Glass-Steagall Repeal Would Have Far-Reaching Benefits to Public
One of the most effective barriers ever erected by humanity is on the verge of demolition. It’s not as old as the Great Wall of China or as historical as the Maginot Line. But for 62 years it has done exactly what its creators intended: Keep investment banking separate from commercial banking in the United States.
That wall is, of course, the Glass-Steagall Act, passed by Congress in 1933 in the wake of the many bank failures that occurred early in the Great Depression. By outlawing bank speculation in securities, Congress felt it could protect depositors from further such debacles.
Historians still debate whether speculation was a significant factor in the banks’ failures. But many other safeguards have been created since Glass-Steagall, and collectively they provide more than adequate protection for the banking system and the American public.
Many observers, inside and outside of the banking system, feel that it’s time to repeal Glass-Steagall, and Congress has indicated that it agrees with them. The buzz on Wall Street is that this wall may come down by the end of 1995.
Critics of this repeal movement may argue that it would benefit no one but the banking community. Nothing could be further from the truth. Repeal of Glass-Steagall would have far-reaching beneficial effects to society in general.
As an investment banker who has dealt with many other firms in my field and with commercial banks as well, I envision a scenario along these lines:
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The major commercial banks will, of course, begin competing immediately with the established investment banking houses, all the way from Goldman Sachs and Morgan Stanley to the smaller regional firms.
But the amount of investment banking business being done isn’t going to increase just because Glass-Steagall is repealed. The pie will be the same size; the only difference will be that there will be more players who want a piece of it.
Without question, this will put downward pressure on pricing. When a new lender opens up on the block, it invariably undercuts established banks in its efforts to book business. The same thing will happen in investment banking: The bankers will charge less for their services, and they will underwrite securities that might not be marketable today.
Thus, repeal of Glass-Steagall will be a boon for Corporate America by providing greater access to capital. Because of the increased competition among investment bankers, companies that might not be able to sell stock today may well be able to do so when the wall comes tumbling down.
This bodes well for American workers. We hear much lamenting that most of the jobs created these days are in the service industry, where wages are low. Not all the companies that will benefit from the Glass-Steagall repeal will be selling hamburgers or chicken; many will be manufacturers and technology companies with far higher pay scales.
In making capital more easily available to business, the repeal of Glass-Steagall will raise caution flags for investors. With a number of newly christened investment bankers competing for the same number of deals, it’s likely that some young, less mature companies that wouldn’t qualify for an underwriting today will be plucked and offered to the public.
Is this a big enough reason not to repeal Glass-Steagall? Absolutely not. Companies seeking to raise money from the public will be subject to the same strict disclosure laws that they are now. There will be no change in the liability of underwriters and their lawyers and accountants. And investors who buy stocks that subsequently decline sharply in value will be just as likely to sue as they have always been.
Institutional investors read prospectuses and they rarely bite when an offering of questionable value is brought to market. It’s the individual investors who refuse to even glance at a prospectus that get hurt. Maybe the repeal of Glass-Steagall will ultimately cause them to do their homework before they buy a new issue of stock.
Perhaps the best argument for repeal of Glass-Steagall is what I call the global case. America’s investment banking firms, even the largest ones, are small in comparison to their hybrid commercial/merchant/investment bank competitors in other countries. The banking powerhouses in Japan, Germany and other financial bastions have no restrictions akin to Glass-Steagall. They can go anywhere and do just about anything they want to, while their governments cheer them on.
The United States can’t continue to operate as though our financial realm is a world unto itself. If Glass-Steagall isn’t repealed, our investment bankers will eventually be relegated to the status of Double-A players looking on while the international major leaguers compete for the big prize.
