United States House of Representatives
Washington, D.C. 20515
December 7, 2009
Re: Support the Hinchey-Inslee-Conyers-DeFazio-Tierney Amendment to restore Glass-Steagall Protections
The over 200 consumer, employee, investor, community and civil rights groups who are member of Americans for Financial Reform write you today to convey the coalition’s strong support for the Glass-Steagall Restoration amendment to H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009, offered by Representatives Hinchey, Inslee, Conyers, Defazio, and Tierney.
Ten years ago, the Glass-Steagall Act of 1933 that had once separated commercial banks from investment banks, was repealed.[i] The result was substantial growth in the size, complexity and risk profile of the nation’s largest banks (now bank- and financial holding companies), which could, for the first time since the Great Depression, combine traditional banking with speculative activity. Last fall’s bank crisis revealed the short-sightedness of this deregulatory experiment, as depository banks that were important to the real economy gambled—and lost—in the speculative economy. In order to save the banks that had become both important to the system and dangerous to the system, Congress delivered trillions of taxpayer dollars to Wall Street. Today, taxpayers are still supporting institutions that are Too Big to Fail, but Too Big to Succeed on Their Own.
The Hinchey-Inslee-Conyers-DeFazio-Tierney Amendment to restore the Glass-Steagall Act’s prohibitions on single firms conducting banking, securities and insurance activities would do much to solve the problem of “Too Big to Fail” firms. The amendment addresses a problem at the heart of last year’s crisis: allowing government-supported, traditional banking institutions that are vital to the “real economy” to take hedge fund-like risks. Sources as ideologically diverse as the conservative Wall Street Journal Editorial Board and Senator Bernie Sanders (I-VT) are calling to “break up the banks” to ensure that taxpayers are no longer liable for the bad bets of Too Big to Fail firms. Nevertheless, size is not the only problem – risk is. The current concentration of assets, deposits, and risk in the biggest banks, must be both divided and constrained to avoid another crisis.
The American people should not be paying for the risk-taking of Wall Street traders—but they have been since the repeal of Glass-Steagall and the creation of Too-Big-to-Succeed-on-Their-Own institutions. These institutions are systemically dangerous not simply because of their size, but because of their ability to use the savings of businesses and families to engage in inherently risky securities activities for their own profit. Americans are paying as consumers through consolidated, anti-competitive banking; we are paying for it as taxpayers through trillions in bailouts and implicit subsidies; and we are paying for it as struggling homeowners and unemployed workers reeling from the fall-out of bank’s excesses in the securities markets. Separating risk-taking from government-supported banking is vital to protecting the American taxpayer and preventing another financial crisis.
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[i] Key effects of the Gramm-Leach-Bliley Act of 1999:
1) The Act repealed the final lines created by the Glass-Steagall Act of 1933 to segregate commercial banks from the inherently riskier investment banks, allowing the aggregate institutions to become bank holding companies benefiting from government protections including access to cheap loans from the Fed.
2) The Act also erased the lines created by the Bank Holding Act of 1956 to divide insurance companies from banking institutions.
3) The Act allowed bank holding companies to apply for a newly expanded status: “financial holding companies”, which still enjoy government protections but are more loosely regulated, with lower capital requirements and greater leeway to speculate and conduct non-financial activities.
4) Finally, the Act allowed certain types of derivatives transactions to trade outside of regulated exchanges, giving birth, among other things, to the unregulated credit default swap market.
For more background on Glass-Steagall, please see: http://www.demos.org/publication.cfm?currentpublicationID=DEF8F451%2D3FF4%2D6C82%2D552CC1037CA0FA10