Would resuscitating a Depression-era banking law strengthen the financial system that we have today? There are many, including me, who believe a reinstatement of Glass-Steagall would help separate the risks of high-velocity, high-volume securities speculation from the pedestrian activity of holding retail deposits. Often forgotten in the discussion of Glass-Steagall is the law’s primary accomplishment: the creation of deposit insurance through the FDIC, which promptly ended the recurring curse of mass withdrawal of retail deposits during financial crises. My grandparents lost all their savings in the banking crisis of 1933. In the wake of Glass-Steagall, the idea that their bank deposits were insured must have seemed like a miracle to them. This act established confidence in the banking system among everyday savers.
Yesterday, DealBook’s Andrew Ross Sorkin took up the issue of Glass-Steagall in a piece focusing on Massachusetts Senate candidate Elizabeth Warren. Sorkin argues that the dismantling of Glass-Steagall was not the cause of the financial crisis. Furthermore, he says that Warren’s proposal to reinstate Glass-Steagall is misguided and would not have prevented the global meltdown of 2008.
I don’t want to speak for Warren, a Harvard Law School professor, but I think what she is pointing to is the need for an updated version of the law, a Glass-Steagall 2.0. Sorkin’s description of why Glass-Steagall would have done little to avert the financial crisis of 2008 parrots the argument made by Wall Street’s elite. See this Bloomberg piece from December 2009, for instance:
“If you look at what happened, with or without Glass- Steagall, it would have made no difference,” said H. Rodgin Cohen, chairman of New York-based law firm Sullivan & Cromwell LLP, who represented one side or the other in more than a dozen transactions stemming from the financial crisis last year, including the rescues of Bear Stearns Cos., Fannie Mae, Wachovia Corp., and American International Group Inc.
Cohen and others say the law wouldn’t have saved Bear Stearns or Lehman Brothers Holdings Inc., both of which were pure investment banks, from collapse. And the government would not have been able to enlist JPMorgan Chase & Co. to take on the assets of Bear Stearns or allow Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies, giving them access to the Federal Reserve’s discount window.