Say goodbye to the investment bank, Glass-Steagall Act
Posted on September 22nd, 2008 by bile Tags: bank, bank deposits, Bank of America, banking, big commercial banks, Bush administration, Congress, Federal Reserve System, finance, Glass-Steagall Act, Goldman Sachs, government agencies, high finance, industrial bank, investment banking, JP Morgan Chase, Morgan Stanley, New York Times, Securities and Exchange Commission, Utah, Wall StreetGoldman Sachs and Morgan Stanley, the last big independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night, a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age.
The firms requested the change themselves, even as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms. It was a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives. It effectively returns Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act.
By becoming bank holding companies, the firms are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
I’m fine with this outcome in that the Glass-Steagall Act has been effectively nullified as far as I can tell. However, it makes me wonder if this was all part of some plan. Yes these firms will become more regulated in some ways but in what way does it harm them vs harming smaller firms. Morgan Stanley has had its Utah based industrial bank and word is they have been looking at the benefits of becoming a bank holding company for a while now.
So now they are a net less risky. They claim revenue will be down as a result as will bonuses and perhaps pay. We shall see. How long till the government forgets what led us here and creates the environment for a bubble again? If we make it out of this one… likely not long.
2 Responses to “Say goodbye to the investment bank, Glass-Steagall Act”
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September 23rd, 2008 at 9:40 pm
[...] Say goodbye to the investment bank, Glass-Steagall Act By bile Goldman Sachs and Morgan Stanley, the last big independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night, … blog of bile - http://blogofbile.com [...]
September 24th, 2008 at 1:52 pm
How long till the government forgets what led us here and creates the environment for a bubble again?
Generational dynamics in action? No, it’s simpler than that. There is no forgetting that needs to be done by the government. As it currently operates, learning that lesson is impossible without the government blowing itself up. Instead, the crisis will pass (bailout or not) and it will be assumed that tinkering or added regulation has fixed the problem. Onto the next bubble!