My FT column this week is about structural reform of financial services:
Since, by common consent, we are immersed in the worst financial crisis since 1929, it is not surprising some of the old remedies are being considered again. More baffling is how quickly one of them is being dismissed.
The Glass-Steagall Act was passed in 1933 in the New Deal reforms of Franklin Delano Roosevelt’s administration. The Act responded to scandals involving Goldman Sachs and National City Bank, and to a fear of JP Morgan’s overweening power, by splitting off investment banking from commercial banking.
On Friday, Paul Volcker, former chairman of the Federal Reserve, said the US could perhaps do with a new version of Glass-Steagall, this time splitting hedge funds, private equity funds and proprietary trading off from Wall Street banks such as Goldman Sachs and Morgan Stanley.
I heard Mr Volcker clearly since I happened to be sitting next to him at the time, on a financial panel convened by New York University’s Stern business school. His views are usually treated respectfully, given his role in curbing inflation in the 1980s, but Glass-Steagall is a tough sell.
“This is a complex issue, so it is surprising that some authorities are rushing to rule it out without publishing any analysis,” wrote Sir James Sassoon, who this week published a report on the future of financial regulation, in the Financial Times. Agreed – so here is mine.
Reinstating Glass-Steagall in its original form is a non-starter. Even if it were possible to split bank lending from securities underwriting – and the invention of securitisation makes that unlikely – there are sound reasons not to try. Apart from anything else it is useful to have banks, to buy insolvent investment banks.
This does not, however, mean that “too big to fail” financial institutions, ranging from Goldman and Citigroup in the US to Deutsche Bank, UBS and Royal Bank of Scotland in Europe, should be allowed to do whatever they previously did, now under an explicit government guarantee.
There are good arguments that they should be barred from proprietary trading and high-octane forms of asset management, including running hedge and private equity funds. Perhaps the fund management “buy side” should be entirely split from the investment banking “sell side”.
I am not sure about the second possibility. But, on the Obama administration’s principle that “a crisis is a terrible thing to waste”, it is wrong to jump from doubting the usefulness or practicality of reimposing Glass-Steagall to rejecting any such structural reform.
You can read the rest here and comment below.
