aking on Wall Street makes for good politics in the Democratic Party. And several of the candidates at Tuesday night’s debate had tough words about big banks. That was particularly true of former Maryland Gov. Martin O’Malley and Vermont Sen. Bernie Sanders.
Although he didn’t say so directly, O’Malley suggested several times that consolidation in the banking business was a big factor in the 2008 financial crash and that the U.S. economy remains vulnerable because of it.
His solution: Bring back Glass-Steagall, the Depression-era law that barred commercial banks from engaging in investment banking that was scaled back in the Clinton administration. We decided to look at O’Malley’s claim about the risks of bank consolidation.
“[T]he big banks — I mean, once we repealed Glass-Steagall back in the late 1999s, the big banks, the six of them, went from controlling, what, the equivalent of 15 percent of our GDP to now 65 percent of our GDP.”
The Big Question:
How much bigger have the largest banks gotten, what did Glass-Steagall have to do with it and, most important, did the scaling back of Glass-Steagall lead to the 2008 financial collapse?
The Broader Context:
Despite what O’Malley and many other people believe, Glass-Steagall was not technically repealed in 1999, but it was effectively neutered. Legislation was passed that year that allowed bank holding companies to engage in previously forbidden commercial activities, such as insurance and investment banking.
The change in the law opened the floodgates for giant mergers, such as the $33 billion deal between J.P. Morgan and Chase Manhattan in September of 2000. During the darkest days of the financial crisis, Bank of America acquired two troubled financial companies — Countrywide Financial Services and Merrill Lynch, deals that wouldn’t have been possible before 1999.
The Long Answer:
The biggest banks are a lot bigger than they once were, mostly because of mergers and acquisitions. What’s not in dispute is that changes to Glass-Steagall allowed the biggest banks to grow bigger, which has raised new concerns about risks to the financial system.
At issue is the “too big to fail” problem: Will the federal government once again be forced to come to the aid of federally insured megabanks that have taken outsize risks with their money?
Since 2008, regulatory changes in the U.S. and abroad have supposedly mitigated that danger. The Dodd-Frank financial overhaul bill contains complicated provisions that would allow regulators to step in and take over failing banks, if necessary.
But there’s plenty of skepticism that the changes have gone far enough.