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Separation of investment banking helps insure against deregulation [ClearOnMoney]
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Separation of investment banking helps insure against deregulation

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Commentary

Separation of investment banking helps insure against deregulation

11 Jun 2012 by Jim Fickett.

Adam Levitin, the bankruptcy lawyer turned banking political activist, makes an interesting point today on Credit Slips – one good reason for having a Glass-Steagal-style separation of basic lending from investment banking is that then politicians have two classes of lobbyists to play off against one another:

The second reason for making banking boring is one that is continually overlooked in the New Glass-Steagal debate, namely the political benefit of separating commercial from investment banking, which helps ensure against deregulation. Commercial and investment banks can both get into trouble when they're not regulated. Indeed, the stories of the S&L crisis and of 2008 are fundamentally stories about deregulation. Glass-Steagal made commercial banking boring by divorcing it from securities. Glass-Steagal also split the financial services industry politically and enabled the different parts of the industry to be played against each other. Commercial banks, investment banks, and insurance companies fought each other for turf for decades. This mattered in terms of regulation because regulation is a political game.

Because of Glass-Steagal, the financial services industry did not present a monolith in terms of lobbying, and a Congressman could afford to take a stand against one part of the industry because there would be campaign contributions forthcoming from the other parts of the industry. This is how William O. Douglas got the Trust Indenture Act of 1939 passed–he made concessions to the commercial banks in order to get their support for legislation that kept the investment banks out of the indenture trustee business. In the agencies, each part of the industry had its pet group of regulators who would push back against other regulators when they thought that there was an encroachment on their turf, which is the basic nature of deregulation—allowing greater activities than previously allowed. And it even mattered in the courts, as the insurance and investment banking industries financed major litigation challenges to commercial bank deregulation. The result of a politically fragmented financial services industry was to hold deregulation at bay for quite a while. This started to unwind in the 1980s and by the Gramm-Leach-Bliley Act, it was over. It didn't take long before we all reaped the fruits of deregulation.