It's Easy to Say 'Bring Back Glass-Steagall'Some of the people clamoring for the breakup of the nation's largest banks also think it would be wise to bring back Glass-Steagall's separation of investment banks from traditional commercial banks. The Federal Reserve was already taking a liberal approach to Glass-Steagall even before the Graham-Leach-Bliley Act of 1999 formally ended restrictions against investment banks affiliating with commercial banks.
Even after Graham-Leach-Bliley was passed, there were still several very large investment banks, or broker/dealers. Having them separated from commercial banks "didn't stop us from having the last financial crisis, because as we saw, the institutions under the greatest pressure were the independent broker/dealers, including Lehman Brothers, Bear Stearns and Merrill Lynch," says Guggenheim analyst Marty Mosby. "These companies didn't have enough liquidity or enough capital."
Morgan Stanley had $80.6 billion in deposits as of March 31, with total assets of $801.4 billion. At the end of fiscal 2007, Morgan Stanley had $31.3 billion in deposits and $1.045 trillion in assets. With the deposit increase and balance sheet shrinkage, Morgan Stanley now has deposits funding 10.1% of total assets, increasing from 3.0% at the end of fiscal 2007. Even though Goldman and Morgan Stanley still have relatively small deposits, the companies have made significant progress in solidifying their liquidity. In addition to the deposit growth, the conversion of Goldman and Morgan Stanley to bank holding company structures has caused the companies to file uniform financial statements with the Federal Reserve, allowing for easy comparison to other large banks. The conversion has also brought the companies directly under the Fed's regulatory and supervisory umbrella, which includes the stress tests and reviews of annual capital plans.
Don't Split Them UpIn 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