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Most people only think about bank runs around the winter holidays when “It’s a Wonderful Life” plays incessantly on television and the protagonist is trying to save his small community bank from going under. Bank runs are an old-fashioned idea, the stuff of black and white movies and not the sort of issue we tend to think of as a problem for this century.
Since the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933, our deposits are protected and we don’t need to worry about banks running out of money.
Or do we?
When banks are allowed to take bets on toxic debt or enter into complex derivatives transactions – essentially gambling with our taxpayer-insured deposits — we may be setting up our economy for another meltdown. Banks can and do lose huge sums of money on failed bets, as happened with several leading banks in the run up to the 2008 crash. These bad bets were part of what caused many financial institutions to fail; the failures set off the chain reaction of the economic crash. Instead of paying back depositors and simply allowing the banks to go under, the government chose to bail out some of them, leading to trillions in payouts under the Troubled Asset Relief Program (TARP) and other bank supports.
They say hindsight is 20-20, but our country’s leaders should have known better then to allow this gambling. For most of the last century, we had strong, clear protections against just that type of bank activity. President Franklin D. Roosevelt and Congress included a ban on riskier investment banking (read gambling) by FDIC-insured facilities when the system of federally-insured deposits went into effect in 1933. This ban between commercial and investment banking was called the Glass-Steagall Act, and it was rolled in with the Banking Act of 1933, which also created the FDIC.
This safety glass was in place for over 50 years and served the country well as we experienced overall stability in the financial industry. But banks desiring to engage in high-risk, high-profit transactions pressured Congress to break down the wall. The Glass-Steagall Act was repealed in 1999 through President Clinton’s signing of the Gramm-Leach-Bliley Act.
After Glass-Steagall’s repeal, commercial banks backed by FDIC guarantees borrowed cheap money and jumped full force into packaging debt, underwriting mortgages and growing their investment strategies. They took bigger risks than ever before, leading us straight to the crisis. Over-leveraged and under-capitalized, the banks’ gambling strategies blew up.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) passed in the wake of the financial crisis will go a long way towards fixing the problem when eventually implemented via regulations, but bank gambling problems haven’t completely faded into the past. As recently as 2012, a JPMorgan Chase trader, Bruno Iskil (a.k.a. the “London Whale”), gambled with FDIC-insured deposits using a failed investment strategy that was purported to be a hedging position, which caused his bank to lose over $6 billion.
Even after the Volcker Rule (the piece of Dodd-Frank that will ban banks from proprietary trading solely on the behalf of the financial institution), the size of our financial markets make it difficult for overburdened regulators to police today’s too big to manage banks and to determine what is permissible versus non-permissible gambling. Going back to a clear Glass-Steagall separation of commercial and investment banking is the easiest way to make sure greedy banksters don’t put our fragile, still recovering economy back on the rocks.
To that end, a bipartisan group of U.S. Senators, including Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) introduced the 21st Century Glass-Steagall Act to restore the complete separation of risky investment banking from straightforward commercial banking activities.
Support for the proposal is overwhelming. On June 16, the 81st anniversary of FDR signing the original Glass-Steagall law, Public Citizen delivered to Senate offices a letter signed by 162 national, state and local groups calling on all senators to co-sponsor the 21st Century Glass- Steagall Act. The public is clearly behind the proposal. Hundreds of thousands of citizens have signed various online petitions urging Congress take action to re-separate commercial banking from risky investment banking, including more than 30,000 of Public Citizen’s members and supporters like you.
NOW is the time to fix our banking system. If you haven’t already done so, please take a moment to sign the petition to tell your Senator that real banking protections should not be a thing of the past.
Susan Harley is the deputy director for Public Citizen’s Congress Watch division.