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Glass-Steagall

5/2/2017
By Charles Payne, CEO & Principal Analyst

The Glass–Steagall separation of commercial and investment banking was divided into four sections of the 1933 Banking Act (sections 16, 20, 21, and 32).[1] The Banking Act of 1935 clarified the 1933 legislation and resolved inconsistencies in it. Together, they prevented commercial Federal Reserve member banks from the following:

  • Dealing in non-governmental securities for customers
  • Investing in non-investment grade securities for themselves
  • Underwriting or distributing non-governmental securities
  • Affiliating (or sharing employees) with companies involved in such activities

-Wikipedia

Over the years, the laws that came out of the bill began to weigh heavily on American banks while the rest of the world took advantage.  It’s really difficult to be the world’s top economy when your banks aren’t the world’s largest or the most powerful ones.  However, some will say that argument is folly considering that the top banks, according to the number of assets, led the world into the Great Recession in 2008.

Rank

Name

Country

Total Assets ($b)

1

Royal Bank of Scotland Group

UK

3,807

2

Deutsche Bank

Germany

2,974

3

BNP Paribas

France

2,494

4

Barclays

UK

2,459

5

HSBC

UK

2,354

6

Crédit Agricole

France

2,268

7

Citi

United States

2,188

8

UBS

Switzerland

2,019

9

Bank of America

United States

1,716

10

Société Générale

France

1,578

11

JPMorgan Chase

United States

1,562

12

Mizuho Financial group

Japan

1,507

13

UniCredit

Italy

1,504

14

ING

Netherlands

1,463

15

Santander

Spain

1,344

16

Bank of Tokyo-Mitsubishi UFJ

Japan

1,337

17

HBOS

UK

1,336

18

Credit Suisse Group

Switzerland

1,209

19

Industrial & Commercial Bank

China

1,189

20

Fortis

Belgium

1,129

21

Goldman Sachs Group

United States

1,120

22

Sumitomo Mitsui Financial Group

Japan

1,081

23

Morgan Stanley

United States

1,045

24

Merrill Lynch

United States

1,020

25

Commerzbank

Germany

908

 

Citi Turns the Table

The bill was signed into law by FDR and overseen by the banking industry until 1999, when Gramm – Leach-Bliley undid key provisions.  

Ironically, it was a move by Citicorp (the old National City Bank) that put the wheels into motion. 

 In 1998, the company bid to acquire Travelers Group, even though the combined companies would violate existing laws. 

The Federal Reserve gave the deal a temporary waiver from the law. One year later, a bill authored by three Republican lawmakers made it official:

  • Sen. Phil Gramm
  • Rep. Jim Leach
  • Rep. Thomas J Bliley

There is no way the Republican Party of Phil Gramm could have guessed it would want more regulations and greater government control of markets.

So, why the change - is Wall Street really going to be corralled by Republicans?

For a long time, I was against the notion of bringing back Glass Steagall  but I’ve changed my mind because everything from bailouts to Fed asset purchases to massive political clout have allowed big banks to ignore the needs of Main Street.

Bank earnings underscore the problem:

Citigroup Inc. 

Citi (C) posted earnings of $1.35 on revenue of $18.1 billion both beat consensus.

  • Retail services -5%
  • Retail banking -3%
  • Institutional revenue $9.1 billion +16%

JP Morgan

JP Morgan (JPM) posted record $25.6 billion in revenue for the quarter resulting in earnings per share of $1.65, both easily beating consensus.  But mortgage business declined 18%, while corporate banking was up 25% overall driven by a 34% surge in investment banking.

Charles Payne
Wall Street Strategies


 

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