The Lehman Resurrection Act Of 2013

Senators Elizabeth Warren (D-MA), John McCain (R-AZ), Maria Cantwell (D-WA), and Angus King (I-ME) today will introduce the 21st Century Glass-Steagall Act, a modern version of the Banking Act of 1933 (Glass-Steagall) that reduces risk for the American taxpayer in the financial system and decreases the likelihood of future financial crises. The legislation introduced today would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. 

Warren: “The 21st Century Glass-Steagall Act will reestablish a wall between commercial and investment banking.” 

McCain:"Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," 

King: “While recent efforts at financial sector regulatory reform attempt to address the ‘too big to fail' phenomenon, Congress must take additional steps to see that American taxpayers aren't again faced with having to bail out big Wall Street institutions while Main Street suffers. While the 21st Century Glass-Steagall Act is not the silver bullet to end ‘too big to fail,' the legislation's re-establishment of clear separations between retail and investment banking, as well as its restrictions on banking activities, will limit government guarantees to insured depository institutions and provide strong protections against the spillover effects should a financial institution fail." 

--Excerpted from the sponsors’ press release, July 11, 2013 

One of the principal lesson of the financial crisis is that the standalone Wall Street dealer firm is an nonviable business model. The reason is that dealer firms lack core deposit funding and their short-term funding is highly confidence-sensitive, even their secured funding. They need core deposits and/or access to the Discount Window. 

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Had the Fed not granted Goldman Sachs and Morgan Stanley Fed membership and window access in October of 2008, they would have faced liquidity crises. Goldman and Morgan Stanley, like Lehman, Merrill and Bear, were standalone Wall Street dealer firms. Ditto Citigroup Securities or whatever its nom du jour is at the moment. Indeed, the investment banking units of all US banks would become standalone self-funding Wall Street dealers under the Warren Act. 

The Warren Act would expel all of Wall Street from Fed membership, and cast them out into funding darkness. Expulsion would be death sentence for Wall Street. They would get low ratings and be unable to fund themselves in any market. Sayonara to Wall Street. Sayonara to the US debt and equity capital markets. Sayonara to capitalism as we know it. 

It is noteworthy but unsurprising that neither of New York's senators are cosponsors of the Warren Act. Should it pass, New York City would become Detroit, and New York State would become Michigan. It would be interesting to try to run a $16T economy with $55T of debt without a capital market. Who needs all that debt anyway? We could weed out the weak.

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