Glass-Steagall Repeal and The Casino: An Influential Report
July 27, 2012 • 9:37AM

Feeding into the Congressional mobilization for Glass-Steagall this week was a report released July 20 by, ironically, the New York Federal Reserve Bank, and noted by New York Members of Congress. The report, "Peeling the Onion: A Structural View of U.S. Bank Holding Companies", was covered July 23 in a Bloomberg News article, which drew its obvious Glass-Steagall implications.

"Critics including Thomas Hoenig, a Federal Deposit Insurance Corp. board member, say the biggest firms are too complicated to manage," Bloomberg noted. "The 1999 repeal of the Depression-era Glass-Steagall Act was the main catalyst for the biggest banks getting bigger, the Fed study concluded. The assets of the largest lenders have since tripled to $15 trillion.

"Hoenig has called for reinstating Glass-Steagall, which separated investment and commercial banking, while [Sen. Sherrod] Brown's proposal would limit asset size."

What the NY Fed study showed is that after Glass-Steagall was weakened by Greenspan leading to its repeal, the biggest U.S. bank holding companies started to explode their subsidiary units — typically from 100 or 200 (mainly for cross-state and foreign banking), to 2-3,000 by 2011, by buying and creating huge networks of subsidiaries subject to overlapping but different regulatory regimes. This is historically typical of investment banks, the NYFed authors note, and Goldman-Sucks and Morgan Stanley lead the pack with 3,000 or more subsidiaries each, matched by JPMorgan Chase among the huge formerly commercial banks.

The six biggest U.S. banks created more than 10,000 subsidiaries overall, "using the legal structures to pay lower taxes and escape tighter regulation."

Even more importantly, as the study shows with charts, after Glass-Steagall repeal the big bank holding companies shifted capital and assets from their commercial banks into the growing maze of securities, derivatives, hedge fund, wealth management, etc. units. By 2011, some 23% of BoA's $2.15 trillion in assets were in such "casino" units; 32% of Citigroup's $1.875 trillion in assets had gone gambling; and 14% of JPMorgan Chase's $2.265 trillion in assets. The NYFed authors don't make the point as such, but here is the origin of the huge "shadow banking sector" of 2007 notoriety. As for the pure gamblers permitted in 2008 to have bank holding company licenses — Goldman Sucks and Morgan Stanley — they have 89% and 90%, respectively, of their assets in securities, derivatives, casino banking generally.

Bloomberg's coverage, again citing Hoenig, also took up the implications for the Dodd-Frank Act's so-called "power to resolve" (wind up) such huge banks failing in a crisis. "It's harder for regulators to use such powers to scale back the largest financial firms, rather than specific laws that would disassemble them, such as Glass-Steagall, Hoenig said. 'In good times, it's very hard to break them up. Anything but very bad times, it's very hard to justify the breakup, because it requires the presumption that they will bring the system down. That's a very significant judgment.'"