‘21st Century Glass-Steagall’ Means Whatever You Want It To, Unless You Want It To Mean Glass-Steagall

Mnuchin’s response at times approached the cosmic incomprehensibility of a Buddhist koan:

There actually wasn’t a reversal. The Republican platform did have Glass-Steagall. We, during the campaign . . . specifically came out and said we do support a 21st Century Glass-Steagall, which is – that means that there are aspects of it that we think may make sense. But we never said before that we supported a full separation of banks and investment banking, if we—

Here Warren interjected: “There are aspects of Glass-Steagall you support, but not breaking up the banks and separating commercial banking from investment banking? What do you think Glass-Steagall was if that’s not right at the heart of it?”

The exchange is worth quoting in bulk:

MNUCHIN: Again, I’m well aware of what Glass-Steagall was. As you may know the original concern about Glass-Steagall was about conflicts, not about credit risk. And if we had supported a full Glass-Steagall we would have said at the time that we believed in Glass-Steagall and not a 21st Century Glass-Steagall. We were very clear in differentiating it. I have realized and I had not realized that your bill was named the 21st century Glass-Steagall—
WARREN: And it has been for three years now.
MNUCHIN: I apologize that I was not aware of that, so—
WARREN: I still haven’t heard the answer to my question. What do you think Glass-Steagall was if it wasn’t separating commercial banking from investment banking?
MNUCHIN: Again, the fundamental part of Glass-Steagall was, as you’ve just outlined, the separation of investment banking from commercial banking because people were concerned about conflicts—

Again there’s some back-and-forth as Warren takes on the look of someone watching a gory athletic injury in slo-mo. “This is like something straight out of George Orwell,” she says.

.. Yet she takes another crack at it. Again, worth quoting in full:

WARREN: I have to try this one more time. What does it mean to be in favor of 21st Century Glass-Steagall if it does not mean breaking apart these two functions in banking?
MNUCHIN: You know what, I’d be more than happy to come and see you and follow up—
WARREN: Just tell me what it means!
MNUCHIN: Had we – we never came out and said separate banks from investment—
WARREN: Just tell me what 21st Century Glass-Steagall means if it doesn’t mean breaking apart those two functions. It’s an easy question – or an impossible question.
MNUCHIN: It’s actually a complicated question because there’s many aspects of it, OK? The simple answer, which we don’t support, is breaking up banks from investment banks. We think that would be a huge mistake. But again, I’m more than happy to listen to your ideas on it. You obviously have strong views, and I’d be happy to follow up and listen to you.
WARREN: This is just bizarre, the idea that you could say we are in favor of Glass-Steagall but not breaking up the banks.
MNUCHIN: We never said we were in favor of Glass-Steagall, we said we were in favor of a 21st Century Glass-Steagall. It couldn’t be clearer!

There you have it! As we have long held, the Trump administration’s “New Modern Twenty-First-Century Glass-Steagall” is just a vacuous string of mouth-sounds with no bearing on anything but the ability of Gary Cohn and Mnuchin to make it through an interview without sounding like a moron.

Steven Mnuchin Says Breaking Up Commercial Banks and Investment Banks Would Be A Huge Mistake

This was the first time that a Trump administration official has said that in its view a 21st century Glass-Steagall would not require the separation of commercial banks and investment banks.

.. The hearing quickly became heated, with Warren become increasingly annoyed with Mnuchin’s answers.

“There are aspects of Glass-Steagall that you support but not breaking up the banks and separating commercial banking from investment banking? What do you think Glass-Steagall was if that’s not right at the heart of it?” Warren asked.

“I’m well aware of what Glass-Steagall was,” Mnuchin said.

“This is like something straight out of George Orwell,” Warren said.

Mnuchin argued that the purpose of Glass-Steagall was to avoid conflicts of interests that can arise when banks act as brokers and securities dealers as well as lenders and deposit takers.

.. “This is just bizarre, the idea that you could say we are in favor of Glass-Steagall but not breaking up the banks,” a clearly frustrated Warren said.

.. Dealbreaker, widely-read by Wall Street’s younger set, described Mnuchin’s answers as having “the cosmic incomprehensibility of a Buddhist koan.”

The Shattered Arguments for a New Glass-Steagall

Investment banking isn’t risky. What’s dangerous is creating stand-alone firms that can’t diversify.

The 1999 repeal of Glass-Steagall was unfairly blamed in the aftermath of the 2008 financial crisis. Some people—apparently Mr. Cohn among them—mistakenly believe that investment banking is so risky that it should be once again kept separate from commercial banking. The truth is exactly the opposite: Traditional investment banking entails very little risk. The danger is stand-alone investment banks that are not diversified enough to survive a shock.

 ..Banks are at risk of failure when they become too concentrated by geography, industry or product line. Risk needs to be diversified so that no one mistake can bring down the entire institution. Even firms like Citigroup and Bank of America that made a series of mistakes in the 2008 crisis survived because they were diversified. Investment banks that were not properly diversified did not survive: Bear Stearns, Lehman Brothers, Merrill Lynch.
..The major perpetrators of the 2008 financial crisis were 20 or so institutions that had originated, securitized and distributed exotic subprime mortgages with toxic features. About 10 investment banks packaged mortgages made by savings-and-loan associations such as Countrywide, Washington Mutual and Indy Mac, and by state-chartered mortgage brokers—many of which committed outright fraud. These S&Ls were the remnants of an industry that had cost taxpayers some $150 billion during the 1980s and early 1990s. Notably absent from this array of culprits were large commercial banks, with an exception or two.

The Right Way to Resist Trump

Mr. Berlusconi was able to govern Italy for as long as he did mostly thanks to the incompetence of his opposition. It was so rabidly obsessed with his personality that any substantive political debate disappeared; it focused only on personal attacks, the effect of which was to increase Mr. Berlusconi’s popularity.

.. There will be plenty of reasons to complain during the Trump presidency, when really awful decisions are made. Why complain now, when no decision has been made? It delegitimizes the future protests and exposes the bias of the opposition.

.. Only two men in Italy have won an electoral competition against Mr. Berlusconi: Romano Prodi and the current prime minister, Matteo Renzi (albeit only in a 2014 European election). Both of them treated Mr. Berlusconi as an ordinary opponent. They focused on the issues, not on his character. In different ways, both of them are seen as outsiders, not as members of what in Italy is defined as the political caste.

.. And an opposition focused on personality would crown Mr. Trump as the people’s leader of the fight against the Washington caste. It would also weaken the opposition voice on the issues, where it is important to conduct a battle of principles.

.. with Mr. Trump’s encouragement, the Republican platform called for reinstating the Glass-Steagall Act, which would separate investment and commercial banking. The Democrats should declare their support of this separation, a policy that many Republicans oppose. The last thing they should want is for Mr. Trump to use the Republican establishment as a fig leaf for his own failure, dumping on it the responsibility for blocking the popular reforms that he promised during the campaign and probably never intended to pass. That will only enlarge his image as a hero of the people shackled by the elites.

.. Finally, the Democratic Party should also find a credible candidate among young leaders, one outside the party’s Brahmins. The news that Chelsea Clinton is considering running for office is the worst possible. If the Democratic Party is turning into a monarchy, how can it fight the autocratic tendencies in Mr. Trump?