{"id":104935,"date":"2017-04-18T11:27:44","date_gmt":"2017-04-18T15:27:44","guid":{"rendered":"http:\/\/countingpips.com\/?p=104935"},"modified":"2017-04-18T07:28:10","modified_gmt":"2017-04-18T11:28:10","slug":"trump-redraws-the-thin-red-line-in-banking","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/04\/trump-redraws-the-thin-red-line-in-banking\/","title":{"rendered":"Trump Redraws the Thin Red Line in Banking"},"content":{"rendered":"<div id=\"inves-4250362637\" class=\"inves-below-title-posts inves-entity-placement\"><div id =\"posts_date_custom\"><div align=\"left\">April 18, 2017<\/div><hr style=\"border: none; border-bottom: 3px solid black;\">\r\n<\/div><\/div><p>By <a href=\"http:\/\/WallStreetDaily.com\/\"><u>WallStreetDaily.com<\/u><\/a> <img loading=\"lazy\" decoding=\"async\" class=\"attachment-home-th size-home-th wp-post-image\" style=\"display: block; margin-bottom: 5px; clear: both;\" src=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/04\/0417_banking_feature.jpg\" sizes=\"auto, (max-width: 580px) 100vw, 580px\" srcset=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/04\/0417_banking_feature.jpg 580w, https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/04\/0417_banking_feature-300x155.jpg 300w\" alt=\"Trump Redraws the Thin Red Line in Banking\" width=\"580\" height=\"300\" \/><\/p>\n<p><img decoding=\"async\" style=\"float: left; max-width: 85px;\" src=\"https:\/\/duip7hn7nchpo.cloudfront.net\/editor-circle-louis-basenese.jpg\" alt=\"Louis Basenese\" \/>If I had to pick one event that led to the housing bubble and subsequent financial crisis, it wouldn\u2019t be difficult\u2026<\/p>\n<p>The answer is easily the erosion of the Glass-Steagall Act \u2014 also known as the U.S. Banking Act of 1933.<\/p>\n<p>In the purest spirit of the legislation, Glass-Steagall was intended to keep commercial banking and investing banking separate.<\/p>\n<p>It worked quite well for the first 30 years.<\/p>\n<p>But greed would ultimately triumph over prudence.<\/p><div id=\"inves-681442045\" class=\"inves-in-content inves-entity-placement\"><hr style=\"border: 1px solid #ddd;\">\r\n<div id=\"inpost_ads_header\">\r\n<p style=\"font-size:10px; float:left; color:#666;\">Free Reports:<\/p><\/div>\r\n<div id=\"inpost_ads\"> \r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/1ApBOV\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2018\/06\/graph_techs_PD.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t     <a href=\"https:\/\/goo.gl\/1ApBOV\"><b><u>Get Our Free Metatrader 4 Indicators<\/u><\/b><\/a> - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter<\/p><br><br>\r\n<br>\r\n<br>\r\n<p style=\"font-size:15px; float:left;\"><a href=\"https:\/\/goo.gl\/f3RrHX\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/investmacro.com\/wp-content\/uploads\/2019\/01\/cot_pie_80.png\" align=\"left\" width=\"80\"  height=\"55\"\/><\/a>\r\n\t    <a href=\"https:\/\/goo.gl\/f3RrHX\"><b><u>Get our Weekly Commitment of Traders Reports<\/u><\/b><\/a> - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.<\/p><br><br>\r\n<\/div>\r\n<hr style=\"border: 1px solid #ddd;\">\r\n<br><\/div>\n<p>Banks began figuring out that Glass-Steagall was a hindrance to growth in the early 1960s.<\/p>\n<p>By 1962, under lobbying pressure, bank regulators began interpreting Glass-Steagall differently.<\/p>\n<p>So the thin red line between commercial banking and investment banking was already blurring \u2014 that is, before Bill Clinton fired the kill-shot in 1999 officially repealing Glass-Steagall.<\/p>\n<p>The chart below shows how the demise of Glass-Steagall gave rise to the term \u201ctoo big to fail.\u201d<\/p>\n<p class=\"centered\"><img decoding=\"async\" class=\"centered aligncenter\" src=\"https:\/\/s3.amazonaws.com\/wallstreetdailywebsite\/wp-content\/uploads\/2017\/04\/toobigfail_chart.png\" alt=\"the rise of too big to fail\" \/><\/p>\n<p>But now there\u2019s a movement within the Trump administration \u2014 driven by top economic aide Gary Cohn \u2014 to put Glass-Steagall back on the books.<\/p>\n<p>Such a move would send profound aftershocks across the financial system.<\/p>\n<p>So I asked my senior analyst, Martin Hutchinson, to get the scoop.<\/p>\n<p>Is this more empty rhetoric from Republicans\u2026 or should we be preparing our portfolios?<a name=\"video\"><\/a><\/p>\n<p>Hutch\u2019s full analysis is below.<\/p>\n<p>Ahead of the tape,<\/p>\n<p>Louis Basenese<br \/>\nChief Investment Strategist, <em>Wall Street Daily<\/em><\/p>\n<hr \/>\n<p><script src=\"https:\/\/fast.wistia.com\/assets\/external\/E-v1.js\" async><\/script><\/p>\n<div class=\"wistia_responsive_padding\" style=\"padding: 56.88% 0 0 0; position: relative;\">\n<div class=\"wistia_responsive_wrapper\" style=\"height: 100%; left: 0; position: absolute; top: 0; width: 100%;\">\n<div class=\"wistia_embed wistia_async_uh9g18kd2n videoFoam=true\" style=\"height: 100%; width: 100%;\"><\/div>\n<\/div>\n<\/div>\n<hr \/>\n<p><strong>Question:<\/strong> Martin, Gary Cohn says he wants to reinstate the Glass-Steagall Act, which was repealed in 1999. What\u2019s that all about?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> Cohn is the director of the Council of Economic Advisers in President Trump\u2019s Cabinet. So when he says something like that, particularly since he\u2019s ex-Goldman Sachs, one pays attention. It\u2019s something that could happen.