A bipartisan group of Senators are proposing the “21st Century Glass-Steagall Act” in an effort to curb the power of big banks by reinstating a Depression-era rule that separated commercial and investment banking. Senators Elizabeth Warren (D-MA), John McCain (R-AZ), Maria Cantwell (D-WA), and Angus King (I-ME) proposed the bill on Thursday.
Enacted during the Great Depression, the Glass-Steagall Act prevented commercial deposit banks, which are insured by taxpayer money through the Federal Deposit Insurance Corp (FDIC), from engaging in insurance and risky investment activities. These restrictions were repealed in 1999. The new bill would reinstate and update the separation between commercial and investment banking, giving financial conglomerates a five-year transitional period to split up their businesses to come into adherence with the firewall.
“Banks should be boring,” Warren argued in her initial public push for the bill, her first major banking measure in the Senate. The bill is more than a mere a reinstatement of the original 1933 Glass-Steagall Act, however. It would also bar commercial banks from some of the newer, more complex practices that they became infamous for in the wake of the recession, including trading complex derivatives and swaps or engaging in hedge fund and private equity activities. Warren explained in a conference call with reporters on Thursday that the new bill also seeks to close loopholes created by regulators’ interpretation of the original bill in the 1980s and 90s preceding its repeal.
The repeal of Glass-Steagall allowed banks to expand rapidly in size, to a stage where the top 0.2 percent of banks control nearly 70 percent of all banking assets. Even after the 2008 financial crisis, the biggest banks continued to grow. Lawmakers from both sides of the aisle have criticized these banks for being not only too big to fail, but also too big for jail or for trial.
Support for restoring the banking firewalll has come from various corners since the 2008 financial crisis. Nobel Prize-winning economist Joseph Stiglitz argued at the height of the recession, that the repeal created a “high-risk gambling mentality.” Two former chairman of Citigroup, Richard Parsons and Sanford Weill — who once had a portrait of himself in his office called “The Shatterer of Glass-Steagall,” have endorsed restoring the firewall. Citigroup, which was bailed out during in 2008, was the first big beneficiary of the firewall’s repeal. Even Rep. Paul Ryan (R-WI) has said that he agrees with reinstating the Glass-Steagall Act.
“Americans want safe banks,” Warren said when asked how she would respond to opponents of Glass-Steagall. “The banks that handle their checking and savings accounts should be rock-solid secure, and they should not be juicing their profits by taking those insured deposits and insuring them in wild financial schemes.” McCain echoed those comments in a statement, adding, “If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer.”
McCain voted for the bill that repealed Glass-Steagall in 1999, and one if its primary authors was a close economic advisor to his 2008 presidential campaign. But he changed his tune in 2009, when he and Cantwell began a similar effort to reinstate Glass-Steagall. The bill never made it out of committee. Sen. Tom Harkin (D-IA) introduced a basic Glass-Steagall reinstatement bill in May on the 80th anniversary of the original bill, but it was overshadowed by other banking measures being considered at the time. Restoring Glass-Steagall has also historically not enjoyed White House support.
Warren said that she believed this bill would succeed where others failed because a bipartisan group of senators are willing to fight for it publicly. “People said we could never get the consumer protection bureau. But we fought for it, and now we have an agency protecting consumers from credit card and mortgage scams,” she said on the press call. “I’ve lived in this world where people say to me ‘You can’t do this,’ and when they say that, I just say to them, Consumer Financial Protection Bureau. We have done it.”
“I’ll be out there fighting, and here’ll be the fun part,” she added. “I’ll be fighting right next to John McCain.”