rally behind in their never ending quest for "truth, justice, and (their version) of) The American Way"

[Andrew Brod]

I agree with Bubba about Glass-Steagall, though of course not about his tiresome and utterly out-of-place invocation of global-warming denialism.

Watch now: He'll call me "Ace" in a moment.

The repeal of Glass-Steagall was the result of a decades-long trend toward deregulation, and so was the erosion of the other financial regulations that made the crisis possible. Both were caused by underlying factors, and I simply don't buy the claim that the repeal of GS was a cause of the financial crisis. You can have sensible financial regulation in a GS-free world. The fact that we opted for stupid financial regulation in a GS-free world doesn't implicate the repeal of GS.

[Jim Caserta]

AB - do you think banks should be able to use federally insured retail deposits for prop trading? Reinstating G-S would have two benefits: separating some of the riskiest banking functions (prop trading) from the ones we need to insure (retail deposits), and it would reduce the size and complexity of the largest firms slightly denting the too-big-to-fail dilemma.

Obviously this is not the only regulatory change that needs to be made. As I said above, I am somewhat disheartened by Sen. McCain's statement that seemed to imply that G-S era banks had little/no risk. Here is a philosophical argument for the regulation for free-marketers.
1. We need to insure retail deposits.
2. In return for accepting fdic insurance, you have limits on your business.

1. is universally recognized as necessary, and 2 flows naturally from 1.

The other side is that those who defend the repeal of GS should show a clear benefit. My link to baselinescenario.com shows that a single multi-national corp. routinely uses many different banks already for many functions. The one-stop shopping is a myth. If you want to increase risk in the system, you should be able to defend it with quantitative evidence of benefit. Banking has become primarily rent-seeking and I would view finance's share of GDP as a kind of tax on productive businesses. If I said I wanted a broad based tax of 4% of GDP to be distributed to mostly the top 1% - 10% of income earners, who would defend it?

[Ed Cone]

AB, I think we all agree that coincidence is not causality, but that does not mean that we can never work backward to determine causal links.

I've said since I first started writing about GS that a return to the original law may not be the best solution.

But the repeal of GS was not just one more marker on the deregulatory road, it was a major moment in terms of both substance and symbolism. We went too far, in theory and practice. The decades-long trend ended in disaster, so it makes sense to look closely at the events along the way.

I think the sources linked in previous conversations on this topic, including Sloan and Kuttner, make cogent and specific arguments about the impact of GS' repeal. And I find some of the voices in favor of a new version, including Volcker and Reed, to carry weight.

You disagree -- but what would you do instead?

[bubba]

"Watch now: He'll call me "Ace" in a moment."

No, at this point you're just some "dude".

[Jim Caserta]

“The separation of those two things per se would not necessarily lead to stability,” Is this supposet to be person of the year caliber insight?

[Jim Caserta]

It should be noted, however, that less instability != stability. Making a system less unstable is not necessarily making it stable.