August 12, 2013
A little more than two weeks ago a "little" story hit the news. And by little, I mean perhaps the biggest money story that you and I will likely see in our lifetimes.
That's because, for the first time in decades, it sets up two opponents, Wall Street and Washington, on opposite sides of the ring.
So who is "the most hated man on Wall Street" right now. That would be Senator Angus King, along with his cohorts Senators Elizabeth Warren and John McCain.
They had the courage to introduce legislation that would bring back the Glass-Steagall law, and in essence, they called for the breakup of the banks as we know them.
This interview with Senator Angus King is critical to understanding the full force of this legislation.
Wall Street will fight with every penny they have. But we're calling for our readers, and every citizen concerned about his or her money and the "too-big-to-fail" culture of socialized risk to get involved.
For starters, we wanted you to see exactly what Senator King had to say about this legislation.
SHAH: Today, we have Senator Angus King from Maine as our special guest. We'll be speaking with the senator about bank regulation and, specifically, the
21st Century Glass-Steagall Act. Senator King, thank you very much for your time, sir. We're delighted to have you here with us on Money Morning on the phone to talk about your bill.
SENATOR KING: Well, glad to be here and glad to have you ask about it because I think it's an important piece of legislation and, hopefully, can keep
us out of trouble like we got into in '08.
SHAH: Well, at Money Morning, we've been behind you and we'll continue to back you on this bill. We think it's terrific. The first question I have for you, Senator King, is why is Glass-Steagall so important and will this bill, the 21st Century Glass-Steagall Act, if it is enacted, be the end of too-big-to-fail banks?
SENATOR KING: Well, I don't think it will necessarily be the end of that, but it will force the banks to divide in terms of function. You will still have very large banks and there -- as you may know, there are some other bills out there. Sherrod Brown and David
Vitter have one that specifically addresses capital requirements and the whole idea of too big to fail. But our approach is to take some risk out of the system by dividing investment banking and investing from commercial banking. To put it most succinctly, we want to make banking boring again. And if people want to be swashbuckling capitalists, let them do it taking their own risks and not risks with FDIC-guaranteed funds and the implicit guarantee from the government. We don't contend that the '08 problem was specifically related to this, but it certainly was a contributing factor, and I just think it's a much more sensible approach than trying to do it entirely by regulation.
SHAH: Well, the bill resurrects many of the walls and bridges that were effective under the original 1933 Glass-Steagall law. What are the differences, Senator, between the old law and your 21st Century bill?
SENATOR KING: Well, we tried to recognize in the bill the evolution of the financial services industry. So, it's not a word-for-word reenactment of the law in '33. There are subtle differences in terms of how it would work and what -- the other piece that we
tried to do was tighten up the language so that a future Fed couldn't undo it piecemeal, which is essentially what happened in the '80s and '90s before the final repeal. As you probably know, by the time of the repeal in 1999, it had been whittled away by decisions of the Fed, which gave the banks permission to much more broadly define the role of commercial banking. So, we're trying to narrow that back down. And, again, you know, this is a law that served us well for 70 years and, you know, I remember at the time thinking, this is a major mistake, and I didn't really get it or what the -- what the upside was and, you know, sure enough, we've learned over and over that it was a mistake.
SHAH: Addressing what you just said, Senator, regarding the Fed, what do you say to critics of the bill like Federal Governor Daniel Tarullo, who has basically said it won't prevent the next financial crisis? In light of the fact, as you just recognized and
commented on, that the Fed, under Section 20 of the 1933 law, was granted additional oversight and regulatory powers it then used to essentially chip away at the laws that it was then ensconced in supposedly protecting. And, ultimately, it was Federal Reserve Chairman Greenspan who helped champion the final eradication of what was left of Glass-Steagall. Is the Fed a cog in the wheel in terms of the new Glass-Steagall bill as you're proposing it?
SENATOR KING: Well, it was in the '80s and early '90s, and that's why part of what we propose is more specific definitions and limitations on the power of the Fed to undo, by regulation, what the intent of Congress is and was. Now, you know, I don't want to get into a dispute with a distinguished governor of the Fed, but I don't think anybody knows what the next financial crisis will look like, except that when we've got these very
large institutions, and basically they are taking risky bets with the implicit guarantee of the taxpayers and the explicit guarantee through the FDIC. I don't see how you
can argue that getting them out of that business won't lower the risk to the society, both in terms of the institutions themselves and also in terms of the risk to the taxpayers on the guarantees. I mean, like I said the other day, if these guys want to go to Las Vegas, that's fine, just don't do it on my dime.
SHAH: I think we all agree with you on that. And you called it a structural rather than a regulatory approach to change, and I think we all agree with you at Money Morning. The 21st Century Glass-Steagall Act bill, as an independent, you cosponsored with Democratic Senators Elizabeth Warren and Maria Cantwell and Republican Senator John McCain, looks bipartisan. Is it seen that way in Congress? And what is the bill's chance of becoming the law of the land?
SENATOR KING: Well, you know, it's hard to say. I have to say when we first introduced it, it was -- you know, obviously, we were supportive of the concept. I've talked about it in my campaign going back, you know, over a year ago. I prefer structural solutions to regulatory solutions. In my experience, no matter how smart you are when you write your regulations, there's always some other smart person out there figuring out ways to get around them, whereas if you have a structural solution, where, you know, you've essentially got two entirely separate entities, I like that better than piling on a thousand pages of regulation. What are the chances of its passing? I've got to tell you, I think the chances are higher -- I believe that the chances are better now than I would have guessed a month ago. We're getting a lot of interest in the bill. We're getting a lot of support from places that I wouldn't have suspected people with a lot of experience in financial services and the financial community. There will be a lot of opposition, of course, and people are going to say, you know, they can't make a profit and they -- you know, they've got to compete internationally. And Paul Volcker had a response to that. The initials were B.S.
