In surprise, GOP looks to revive Depression-era banking law

By KEN SWEET, Associated Press

NEW YORK — The Republican Party has taken a page straight out of the campaign books of Bernie Sanders and Elizabeth Warren.

What? No, we’re not kidding.

In the party’s 2016 platform, the GOP advocates for reinstating the Glass-Steagall Act, a Depression-era law that regulated the U.S. banking industry until it was repealed in 1999. Bringing the law back would lead to the breakup of major U.S. banks like JPMorgan Chase in order to separate investment banking from commercial banking.

“It’s a spectacular about-face by the Republican Party,” said Aaron Klein, an economist and fellow at the Brookings Institution who has written about bank regulations.

In a party that traditionally favors deregulation and hands-off governance, the adoption of this provision by the Republicans has raised eyebrows on Wall Street and among industry experts. Here’s a primer about what Glass-Steagall is and what the GOP’s adoption of this policy means:

What is Glass-Steagall?

The Glass-Steagall Act of 1933 was passed in the wake of the stock market crash of 1929 and the thousands of banks failures that led up to the Great Depression.

While the law did a lot of things, the provision most talked about was the law segregating the U.S. banking industry into commercial banks, or banks that take consumer deposits and operate branches, and investment banks, or those that trade and underwrite stocks and bonds and advise companies on making deals. It also separated out insurance.

A bank could be only a commercial bank, an investment bank or an insurance company. That’s it.

Why was it repealed?

As banks became larger and more complicated in the decades after the passage of Glass-Steagall, U.S. financial regulators had been easing their requirements under the law. Commercial banks increasingly started offering services that had traditionally been associated with investment banks. By the late 1990s, some historians and economists had begun to argue that Glass-Steagall was effectively dead.

The final blow came when banking giant Citicorp said it intended to combine with Travelers, an insurance company. The proposed deal faced regulatory concerns from the get-go since Glass-Steagall prohibited the combination of insurance and banks. But a GOP-led Congress passed the Gramm-Leach-Bliley Act in 1999, which President Bill Clinton signed into law, which repealed that provision.

Citicorp and Travelers became what’s known as Citigroup. Other banks followed. Chase Manhattan Bank merged with JPMorgan & Co. to become JPMorgan Chase & Co.

So why bring it back?

After the financial crisis, much anger was directed at Wall Street for the behavior that led to the crisis. Part of that anger jelled into an argument that Glass-Steagall could have mitigated or prevented the financial crisis by keeping Wall Street from growing too large. While there had been pushes for the return of Glass-Steagall since its repeal, the appeal of that argument grew exponentially following the crisis.

When advocates say they are in favor of restoring Glass-Steagall, they are typically not referring to the entire law, just the provision that would separate investment banks and commercial banks.

Senator Warren, a Massachusetts Democrat who is well-loved by the anti-Wall Street crowd, has been an advocate for the return of Glass-Steagall. That position was also adopted by Senator Sanders, a Vermont Democrat who built his presidential campaign partly by forcefully arguing for the breakup of big banks.

Until this week, restoring Glass-Steagall was a policy advocated for almost entirely by the left wing of the Democratic Party.

Would it work?

It’s unlikely Glass-Steagall would have stopped the financial crisis.

The first institutions that failed in the crisis were mortgage lenders. That was followed by Bear Stearns, Lehman Brothers and the near-collapse of Merrill Lynch, three traditional investment banks that did not have commercial banking operations. Other banks that failed, like Washington Mutual and Wachovia, were commercial banks that collapsed because of bad mortgage lending practices.

“The common thread with the bank failures in the 2007-2008 crisis was these banks were weakly capitalized, not that they had both investment bank and commercial bank operations,” said Kim Schoenholtz, an economics professor at the New York University Stern School of Business. “The goal of the people who want to bring back Glass-Steagall is to make the system safer. But this is just a bad idea.”

But it has appeal, clearly

Glass-Steagall became political “cure-all” for the public’s anger with Wall Street and the U.S. banking industry, Klein said.

“What I’ve come to realize is that people who are pining for the return of Glass-Steagall, they are not pining for the prohibition on earning interest on your checking account,” Klein said. “It’s a pining for a return to the culture and norms of the post-Depression era. That strong regulation could have prevented the crisis.”

So why is the GOP adopting a Democratic Party policy proposal?

One reason why the Republican Party is adopting this proposal could be the hope of appealing to Sanders supporters who don’t want to vote for Hillary Clinton. While restoring Glass-Steagall was in the Democratic Party’s preliminary 2016 platform, the Clinton campaign does not argue for the return of Glass-Steagall.

“The Trump campaign seems to have a fantasy that they will be able to acquire some significant share of Bernie Sanders voters in the general election and this is one way to appeal to them,” said Tony Fratto, a former Treasury Department official under George W. Bush who now runs a lobbying firm focused on financial issues.

Fratto doesn’t see the strategy working, however.

“Sanders supporters would have to overcome their concerns about Trump’s positions on immigration, race, the wall, taxes, etc. — all of those things — to support Trump over this throwaway line in the party platform,” he said.

Even Warren finds the move perplexing. While she supports the return of Glass-Steagall, an aide said the Senator is “bewildered” that the GOP would adopt the provision but still advocate for other deregulatory proposals such as the repeal of Dodd-Frank, the key financial regulatory reform law passed following the 2008 financial crisis.

A throwaway line?

The official GOP party platform carries only symbolic weight in the election and is not something required to be adopted by the GOP if they win the general election, Klein and Fratto said.

And there is little interest in Congress to bring back Glass-Steagall.

Jeb Hensarling, a Republican from Texas who chairs the House Financial Services Committee, has expressed no interest in bringing back Glass-Stegall. Warren’s bill has only nine co-sponsors, of which one of them is Republican, making it unlikely to be adopted by the Senate.