Washington, DC - Congressman Maurice Hinchey (D-NY), the author of the Glass-Steagall Restoration Act, today hailed President Obama's proposal to prevent commercial banks from owning, investing or sponsoring a hedge fund or a private equity fund, or engaging in proprietary trading operations. The congressman, who will be formally calling on the House to hold hearings on his legislation, said the president's proposed restrictions would help protect Americans who have deposits in large banks, break up parts of oversized financial institutions, and help avoid future financial collapses.
"For far too long, big banks have been allowed to get away with making risky bets with money deposited by hard-working Americans," said Hinchey, who is a senior member of the Joint Economic Committee. "These banks have been able to rely on federal protections for depositors as cover for what has at times amounted to a bad gambling habit. President Obama is right to be very critical of these practices that have unnecessarily exposed the American people and our economy to substantial risks. In the midst of the Great Depression, Congress passed the Glass-Steagall Act to prevent banks from mixing commercial lending with investment activities. As time passed, Congress mistakenly relaxed those restrictions and the greed that subsequently ensued contributed to the financial collapse that began in 2008. Now is the time for Congress to act and put those safeguards back in place so that the American people are protected from greedy Wall Street firms."
The Glass-Steagall Act was repealed in 1999 by the Gramm-Leach-Bliley Act, which Hinchey strongly opposed and voted against. That bill paved the way for the establishment of super-sized banks that serve as both commercial lending institutions and investment companies. Today, just four huge financial institutions hold half the mortgages in America, issue nearly two-thirds of credit cards, and control about 40 percent of all bank deposits in the U.S. In addition, the face value of over-the-counter derivatives at commercial banks has grown to $290 trillion, 95 percent of which are held at just five financial institutions.
In December 2009, Hinchey offered an amendment to the Wall Street Reform and Consumer Protection Act that would have restored the Glass-Steagall Act as part of the broader financial regulatory reform legislation. That amendment was blocked from coming up for a vote before the full House. Following the amendment's rejection, Hinchey introduced the Glass-Steagall Restoration Act, which would statutorily require banking giants to decide whether they want to serve as a commercial bank or an investment bank and require them to cease activities in one of those areas within one year of the bill's enactment.
President Obama's proposal captures the spirit of Hinchey's legislation that aims to separate commercial and investment banking while also limiting the excessive growth of the market share of liabilities by large financial institutions.
"President Obama's proposal would safeguard the American people from many of Wall Street's riskiest practices and I will work in Congress to help implement his proposals," Hinchey said. "I will also work to go even further and have Congress reinstate the Glass-Steagall Act in order to prevent any investment banking institutions from engaging in commercial lending at the same time."
Hinchey is also the author of the Too Big to Fail, Too Big to Exist Act, which would require the Secretary of the Treasury to dismantle any U.S. financial institution deemed to be so big that its potential collapse would undermine the entire U.S. economy. U.S. Senator Bernie Sanders (I-VT) is the author of that legislation in the Senate.
January 21, 2010
WASHINGTON, January 21 – Sen. Bernie Sanders (I-Vt.) issued the following statement today after President Obama proposed tough new restrictions on the size and activities of the nation's largest financial institutions:
“President Obama’s proposal is a major step forward to limit the greed and reckless behavior of Wall Street that has caused so much damage to the economy. We need to do everything we can to limit the size of too-big-to-fail financial institutions and end the gambling addiction on Wall Street.
“One of the reasons I am strongly opposed to the re-nomination of Ben Bernanke is that, in truth, he has had the power to do this from day one. Our goal must be to create a new Wall Street that invests in the productive economy creating decent paying jobs for all Americans."
Sanders is the author of legislation that would require the Treasury Department to break up too-big-to-fail financial institutions (S.2746, The Too Big to Fail, Too Big to Exist Act)
'Taxpayers will no longer be held hostage by Wall Street's obsession with reckless policies and obscene profits,' says SEIU's Anna Burger
WASHINGTON, D.C.--Today, the Service Employees International Union (SEIU) released the following statement of Secretary-Treasurer Anna Burger on President Obama's recent proposals to rein in the reckless policies of Wall Street:
"Today, President Obama sent a strong and clear message to Wall Street: The game is over. Taxpayers will no longer be held hostage by Wall Street's obsession with reckless policies and obscene profits.
"Over the past year, we've witnessed the same Wall Street banks that crippled our economy and took trillions in taxpayer bailouts revert back to the same risky practices that led to our economic collapse. Even worse, they are now rewarding themselves with multi-billion dollar bonuses paid for by the American people.
"At the same time these banks continue to foreclose on homes, deny small businesses the resources they need to stay in business, refuse to provide state and local governments the relief they need to save jobs and critical public services, and jack up credit card and bank fees on consumers.
"The American people are justifiably angry--they've lost their jobs, their homes, their businesses, and their life savings and the big banks are doing nothing to invest in our economic recovery.
"That's why thousands of Americans have taken to the streets over the past year to demand Congress hold Wall Street accountable. The Senate must immediately act on common sense financial reform legislation that puts our families ahead of oversized bank profits and prevents future economic crises.
"By limiting the scope of financial institutions and limiting excessive growth of the financial sector, President Obama and Chairman Volcker's proposals are important steps towards ending the risky practices that helped get us in the financial crisis we are in today and getting America back on the road towards economic recovery.
"To be successful, any financial reform must include the President's proposals to rein in the risk taking of big banks and impose fees on banks to recoup billions in taxpayer aid. We support additional provisions to further crack down on reckless practices and too big to fail institutions--including an independent and fully empowered Consumer Financial Protection Agency to protect Americans from intentionally deceptive products, separation between commercial and investment banking, the open exchange of derivatives, strong resolution authority and comprehensive reform of credit rating agency practices."
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Simon Johnson has follow-up questions.
I’ve been thinking a lot about this approach as a major piece of regulating the financial sector. The point isn’t to simply redo what we’ve already done, because markets change and our government’s approach to them needs to change as well. There’s an argument that the old conflict between commercial and investment banking is gone, and that having these two types of business lines together now actually creates stability for the firm itself. So the idea is to take the spirit of what has worked in the past and update it to new challenges, and in this sense I like to think of this as a “21st Century Glass-Steagall.”
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And the separate but related question of conflict of interest will be interesting: During the
first FCIC hearing last week, Angelides grilled Goldman Sachs CEO Blankfein about whether or not there was a conflict between Goldman’s market making and prop desk and their underwriting desk. Blankfein said no, these are never in conflict, while Angelides clearly thought they did. I will withhold saying more until I learn about the press conference, but how these types of conflicts of interests are separated out will be a major piece of concern for financial reform, and something that should be clarified today.
So as we discussed in the previous entry, this is a simple and elegant solution. There’s no raising a “rainy-day” TARP-esque fund. There’s no trying to second-guess the proper limits for trading for profit within a commercial bank. If you want to be in that space, and get the safety net and stability that comes with it, you have to accept simple terms.
Because if a commercial bank fails, it has access to government mechanisms through the normal FDIC channel. If a prop-trading investment bank fails, it should be wound down in accordance with new financial firm bankruptcy rules. Now note we have to move two other piece of reform in order to make this credible: we need a system where parties are aware of the derivatives holdings of an investment bank pre-crisis, say through a clearinghouse or exchange, so to make resolution credible and prevent panics. We also need a new resolution authority to handle these firms in a manner that won’t destroy the system. Regulating exchanges, and special bankruptcy proceeding for financial firms: we’ve done this before in the New Deal, we just never upgraded it for a new century, and right now a broken financial sector calls again for these changes.
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