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Over the course of the summer, we had a flare up of a national debate on whether Glass-Steagall should be reinstated.There has been a rush of well-known senior banking executives from the past lining up around the issue: Phil Purcell (of Dean Witter fame), John Reed (Citibank), Dave Komanski (Merrill Lynch) and, most famously, Sandy Weill (Citigroup) have weighed in on the side of rolling back the clock; Bill Harrison (JP Morgan) and Dick Kovacevich (Wells Fargo) are on the other side.
It’s a bit like watching an alumni basketball game. And, a bit like an alumni basketball game, the score doesn’t particularly matter.
Regardless of where the collective perspective of these gentlemen lands, the chances of reinstating Glass–Steagall are slim to none….absent another significant financial crisis. Exhibit 1 to this effect is that we are in a world in which reform to money funds failed. There, we have a product that has implicit guarantees to individual investors, with no capital backing (!!); the systemic risk is significant; and the need for reform is agreed to by everyone from the Wall Street Journal OpEd page to Gretchen Morgenson of The New York Times (when was the last time those two agreed on anything???).
But one should note that the Glass-Steagall debate isn’t really about reinstating Glass-Steagall. At its core, it’s a debate about how much risk banks should carry; and its underpinning is the recognition that banks (and regulators, and rating agencies, and Boards) did not understand how much risk they carried going into the downturn. And that the JPMorgan “whale” losses, the Barclays’ LIBOR scandal, the Knight Securities trading losses, the Standard Chartered money laundering scandal….and so on…indicate that they still don’t.
The burden then falls on bank Boards (which have turned over many of their members since the downturn, but do not appear to have made fundamental changes in how they govern); on the ratings agencies (I know, I know……their fundamental conflicts give one little hope here); and the regulators. Thus the burden being placed on regulators’ stress tests to gauge risk and simulate bank performance in a downturn is extremely high. Stay tuned…..
This post originally appeared on LinkedIn.
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