And Just Like That, Too Big To Fail Was Born

And Just Like That, Too Big To Fail Was Born

Legislation known as the Gramm Leach Bliley Act or GLBA, was supposed to usher in financial services modernization. At least that is what we were told. It was allegedly supposed to remove risk from the financial services industry by allowing companies to diversify into other financial sectors.

GLBA repealed the part of the Glass-Steagall Act of 1933 that prohibited any one institution from acting as any combination of a commercial bank,?investment bank, and an?insurance company. With the passage of the?Gramm–Leach–Bliley?Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate.

In 1998, a year before GLBA was passed, Citicorp, a commercial bank holding company, merged with Travelers Group to form the financial conglomerate?Citigroup that combines banking, securities, and insurance services.

At that time, this merger was a violation of both the Glass–Steagall Act of 1933 and the?Bank Holding Company Act of 1956. However, the?Federal Reserve?exempted the newly formed Citigroup a temporary waiver on September 23, 1998, in a 99-page press release that outlines what the new conglomerate had to do to comply with the above laws, including getting it done in two years.

I do not know, nor do I care under as to what authority the Federal Reserve Board had to grant this exemption. It just stinks because less than one year later, GLBA was passed to legalize these types of mergers on a permanent basis. The phrase “pissing on my boot and telling me it’s raining” comes to mind.

The law also repealed Glass–Steagall's conflict of interest prohibitions "against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank".

To make matters worse, GLBA failed to give to the SEC, the FDIC, the OCC, the Federal Reserve, or any other financial regulatory agency the authority to regulate large investment bank holding companies.

Gramm, Leach, and Bliley were all Republicans. On November 4, 1999, the final bill resolving the differences was passed with bipartisanship support by the Senate 90-8 and by the House of Representatives 362-57. The Gramm-Leach-Bliley Act was signed into law by President Bill Clinton (D) on November 12, 1999.

Thus, too big to fail was born.

Less than ten years later, the cracks appeared and along came sub-prime lending, the mortgage crisis, The Great Recession of 2008, over 400 banks failing, failures of both Fannie Mae and Freddie Mac, quantitative easing, and The Dodd Frank Act so this would never happen again.

And Too Big to Fail became more firmly entrenched.

And now the banking crisis with Silicon Valley Bank, Signature Bank, and others to come is here. This is further compounded and confounded by regulators that are accused of being asleep at the wheel. Maybe they were. Who knows? If a bank is to big to fail, it doesn’t matter.

The hearings on Capitol Hill where Congressmen and Senators can show how they want to hold those bank chief executives accountable have already started. Harumph! Harumph!

History repeats itself under the false political promises of legislating something under the guise of that something never happening again. More of the same is only going to get you more of the same. 20-20 hindsight may be perfect however it is not any good if nobody is looking.

Too Big To Fail is now just a generation removed surviving second cousin to the breakup of the Bell System in 1982. That breakup took eight years of court battles and another two years for Bell to divest of everything except its long-distance services, Bell Labs, and Western Electric.

The difference between the Bell breakup and its TBTF bank cousins is that the TBTF cousins are now addicted to political financial steroids creating a codependency with an even bigger and more intrusive government that will take years to wean them off each other if they can be weaned off at all.

That weaning will only happen if, and only if, community and commercial banks have the courage and political will to fight for their industry, doing what it takes and getting bloody enough to break up the banking conglomerates like the Bell System was broken up. And it will be bloody.

In the meantime, here’s one radical, outrageous, and unconventional approach. I have more.

Create a “restrictor plate racing” deposit insurance fund with a reverse declining scale of deposit insurance where federal deposit insurance coverage is higher for smaller banks, less for bigger banks, none for TBTF banks, and keep ALL banks FDIC assessment calculations as they are now.

The bigger the bank, including TBTF banks, pay more insurance premium dollars into the deposit insurance fund. Under this concept, all banks regardless of size can only go up to a certain maximum speed where the better bankers win.

Rather than restrictor plate banking, go ahead and call it Robin Hood if you prefer.

Either way, I can already hear the snorts of derision and screams of outrage.

Community Bank CEOs…If you don’t bring something to the table every day you are just the daily special on somebody else’s menu and you are just one order away from being consumed.

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