Analysis

Will Trump break up the banks?

Wall Street's "dream president" could turn out to be its biggest nightmare

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Wall Street's "dream president" could turn out to be its biggest nightmare, said Michael Corkery and Jessica Silver-Greenberg at The New York Times. President Trump has vowed to roll back financial regulations, much to the delight of big banks. But the president's top advisers "continue to float an idea that would not only hurt the nation's largest banks, it would upend them." In a recent meeting with lawmakers, Gary Cohn, the White House's chief economic adviser, said the administration is open to resurrecting the Glass-Steagall Act. This Depression-era law forced the separation of retail banking from investment banking, splitting the industry into Wall Street trading firms and Main Street banks taking deposits. It stood for decades before being repealed during a wave of deregulation by President Bill Clinton in the late 1990s. Bringing back a version of Glass-Steagall is that Washington rarity, an idea with bipartisan support. Democratic Sen. Elizabeth Warren has seized on Cohn's comments and reintroduced a bill she sponsored with Republican Sen. John McCain, called the 21st-century Glass-Steagall Act. Suddenly, overhauling Wall Street is "back in vogue."

"Breaking up the banks offers a lot to like," said Barry Ritholtz at Bloomberg. The repeal of Glass-Steagall probably didn't cause the 2008 financial crisis, as it's often been accused of doing, but by encouraging banks to become bigger and more intertwined, it almost certainly made the crash "significantly worse." Bringing back Glass-Steagall would restore the "firebreak" between Wall Street and Main Street by preventing large investors from risking everyday people's money on speculative bets. But there's another bonus: Restoring Glass-Steagall would also effectively end the problem of too-big-to-fail banks. After all, "when a speculative bank blows up, who really cares?" Big investors would be hurt, but consumers would largely be insulated. Bankers are worried, and they should be, said John Authers at the Financial Times. "Hatred of Wall Street is intense" on both sides of the aisle, and a revived Glass-Steagall "would inoculate politicians against the charge of being too soft" on Big Finance.

At first glance, it's a shock that Cohn, the former No. 2 at Goldman Sachs, is one of those pushing Trump to shrink the banks, said Jordan Weissmann at Slate. "But maybe it shouldn't be so surprising." For most of its history, Goldman Sachs was a pure investment bank, and dominated the industry. But after Glass-Steagall was repealed, Goldman had to compete with huge financial-service conglomerates like Citigroup and JPMorgan Chase. "Maybe Cohn has considered that." Glass-Steagall "has become the shorthand for reining in bankers," said Nicholas Lemann at The New Yorker. But would it really be effective? Rebuilding the wall between investment and retail banking wouldn't do anything to address the main problems that caused the financial crisis, like overleveraged banks and insufficient capital. Dodd-Frank, however, does. "It's entirely possible" that a new Glass-Steagall would be used by Congress as a fig leaf for gutting the most important consumer protections enacted since the recession. "And that would be the first step on the road to the next crisis."

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