Top Treasury nominee signals support for new Glass-Steagall

If a new Glass-Steagall bill actually becomes law, it could be the most dramatic change to the investment industry in decades.

File image: Heath Tarbert

WASHINGTON, May 19, 2017 ⏤ This week, Heath P. Tarbert, President Trump’s nominee for Assistant Secretary of the Treasury for International Markets and Development, seemed to signal his support for the re-introduction of the Glass-Steagall Act. “Mr. Tarbert,” Senator John Neely Kennedy, a Republican from the State of Louisiana, asked the nominee, “can you give me your thoughts on Glass-Steagall?”

“My understanding is that the administration is considering a 21st Century Glass Steagall,” Tarbert responded. “I don’t have any opinion on that.”

The question and answer came during a May 16 hearing before the Senate Banking Committee. Unhappy with Tarbert’s response, Senator Kennedy continued to press. “You’ve written extensively about it: Good idea or bad idea?”

“What I believe is that Federal Deposit Insurance should not subsidize non-banking activities,” Tarbert responded.

What is Glass-Steagall

“In 1933,” notes an Investopedia entry,

“in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. At the time, ‘improper banking activity,’ or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash. According to that reasoning, commercial banks took on too much risk with depositors’ money.”

The previous lack of separation between the two major banking functions addressed by Glass-Steagall was blamed by many, at least in part, as one underlying cause of the 1929 stock market crash.

William Donaldson, a former Securities and Exchange Commission (SEC) Chairman from February 2003 to June 2005, once said of that period, “If they [the banks] were underwriting a stock offering and had trouble getting rid of the stuff, they would buy it with people’s deposits.”

During the Clinton Administration, Congress began to chip away at elements of  Glass-Steagall, until it was repealed entirely in 1999.

That repeal has been blamed by many in recent years for at least contributing to the 2008 financial crisis, prior to which banks increasingly became involved in the securitization of mortgages as well as the trading and underwriting of sophisticated and frequently misunderstood “derivatives” like credit default swaps and collateralized debt obligations (CDOs).

In the aftermath of the ensuing “Great Recession,” the “Volcker Rule,” named after the former Federal Reserve Chairman who proposed it, was, after considerable debate, put into effect as part of the “Dodd–Frank Wall Street Reform and Consumer Protection Act” (generally referred to as “Dodd-Frank”), which was passed by Congress in 2010. The Volcker Rule, which has sometimes been referred to as “Glass-Steagall in spirit,” forbids banks from engaging in proprietary trading activities.

Dodd-Frank has been criticized by many as being far too burdensome and complex. Republicans, in particular, have pushed to loosen the legislation’s restrictions or even eliminate the law in its entirety. Unsurprisingly, the House Financial Services Committee recently passed the “Financial Choice Act,” which would repeal the Volcker Rule.

But at the same time, reports have surfaced that the Trump Administration is seriously considering the introduction of a new version of the Glass/Steagall Act, as reported in a recent CNN story:

“Nearly 20 years after Congress killed it, Glass-Steagall is making a comeback in the Trump era. One problem: no one knows what a revival of the Depression-era banking law should look like.

“The original Glass-Steagall Act of 1933 prohibited traditional banks from also doing the riskier work of investment banks. Congress repealed Glass-Steagall in 1999, clearing the way for the creation of banking behemoths like JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C).

“All of them have big presences on Main Street that allow them to take deposits. At the same time, they participate in Wall Street activities like selling stocks and bonds to investor.”

If a new Glass-Steagall bill actually becomes law, it could be the most dramatic change to the investment industry in decades.

Who is Heath Tarbert?

Heath Tarbert, if confirmed as an Assistant Treasury Secretary, would come to the department after many years of financial regulatory experience.

Tarbert is currently a partner in the law firm Allen & Overy where, according to his biography on the company’s website, he “heads Allen & Overy’s U.S. Bank Regulatory group and is a leader in the firm’s Global Financial Services Regulatory practice.” The entry further notes,

“He regularly represents clients before the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and other U.S. federal and state financial regulators.”

In his recent remarks to the Senate Banking Committee, Tarbert outlined his likely areas of responsibility should he be confirmed.

“If confirmed as Assistant Secretary, I would lead nine of the Treasury Department’s offices charged with protecting and supporting foreign investment in the United States, reducing global financial instability, fostering international economic development, and managing key global challenges.”

Said Tarbert, “I believe that my professional background and desire to serve our country will enable me to perform this role and work to keep our country safe and prosperous.”

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