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Big Bank Phobia: Glass-Steagall Would Be Folly

There's no question that Goldman and Morgan Stanley are stronger and better regulated institutions now that they are bank holding companies.

Don't Split Them Up

In a report on Monday considering alternatives to the breakup of the nation's largest banks, Mosby pointed out that "JPMorgan Chase has been active in broker/dealer activities throughout the evolution of the U.S. financial system," and that the company's structure "hasn't seemed to push this financial institution in harm's way." Bear in mind that JPMorgan Chase, along with several other large banks that received federal bailout funds in October 2008 through the Troubled Assets Relief Program, or TARP, was specifically directed by then Treasury Secretary Henry Paulson to accept the money. Or else. JPMorgan repaid TARP in June 2009.

Mosby neatly summed up the argument against bringing back Glass-Steagall:

"During the last financial crisis, the escape hatch was to consolidate the stressed broker/dealers into the safety of the diversified banks. By nature, independent broker/dealers require less capital, and the use of leverage is a fine-edged sword that can push these firms to the edge."

"On the other hand, we believe that by incorporating market making and investment banking into the overall commercial banking relationships of traditional banks, the need to generate these incremental revenues through riskier activities is minimized," Mosby wrote.

Mosby does agree with the stipulation under the Dodd-Frank Wall Street Reform and Consumer Protection Act that banks should have their "broker/dealer activities [limited] to just market making. This is known as the Volcker Rule, and its implementation has not yet been finalized by the Federal Reserve. But "it is more important to limit principal transactions than totally remove these activities," Mosby wrote.

In the end, it's obvious the independent broker/dealers were at a severe disadvantage during the credit crisis, because their funding dried up almost overnight. Separating investment banks and/or broker/dealers from the big six U.S. banks would create large new entities that would quickly find their backs to the wall in a repeat of the 2008 crisis.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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