"I was trying to find out what it was that everybody else understood without giving up my stubborn and hard-won lack of understanding." (David Antin)

This past week we were informed that JPMorganChase lost $2 billion in what they admit was stupid and excessively risky credit default swap trades.

The Great Depression had many causes. Some inevitable as the economy has cycles, excessive exuberance (Stock Market Crash), a wide spread drought, and some caused by unwise government policies (notably the Smoot-Hawley Tariff). And it was made worse because of the bank failures and loss of depositors money.

Two great responses which served our nation well for almost 70 years and intricately related was:

1) Federal Deposit Insurance which assured depositors their money was safe.
2) Glass Steagall which, if the government was going to insure deposits, restricted banks from engaging in certain risky activities which would add risk to the financial system (called systemic risk).

Around 1984, Glass-Steagall was reformed to allow banks to sell insurance to their customers and establish wealth management services (primarily provide stock broker services). I worked for Senator Abdnor at the time and this was an area under my purview. Primarily because of Senator Abdnor’s chairmanship of the Joint Economic Committee plus South Dakota’s reliance on community banks, Senator Abdnor was a leader in the crafting of this G-S reform.

To this day, I do not doubt the reform was a good reform in light of changing technology and increased competition for bank deposits from non-bank entities. But after it passed, my colleague from Senator D’Amato’s office (also a leader because he represented New York) and I had a celebratory drink when it passed. During my tenure with Senator Abdnor it was easily the most significant and complex matter on which I worked.

As we celebrated, we saw something on the horizon we feared, a further relaxation of G-S and possibly its demise. In the late 1990’s with the support of President Clinton, Treasury Secretary Robert Rubin, and the Republican Congress, our fears were realized with the passage of Gramm-Leach which gutted G-S.

Gramm-Leach had two effects. First, it allowed the banks to engage in the activity that resulted in the $2Billion loss by JPMorgan. Second, it gave big banks access to low cost capital (from federally insured deposits and access to the Federal Reserve) to expand and essentially become the predominant influence on financial activity. Such size by definition increased systemic risk to our financial system.

When the meltdown happened in 2008, I was not surprised. Then, Congress and the President responded with a stubborn refusal to examine Gramm-Leach and made it worse by passing Dodd-Frank, a “cure” that only worsened the disease (large banks that are “too big to fail” were only going to get bigger).

Rather than make this post longer than necessary, I leave you from some articles that address the following:

Describes how they have gotten bigger. When Gramm-Leach passed, the biggest banks controlled about 20% of the nation’s deposits. In 2007, they controlled 43% of the nation’s deposits. Today, proving what I predicted from Dodd-Frank, they control an astonishing 56% of the nation’s deposits.

http://www.theatlantic.com/business/archive/2012/05/the-lesson-of-jp-morgans-2-billion-loss-break-up-the-big-banks/257050/

http://www.suntimes.com/news/huntley/12522889-452/dodd-frank-law-too-big-to-succeed.html

A Call to Revive Glass-Steagall:

http://triblive.com/opinion/1795433-74/glass-steagall-banking-billion-jpmorgan-risk-actually-bank-capital-lost

And, related to reviving Glass-Steagall and pointing out that pretending the government can regulate us into total protection is futile.

http://www.nypost.com/p/news/opinion/opedcolumnists/break_up_the_banks_NoZue6C7k34jZqUcjnTzYM

Abolish Dodd-Frank and revive Glass-Steagall. Until we do it, the next meltdown is just around the corner. And, this time we will not have the resources we did in 2008 ($3Trillion of Federal Reserve cheap capital and $1Trillion of direct federal bailouts). The system WILL collapse making the Great Depression look like a walk in the park.

P.S. Sorry, I can’t figure out how to imbed the links so you have to cut and past them.

