Itwas nearing the fourth hour of questioning when Rep. Maxine Waters, D-Calif.,broke the news toJohn Stumpf, then thechairman and CEO of Wells Fargo& Co.: the OCC had slapped Wells Fargo Bank NA with a $20 million civil penalty forthe illegal repossession of servicemembers' automobiles. Even during a congressionalhearing, Waters jabbed, Stumpf's company just couldn't keep it together.
Hertheory: that Wells Fargo is just too big to manage.
"Ihave come to the conclusion that Wells Fargo should be broken up," Waterssaid.
Watersjoins a growingchorus of politicians arguing for dismantling the nation's biggest banks.Although the words "Glass-Steagall" were never mentioned in the twocongressional hearings where Stumpf testified in recent weeks, the widelypublicized fallout of Wells Fargo's fake accounts scandal has revived politicaldiscussion of the Depression-era law. But the jury is still out onGlass-Steagall's efficacy as a financial regulatory framework for the modernworld. It remains unclear whether reinstating the law is a viable policyoption, or just a tool to promote political rhetoric.
Congressenacted Glass-Steagall in 1933, separating investment banking and commercialbanking until its repeal by then-President Bill Clinton in 1999 as part of theGramm-Leach-Bliley Act. Since the 2008 financial crisis, dismantling thenation's biggest banks has become a more popular political platform. BernieSanders made Glass-Steagall a focal point of his candidacy for the Democraticpresidential nomination and both the Republicanand Democraticplatforms for the 2016 election explicitly state support for a modern-day revivalof the bill.
Almostevery post-crisis session of the Senate and the House has introduced a modern-dayGlass-Steagall bill, but none gained enough support to make it to a floor vote.
Thefailure to move a new Glass-Steagall bill reflects the lack of consensus onwhether bank breakups make the financial system safer. The debate that hasn'tbeen settled even eight years after the crisis. As leaked emails fromHillary Clinton campaign chairman John Podesta state, the issue ofGlass-Steagall is one better off ignored since "people don't get it."
MaxWolff, chief economist at merchant-banking firm Manhattan Venture Partners,said Glass-Steagall made "a lot of sense" when it was implemented in1933. But times have changed.
"Ina deregulated, globalized world, I don't think it makes sense for us to havesmall, vulnerable banks that have limited ability to finance internationalbusiness," Wolff said.
Bybreaking down the 66-year-old wall between commercial and investment banking,Gramm-Leach-Bliley aimed to allow banks to tap into new revenue streams likeinvestment banking, advisory, and underwriting fees and keep American banksmore competitive with institutions around the world. SNL Financial data showsthat revenue from these lines of business will amount to a projected 13.3% oftotal revenue for U.S. banks in 2016.
Thebanks that make most of their money from these services tend to be the biggerones. The fact that the large banks seemed to benefit the most fromGramm-Leach-Bliley became a point of contention when the 2008 financial crisisstruck, raising concerns about how the overlap of commercial and investmentbanking increases systemic risk.
FedChair Janet Yellen addressed the relation between Gramm-Leach-Bliley and thefinancial crisis during a recent appearance before .
"That'snot really what was really responsible, in my opinion, for the financialcrisis," Yellen said. "In fact, some of the most serious problemshappened at standalone investment banks like Lehman and Bear Stearns thatweren't part of bank holding companies at all and now they're subject toconsolidated supervision."
WellsFargo is not doing the big banks any favors with its fake accounts scandal.Some politicians are using the news to make the case that customers are beingvictimized by banks fostering profit-first cultures, and that the only way toaddress the issue is by breaking them up.
PhilipWallach, a senior fellow at the Brookings Institution, says breaking up thebanks to straighten out corporate culture is the best argument for aGlass-Steagall revival that really has no legs.
"Theymake it sound as if the business of commercial banking would somehow be transformedinto this risk-free, scandal-free world upon reinstating Glass-Steagall. Andall the dicey stuff would have to go outside of the commercial world,"Wallach said. "But commercial banking is an inherently risky business."
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