Separate Main Street from Wall Street: Cantwell, McCain, Warren
Source: Seattle PI
A bipartisan group including Sens. Maria Cantwell, D-Wash., and John McCain, R-Ariz., on Thursday introduced legislation that would rebuild the wall between commercial and investment banking in America that protected the country’s depositors for 60 years after the Great Depression.
The legislation, called the 21st Century Glass-Steagall Act, would replicate features of the 1935 Banking Act, known by the names of its sponsors.
It would separate traditional banks, which have savings and checking accounts insured by the Federal Deposit Insurance Corporation, from riskier financial institutions that engage in swaps dealing, hedge fund and private equity activities, investment banking and insurance.
“Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world,” McCain said. “Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured depositors.”
Cantwell is a member of the Senate Finance Committee and played a major role in Wall Street reform legislation that passed Congress in 2010. Senate Republicans have blocked confirmation of the director of the consumer protection agency created under the bill.
“Too many Main Streets across America have paid the price for risky gambling on Wall Street,” said Cantwell. “We need to reduce risk in our banking system and get capital into the hands of small business.”
Washington state suffered the biggest bank failure of the Great Recession — the meltdown of Washington Mutual. “WaMu,” long advertising itself as “the friend of the family,” played the high-risk mortgage game. According to a Senate investigation, top management ignored warnings from employees within the ranks of the company, who found themselves demoted.
The executives who presided over the WaMu debacle paid relatively small financial penalties and were never prosecuted.
A third co-sponsor of the legislation is Sen. Elizabeth Warren, D-Mass., the former Harvard Law professor who designed the new consumer protection agency. Warren ran for the Senate in 2012 after President Obama passed her over for the directorship, on grounds she could not get confirmed by the Senate.
“The four biggest banks are now 30 percent larger than they were just five years ago,” Warren said Thursday, “and they have continued to engage in dangerous, high risk practices that could once again put our economy at risk.”
Sen. Angus King, an independent from Maine — he caucuses with the Democrats — is the bill’s fourth cosponsor.
The legislation creates what King describes as “clear separations between retail and investment banking” together with “strong protections against the spillover effects should a financial institution fail.”
The original Glass-Steagall legislation was a response to the 1929 stock market crash that triggered the Great Depression. The Banking Act separated depository from investment banks.
It was considered conservative legislation at the time: Its chief sponsor, Sen. Carter Glass, was a conservative Virginia Democrat who later had his doubts about the New Deal.
In the deregulatory climate of the 1980s and 1990s, however, Glass-Steagall was seen as an impediment. Decisions by the Federal Reserve and comptroller of the currency eroded the barrier between Main Street banking and the type of risky go-go strategies that were expanding the former “friend of the family.”
The key provisions of Glass-Steagall were finally repealed by the Gramm-Leach-Bliley bill in 1999, named for its three Republican cosponsors — Sen. Phil Gramm, R-Texas, was a McCain buddy — and signed into law by President Bill Clinton, a Democrat.
Said Elizabeth Warren: “The 21st Century Glass-Steagall Act will reestablish a wall between commercial and investment banking, make our financial system more secure, and protect investment banking.”
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