11 Replies to “"I was trying to find out what it was that everybody else understood without giving up my stubborn and hard-won lack of understanding." (David Antin)”

  1. Anonymous

    As an ardent Tea Party Republican, I am very disappointed in this post. We need some largely bloated and ineffective agency to oversee our markets like we need another hole in the head. Consumer Protection Agency is just another socialist term for “wholesale communistic attack on the free market.” It’s amazing I am not standing in line to buy shoes at the state-owned store down the block. Can’t you see that the enactment of more laws is not the answer? The Voelker Rule, Dodd-Frank, and all of the prior oversight laws were trash (no offense but you are advocating for a law that stopped being relevant when Abnor was in office). Kristi Noem is absolutely right in that government should stop regulating business. Am I happy that my bank gives me 0.0% interest on my CDs. Nope, but that’s not the banks fault, that fault rests with the hypocrites at the Federal Reserve and the Dept. of Treasury. I am, however, happy that my bank is taking advantage of the investment tools and strategies that are out there to get me a decent divident on my shares of stock. Mr. Jones, I applaud your service, but more regulation isn’t the answer, and a return to the ‘old days’ doesn’t fit when our government wants its hands squarely in everybody’s piece of pie.

  2. Troy Jones Post author

    For some reason, your post got caught by the spam filter. I just released it.

    Your position is legitimate if you also advocate for an end to FDIC insurance which provides banks cheap capital via the government guarantee of their funds to engage in risky behavior.

    You can’t have it both ways as a stockholder- have your stock appreciate from profits derived as a result of a government guarantee and then assert you want free enterprise devoid of regulation.

    Furthermore, your post belies a lack of understanding of Glass-Steagall. It is not consumer protection legislation and it isn’t even regulation. It simply says:

    If you want access to FDIC insurance, the corresponding access to cheap capital and operate as a bank your only approved lines of business is business and personal loans.

    If you want to engage in other lines of business including risky investments, you must raise your capital in the marketplace.

    But, you can not use government subsidy to grow yourself to become “too big to fail.”

    Few people think the current concentration of bank assets in the big banks is good (except Treasury Secretary Geitner and by extention I assume President Obama). The only way to stop this is to re-enact Glass-Steagall. Otherwise, I think in four years, the big banks will hold over 60% of bank assets in our nation, exposing us to significant systemic risk.

    FYI: If you pay attention, I oppose Sarbanes-Oxley, everything in Dodd-Frank, and a host of other regulation regarding our markets. I believe they give people a false sense of security with regard to the safety of investments. Despite all the regulation we had, they couldn’t prevent this fiasco at JPMorgan, Bernie Madoff, etc.

    But as long as we have FDIC insurance of deposits, we need Glass-Steagall. Without G-S we basically subsidize Wall Street. And, since an end to FDIC would wreak havoc via a run on the banks similar to the Great Depression and what is occurring in Greece today, I prefer Glass-Steagall.

  3. sdpride

    They lost $2 billion but they have more than enough to cover the losses.

    The taxpayers aren’t on the hook for anything. And now JP Morgan has learned it’s lesson. That’s how the free market works.

    LOL. Nothing free when you gamble with government guaranteed money. Troy

  4. Anonymous

    YOU GUYS DONT GET IT ESPECIALLY THE REPUBLICANS THEY THREW ONE TRILLION AT THE BIG BANKS, SOUND FAMILAR LIKE THEY WERE GOING TO HOLD BANKERS ACCOUNTABLE.NO ONE WENT TO JAIL. AND YOU GUYS ARE HELPING TO GIVE OBAMA ANOTHER 4 YEARS, AS YOU DO GIVE HIM HOPE.

  5. sdpride

    I agree that it is not a totally free market. But I was trying to make the point that in a market things will fail. In this case they didn’t even fail. Their CEO is still projecting a profit.

    As to your point on Gramm-Leach, some of the worst failures (Bear Stearns and Lehman Brothers) did not combine investment banking with commercial banking while those that did in general came out better.

    I agree about getting rid of Dodd-Frank.

  6. Lee Schoenbeck

    Thank you for the article and the comments, that helped flesh it out and put the issue in perspective. I appreciate this information, and the excellent discussion.

  7. Anonymous

    Crooks should go to jail based on what they do wrong not on the position they hold or held…….

  8. gold price

    Investment banks could underwrite securities and sell securities, but they could not accept bank deposits or make loans to customers.