Forum Post: Glass Steagall fakes in senate

Two bills claiming to "break up the big banks" and "accomplish the same goal as Glass-Steagall" will shortly be floating in the Senate; neither bill breaks up any banks or bank holding companies, or prevents commercial banks from putting deposit funds into securities and derivatives. Liberal media are giving wall-to-wall coverage to both, along the lines of "it's what's practical", "might pass", etc.

One bill, by Sen. Bernie Sanders (S 685) calls for the biggest banks to be broken up by decision of Obama's Treasury Secretary (that would be Citigroup veteran Jacob Lew), without suggesting how this would be done — in fact, only the bill's title has been filed, with no legislative text; the description of requiring decisions by Lew, comes from a Sanders press release. This is apparently more of a protest resolution than a bill.

For the other, still-forthcoming Brown-Vitter "too-big-to-fail" bill, a detailed draft legislative text has been leaked and circulated by some Senators, which makes clear that it does not break up any financial institutions.

Brown-Vitter will be a bank capital requirements bill, to which will be added a number of elements of the Glass-Steagall Act, for verisimilitude, but without the two central elements: separating commercial banking from securities broker-dealing, etc.; and preventing commercial banks from dealing in securities, derivatives, and insurance.

Judging from the circulating draft, Brown-Vitter:

a) requires five years for its basic provisions to take full effect (!), compared to one year for Kaptur-Jones;

b) will require all banks have a 10% capital ratio of tangible equity / tangible assets including "fair value" of all derivatives and off-balance-sheet entities;

c) will require banks with more than $400 billion in assets have a capital ratio on a sliding scale, greater than 10% but less than 15% tangible equity / tangible assets;

d) will withdraw United States banks from the Basel III agreement on capital standards; BUT, paradoxically,

e) will allow U.S. regulators to design their own "risk-weighted capital standard" — exactly what is most objectionable about Basel because it favors the biggest bank holding companies which use computer risk-models and derivatives trades to make their assets go away for capital purposes (smaller denominator = higher capital ratio in b) above);

f) will prohibit bank holding companies from making transfers of securities between investment affiliates and the commercial bank (a Glass-Steagall-like provision);

g) will prohibit bank holding companies or commercial bank units from making loans, purchases of securities, repo agreements, or derivatives contracts with non-bank affiliates (a strongly Glass-Steagall-like element).

h) will prohibit government assistance/insurance to non-banks (another strongly Glass-Steagall-like element);

i) will specifically permit commercial banks and their holding companies to operate insurance affiliates.