No way! Sen. John McCain sponsors amendment to restore Glass-Steagall Act

Posted by AzBlueMeanie:

No way! I might be more inclined to believe this if Sen. John McCain was not the BFF of former Sen. Phil Gramm, the "free market" deregulator of the financial services industry whose deregulatory zeal is responsible for our economic house of cards collapsing under the weight of "casino capitalism" and creating the giant Ponzi scheme that Wall Street is today. Phil Gramm is McCain's "economic guru," and would have been his Secretary of the Treasury. I don't trust McCain, my instincts tell me he's up to something. Phil Gramm is waiting in the wings.

Newsweek reports McCain and Cantwell Want a New Glass-Steagall Law:

[John McCain is] joining up with Democratic firebrand Maria Cantwell to propose something that will be anathema to both Wall Street and the Obama administration. According to two congressional sources, the two maverick senators want to reinstate Glass-Steagall Act, the Depression-era law that forced the separation of regular commercial banking from Wall Street investment banking. The senators' proposal echoes a failed amendment introduced in the House last week by Rep. Maurice Hinchey of New York.

The Senate prospects for the success of the McCain-Cantwell bill—which the two plan to announce together on Wednesday morning—seem bleak at best. But McCain and Cantwell join a still small but not insignificant insurgency of chronic doubters, including former Federal Reserve chairman Paul Volcker, who say not nearly enough is being done to change Wall Street and, in particular, to address the "too big to fail" problem. The issue is one of the few in Washington that can unite the left and right sides of the political spectrum. Democrats like Cantwell deplore Wall Street's outsize role in the real economy and its lobbying influence, and conservatives such as McCain are appalled at the way the market system has been undermined—some would say rigged—by the power of the big banks.

Bankers and regulators, Volcker said earlier this month, "have not come anywhere close to responding with necessary vigor" to the crisis. He wants to ban federally guaranteed commercial banks from risky trading in derivatives and other arcane instruments that could precipitate another huge bailout some day. That too is a proposal no one who currently controls the levers of power in Washington is considering. But among those who now support Volcker is Arthur Levitt Jr., the former chairman of the Securities and Exchange Commission. "I tend to be in the Volcker camp in saying banks should either be investment banks or take deposits and make loans," Levitt told me in an interview this week.

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Reinstituting Glass-Steagall would be almost akin to unscrambling an egg. By the time it was formally repealed in 1999, commercial banks like Citigroup had been moving gradually into investment banking for nearly two decades. Glass-Steagall had come under continual pressure as traditional commercial banks sought to follow their old clients into the capital markets, issuing stocks and bonds instead of borrowing the old way. Innovators like JPMorgan had gone global while the law still reigned at home, becoming big in the Euromarkets. "I don't think it's practical to think you can slice and dice classes of activities in any meaningful way," Gerald Corrigan, the former president of the Federal Reserve Bank of New York, told me recently.

Indeed, after last year's crash some experts concluded that the repeal of Glass-Steagall had little to do with it. After all, everybody—investment banks, nonbanks, insurance companies—had gotten into trouble: firms, in other words, that were not ostensibly changed by the repeal. Some even argued that the absence of Glass-Steagall made the cleanup easier: it allowed Bank of America to buy Merrill Lynch, for example.

But that critique missed a larger point that McCain, Cantwell, and other critics are now trying to address. The blinding complexity and interconnections created by modern capital markets—especially because of the way nearly half a trillion dollars in derivatives trades linked the firms to each other—demanded that there be strong firewalls and capital buffers between Wall Street institutions and their affiliates, and between banks and nonbanks and insurance companies. Otherwise there would be no islands of safety—no healthy institutions left to come and rescue the day, as commercial banks traditionally had done since the days of J. P. Morgan's famous bailout in 1907. The repeal of Glass-Steagall took things in precisely the opposite direction, eliminating most of the firewalls and inviting staid commercial banks into the buccaneering world of Wall Street trading. Representative Hinchey says it "was a recipe for disaster because these banks were empowered to make large bets with depositors' money, and money they didn't really have. When many of those bets, particularly in the housing sector, didn't pan out, the whole deck of cards came crumbling down and U.S. taxpayers had to come to the rescue."

Today the walls between firms still seem low indeed, and trading in derivatives that are "over the counter" (that is, out of public sight) continues at an astonishing pace, having risen back up to nearly $600 trillion worth. One big danger sign ahead is that the biggest banks have gotten even bigger in the aftermath of the catastrophe, and under the new rules requiring swap dealers to post capital for margin requirements, the big banks are likely to monopolize even more of this derivatives market and become that much richer and more powerful. That won't necessarily be a problem—unless the next crash proves once again that they cannot be allowed to fail, and the government must step in. Until McCain and Cantwell decided to speak out, very little that is currently under consideration by Congress or the executive branch would have changed that.