Has the Wall Street Journal done a 180 on Glass-Steagall?
Readers of the Wall Street Journal edit page today encountered an editorial siding with Andrew J. Hall, the castle-owning commodities trader fighting for his $100 million payday but criticising the corporate structure of Citi that made that payday possible.
We think a contract is a contract, and if Mr. Hall is owed $100 million then Citigroup ought to pay it. But an equally important issue—especially for taxpayers—is whether Citigroup ought to own a high-risk trading operation like Phibro. As a bank holding company, Citi is funded in part with deposits insured by the taxpayer. And we know from painful experience that regulators think Citigroup is too big to fail.
What the Journal editorial board seems to be saying here is “Bring Back Glass-Steagall! “
Whining about Andrew Hall’s bonus is the cheap way to avoid answering the difficult question of “too big to fail” while appearing to seek financial reform. Of course, if the question were answered, there would be no need to address compensation at all. Smaller, more tightly regulated banks do not run the risks that generate huge returns and huge salaries.
Translation: We wouldn’t even be having this conversation about excessive compensation if we hadn’t repealed the law that barred guys like Andrew Hall from amplifying their risky bets with your hard-earned cash.
See, the compensation wouldn’t be so excessive in the first place, because it wouldn’t have been possible to lever and arbitrage your way to such dramatically huge short-term returns at the possible expense of the entire financial system,* (and maybe the world’s physicists would have even devised a way to stop the ice caps from melting instead of spending the past decade modelling new ways of tranching) if only the Democrats had not repealed the sacred Glass-Steagall Act back in 1999!
Where could the Democrats have gotten that crazy idea of repealing a crucial piece of the New Deal financial reforms? Let’s travel back o the Wall Street Journal editorial page of April 7, 1998, shall we?
What’s really big here is that for the first time a financial services company has been created that reflects the true scope and versatility of the modern, global marketplace. Conjoined, Citicorp and travellers hope to reach customers just about anywhere money is passing between hands on the planet, and offer them easier access to the vast net of financial instruments that criss-cross the globe. This lets people tailor the management of their money in ways best suited to individual needs. And that is a sales formula not just for enhancing shareholder wealth at Citicorp and travellers (both stocks soared Monday morning on the news of the merger). It is by trundling down avenues such as this that the whole world now creates wealth…
“Big,” however, is a word that still triggers arrhythmia among the codgers of various legislatures and government regulatory agencies. So expect critics to pile on once the news starts to sink in.
For this merger to stick, the Federal Reserve must over the next few years approve various aspects of the new Citigroup’s operations. Congress, for its part, has failed 11 times over the past dozen years — most recently, last week — to output a bill reforming the antique known as Glass-Steagall, whose mirrors allow regulators to see the financial world as divided into the neat nooks of investment banking and commercial banking. These bills keep dying in committee, not so much on ideological grounds but partly because the whole exercise is a turf war. Laws separating the functions of banks, insurance companies and brokerage firms have left each of these industries with its own patch to defend.
It really is a new day on Wall Street.
*Because in this universe, banks and regulators would have learned something from the collapse of Long Term Capital Management.
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