<\/p>\n<p>Glass-Steagall in the 1930s split commercial and investment banks. Then the 1999 legislation allowed them to re-merge again.<\/p>\n<p>Basically, commercial banks take deposits and lend. And investment banks play around in capital markets and advise on financings and mergers.<\/p>\n<p>Back in 1929, there was no separation of the two, and so banks got in trouble playing with share issues.<\/p>\n<p>After the crash, there were two pieces of legislation. One was Glass-Steagall, which separated commercial and investment banks. And the other was deposit insurance, which insured deposits in commercial banks \u2014 making the banks safe for little old ladies.<\/p>\n<p>The trouble with deposit insurance is it encouraged the banks to leverage like maniacs. Banks were leveraged about 5-to-1 before deposit insurance. They\u2019re about 20-to-1 now.<\/p>\n<p><strong>Question:<\/strong> Does reinstating Glass-Steagall solve the problem?<\/p>\n<p><strong>Martin Hutchinson:<\/strong> To some extent Glass-Steagall separated deposit trading from underwriting, which is arranging financings. But the real problem these days is trading, which wasn\u2019t as big in 1929. They didn\u2019t have computers.<\/p>\n<p>It\u2019s the big trading in derivatives and other things that brings the big risks.<\/p>\n<p>If you\u2019ve got big trading in a bank with insured deposits, the bank is essentially gambling with both small savers\u2019 money and, indeed, with taxpayers\u2019 money (taxpayers have to bail the mess out if it goes bust). And hence, you need something a bit stronger than Glass-Steagall. Something that separates both investment banking and trading from banks, except maybe short-term foreign exchange and commercial paper.<\/p>\n<p>The Volcker Rule, which came in with Dodd-Frank, does a lot of the work here. But it\u2019s too complicated, because the banks got at it and made it incomprehensible.<\/p>\n<p>The objective is the banks that pay guaranteed deposits should be limited to small-scale and short-term trading \u2014 as well as, of course, their normal lending business.<\/p>\n<p>All the big trading rubbish should then go in hedge funds, which nobody guarantees and go bust all the time. And the real investment banking \u2014 advising on mergers and financings \u2014 should be done in medium-sized houses, where the bureaucracy doesn\u2019t overwhelm you and there aren\u2019t too many conflicts of interest. You don\u2019t have a huge trading desk playing games, and you don\u2019t have a huge lending business for the companies you\u2019re advising.<\/p>\n<p><strong>Question:<\/strong> Interesting. Hutch. Give us the bottom line for investors.<\/p>\n<p>Martin Hutchinson: The bottom line for investors is that I think Glass-Steagall \u2014 or something like it \u2014 is likely to come back. So you don\u2019t want to own a big behemoth bank like J.P. Morgan Chase or Citigroup.<\/p>\n<p>You might buy a pure commercial bank like Wells Fargo (WFC), which is pretty well a pure commercial bank. But my preference would be to buy a medium-sized investment bank, one doing advisory work and asset management.<\/p>\n<p>The one I like is Lazard Ltd. (LAZ). That has a $6 billion market cap \u2014 as opposed to $100 billion for the biggies. It has 2,700 employees, which is a size where people know each other and the bureaucracy\u2019s not too bad. And its business is worldwide advisory, mergers and asset management work. So 15 times P\/E, 12 times prospective P\/E, with a 3.3% yield. To me that looks like a very attractive proposition.<\/p>\n<p><strong>Question:<\/strong> Great stuff as always. Thank you, Hutch.<\/p>\n<p><strong>Martin Hutchinson:<\/strong> A great pleasure.<\/p>\n<p><strong>Question:<\/strong> This is Wall Street Daily, signing off.<\/p>\n<p>Smart Investing,<\/p>\n<p>Martin Hutchinson<br \/>\nSenior Analyst, <i>Wall Street Daily<\/i><\/p>\n<p>The post <a href=\"https:\/\/www.wallstreetdaily.com\/2017\/04\/18\/trump-redraws-thin-red-line-banking\/\" rel=\"nofollow\">Trump Redraws the Thin Red Line in Banking<\/a> appeared first on <a href=\"https:\/\/www.wallstreetdaily.com\" rel=\"nofollow\">Wall Street Daily<\/a>.<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>By WallStreetDaily.com If I had to pick one event that led to the housing bubble and subsequent financial crisis, it wouldn\u2019t be difficult\u2026 The answer is easily the erosion of the Glass-Steagall Act \u2014 also known as the U.S. Banking Act of 1933. In the purest spirit of the legislation, Glass-Steagall was intended to keep [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-104935","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104935","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=104935"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104935\/revisions"}],"predecessor-version":[{"id":104943,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/104935\/revisions\/104943"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=104935"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=104935"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=104935"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}