SHAH: Well, specifically, Senator, can you identify where the resistance to the bill is coming from? And are you concerned, perhaps, that the same big banks that this bill will affect are funding the campaigns for many of the senators and representatives
that will be ultimately voting on the passage of the bill?
SENATOR KING: Well, you know, I haven't seen that yet. To be frank, I haven't heard from the big banks. They haven't contacted me and said, what are you doing? So, I think we're all assuming that they're going to be up in arms about this. But my guess is they're still in a sort of thinking and planning mode to see whether this is going to have any real opportunity of going anywhere. But I -- you know, as I talk to people in the
Senate, I think -- as I say, there's more interest than I think we originally anticipated, and we're going to work on trying to expand our cosponsor list at this point and, you know, it's an -- to me, it's an idea that's pretty hard to argue against. I mean, if you're -- if the taxpayers are ensuring one part of your business and then the other part of your business, the same corporate entity you're taking flyers on derivatives or doing
investment banking, I mean, it's hard to argue that the two should be mixed.
It's a pretty straightforward proposition that I think as people understand it better and listen to the arguments, they're going to say, yeah, that makes sense. To say it won't prevent the next crisis, well, you know, as I said, who knows what the next crisis will be? I think it diminishes the risk. That's the key. Diminishing the risk in the financial industry and, you know, if we ever -- if we ever didn't think that was a problem, we certainly should realize it after 2008.
SHAH: I totally agree. I've read quite a bit of criticism of Dodd-Frank, as I'm sure you have, and quite a bit of criticism about your bill. It seems to be that the leanings of the critics are it would rather see Dodd-Frank totally enacted in whatever final form it takes. Why would critics of both Dodd-Frank and the 21st Century Glass-Steagall Act prefer Dodd-Frank with its thousands of pages of regulations written and both
still yet unwritten, to your more straightforward, simplified structural change in the banking landscape?
SENATOR KING: Well, I think you answered your own question, and that is that particularly the bigger institutions know that they have legions of lawyers and
accountants and they can -- they can figure out how to get around those regulations.
It's much harder to get around a structural change. And my problem with Dodd Frank is the effect that it's had on smaller financial institutions who weren't the source of the problem, you know. Androscoggin Savings Bank didn't cause the problem in
2008. And, yet, what I'm seeing is a hugely increased regulatory burden on community banks and smaller financial institutions who don't have the wherewithal to have all the lawyers and accountants and compliance officers. It's drying up credit. It's costing a lot of money, and it's really been a problem. And so, my -- I'm not surprised that the folks
would say, oh, you know, we'd rather have Dodd-Frank probably because they were already figuring out ways around it, whereas our bill is much harder to evade.
SHAH: Well, speaking of ways around it, and as we addressed slightly earlier in the program, that the Federal Reserve's take on the past and probably its impact on the future, the question comes up, naturally, have we perhaps reached or are we past high time to be looking at the Federal Reserve and what power it wields over the banks it essentially works for and coddles and its enormous power over the economy?
SENATOR KING: Well, I don't know if I could go that far. I think that the Fed has done a lot of good and I think Ben Bernanke has been a good chair and really helped us out in this situation that we're in now. Like any other agency of the government, I think it ought to be reviewed and there should be oversight. On the other hand, and, I think the structure that maintains a level of independence -- although the chair has to be confirmed and, you know, there's kind of checks and balances built in. But, you know, I don't know about you, but I think I'd rather have the Fed working on interest rates than
Congress.
SHAH: I think there's no dispute there.
SENATOR KING: If you have to make a choice, I think insulating those decisions from politics was probably not a bad idea. It's always a tough balance. You want to -- you want to have agencies that have independence, but you want to have accountability and not set them up as - you know, as little principalities. But I think there are checks and balances here and -- but, again, I don't - I think the Fed contributed back in the '80s and '90s when they whittled away at Glass-Steagall. And, to me, this is back to the future and trying to utilize a tool that was really effective for a long time. Those guys that wrote Glass-Steagall in 1933 knew what they were doing. They were fresh out of a tremendous in-depth review of what caused the Depression. And, you know, I think they had an important idea and it's time we put it back into place in order to help
protect us from risk. And, again, you know, I -- if people want to be investment bankers, that's great. But, you know, don't also hold deposits and do home mortgages.
SHAH: Your leadership in shepherding this bill is critical and we at Money Morning are 100 percent behind you. It's wonderful to have solid and terrific, prudent leadership in the Senate, and we appreciate that. And speaking of leadership, is there anybody you would like to see, Senator King, as the next chairman of the Federal Reserve?
SENATOR KING: Well, I'm one of those people that signed the letter on behalf of Janet Yellen. I think she's highly qualified, has a good strong background, has experience in the Fed, and I think she'd be a good leader. You know, it's the president's call ultimately, but I'm -- I think that she'd be a strong one. But, you know, I'll certainly give consideration to whoever the president puts forward. It's certainly an important position and it's particularly important because the position outlives the president. It's not limited to just the president's term. So, I think that requires that it be given special scrutiny. But I'm just hoping he'll put forward somebody who is even-handed and thoughtful and understands the risks and the role that -- the important role the Fed
plays.
MR. GILANI: Well, we certainly hope so. We hope that the president listens to you on that prudent advice. Thank you, Senator. It's been a great pleasure speaking with you, and good luck with getting your bill enacted into law. The country is behind you, Money
Morning is behind you, and I'm certainly behind you. Thank you so much for your time.
SENATOR KING: Well, we're going to work at it. Thanks very much, and let's hope we can make some progress.
MR. GILANI: Thank you.
