Senator Elizabeth Warren is advocating simply for regulations that were around when banks were not TBTF. Glass-Steagall was in place when Bear Sterns and Lehman and other banks were still alive and seemingly invincible so I don’t see why CNBC anchors are so against it. None of their reasons are: it’s bad for business or banks. Instead, it’s arguments against the process of legislating or saying this alone won’t solve the problem.
Glass-Steagall simply makes it so that instead of an executive being able to say fork over those deposits! to a consumer banking division head, they have to actually make compete to invest cash from many consumer banks that are independent of investment banks. The simple argument for Glass-Steagall is that the purpose of an investment bank does not track with that of a consumer bank. So let them compete for consumer bank investment dollars in a market as opposed to command them in a closed supply chain. It won’t say stop a future financial crisis all on it’s own.
For the record: former liberal representative Barney Frank and primary sponsor of Dodd-Frank is opposed to Glass-Steagall proposal by Senators Warren and John McCain and says so on CNBC this past Monday. He argues that Glass-Steagall is only banks and much of the damage that occurred in 2007 happened outside of banks (see AIG, Bear Sterns, Lehman and derivatives trading). He makes the good point: securities were designed so a lender didn’t have to worry about not getting repaid so bad loans could be bundled and sold off the books to suckers. But he also makes the point: Congress has underfunded Dodd-Frank implementation which has prevented these safe guards.
I think Frank is off on this because Glass-Steagall would help to make failed banks easier to wind down (consumer or investment) and make consumer banking a safer bet for consumers in general. It isn’t to prevent failures, it would make them manageable. The constant undercurrent in these CNBC conversations is: this wouldn’t “stop” bank failures or TBTF. I think it would help mitigate some of the problem by making bank failures manageable by shrinking their conflicts of interest, simplifying their creditor relationships and is worth passing. With regards to AIG, I would hope that a Glass-Steagall type law would declare that underwriting and issuing credit default swaps is an investment bank activity and should require AIG to spin off a wholly separate investment bank, just like a bank would have to under Glass-Steagall.