Ignore the Party Platforms: Pols Don't Really Want to Break Up JPMorgan
The Democratic convention debuted Monday and -- like its Republican counterpart -- the party included a provision in its platform recommending that lawmakers reinstate the 1933 Depression-era Glass-Steagall Act, which would break up the largest banks.
That may raise the hopes of some break-up supporters, but a legislative effort to reinstate the landmark law, which was neutered by a 1999 statute, will have a tough if not impossible time passing. The proposal's inclusion in both parties' platforms, however, does suggest that Donald Trump and Hillary Clinton would each face pressure to remain tough on large banks.
Bringing back the statute axed by the Gramm-Leach-Bliley Act would ease worries by a large number of Democrats and Republicans about a recurrence of the 2008 financial crisis precipitated by the failure of Lehman Brothers. The fourth-largest U.S. investment bank, its bankruptcy was the largest in the country's history. A separation of investment banking and commercial banking, such advocates contend, would make the economy less vulnerable if a large institution such as Bank of America, (BAC) - Get ReportJPMorgan Chase & Co. (JPM) - Get Report or Citigroup (C) - Get Reportwere to collapse in the future.
Regulatory observers contend that with the Republicans expected to continue to control the U.S. House of Representatives after the November election, the passage of such a controversial piece of legislation would be unlikely. Republicans in the House have shown no support for Glass Steagall and Trump himself appears to be more focused on repealing the Dodd-Frank Act, written in the wake of the 2008 crisis.
Clinton's choice of Sen. Tim Kaine, a former governor of Virginia, for vice president, rather than some high-profile left-leaning populist rivals (Read: Sens. Elizabeth Warren or Sherrod Brown) also suggests to observers that a real Clinton push for reinstatement of Glass-Steagall is improbable.
"You have this shiny object over here saying, 'Let's restore Glass-Steagall,' which you know will never happen, and that takes the heat off the main event, which is the concentration of banking in the big six players," said Boston University Banking Law Professor Cornelius Hurley. "Kaine has made career as a get-along kind of guy, and there is no reason to think he will rock the Hillary Clinton boat."
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Donald Lamson, of counsel at Squire Patton Boggs in Washington and a former regulator at the Office of the Comptroller of the Currency, said the decision by both parties to include the reinstatement of Glass-Steagall in their platforms is more of a political barometer than an indication of strong support.
"This tells me that we are living in a time when populism is more prevalent than pragmatism," said Lamson. "It is easy to put in a platform that you want to reinstate Glass-Steagall because it satisfies the appetite of people who don't like banks and have a fear of concentration."
But Brian Gardner, a Washington-based analyst at brokerage Keefe Bruyette & Woods, envisions a scenario that could include Glass-Steagall reinstatement in 2017 if the House passes a bill to dismantle parts of Dodd-Frank while the Senate OKs a measure offering relief to community and regional banks.
"If that happens, it is an opportunity for Warren or another populist to offer a Glass-Steagall amendment -- can Warren block passage without Glass-Steagall?" Gardner asks. "Then you get into the political calculus of whether free-market Republicans who don't support breaking up banks consider whether they would approve it in exchange for relief for small and regional banks."
Even if a legislative option fails, regulatory observers contend that inclusion of the provision in both GOP and Democratic platforms, combined with the continued presence of Vermont independent Sen. Bernie Sanders, the would-be presidential candidate and an advocate of shrinking banks, will likely keep the pressure on career regulators to continue tough oversight.
That will likely drive the Federal Reserve's top bank supervisor, Daniel Tarullo, to continue taking steps that could make the biggest banks smaller at the same time that it gives an edge to mid-size banks such as BB&T (BBT) - Get Report and Regions Financial (RF) - Get Report , which aren't subject to the same merger restrictions.
Kaine argued in a July 18 letter to regulators -- just a few days before he was chosen as Clinton's VP nominee -- that it's unfair to require regional banks and credit unions to calculate and report liquidity on a daily basis rather than once a month. At the very least, neither administration is expected to allow the largest banks to acquire additional depository institutions.
"The regulators aren't going to do anything without the population requiring it," said Hurley. "If Bernie Sanders hadn't come out of nowhere, we wouldn't be talking about this issue. Sanders is the reason we are having this discussion."
In either administration, the Fed will probably move forward with an effort to prohibit Goldman Sachs (GS) - Get Report and Morgan Stanley (MS) - Get Report from engaging in a wide range of commodity-related activities. Tarullo suggested recently that an advantage held by the two companies under Gramm-Leach-Bliley could be phased out.
The law, as it stands, allows Goldman Sachs and Morgan Stanley to keep any physical commodity business they owned before September 1997. The effort to eliminate the loophole is bipartisan: Lawmakers as varied as Warren, D-Mass., on the left, and Senate Banking Committee Chairman Richard Shelby, R-Ala., on the right, have suggested that it's unfair for two big banks to receive special privileges. The Fed now has more time to consider such a change as other rules have been adopted, Gardner notes.
Additionally, regulators will be pressured to administer stringent yearly stress tests to determine whether banks have enough capital to withstand a future crisis similar to the 2008 market meltdown. Tarullo has suggested that the largest financial institutions will need to hold significantly more capital in future reviews, likely by 2018.
Clinton, who hasn't been enthusiastic about breaking up the banks, has said she would dismantle them if they continued to receive failing grades from regulators in Washington over living wills, annual documents that detail how they would unwind themselves in bankruptcy without wreaking havoc on the broader economy.
"We expect the pressure to start rising next year," said Jaret Seiberg, analyst at Guggenheim Securities in Washington.
Still, many expect that support for bringing back Glass-Steagall itself will fade. "I don't pay much attention to party platforms," said Gardener. "Once the gavel comes down closing the convention, no one pays any attention anymore."