Washington, D.C. – U.S. Senator John McCain (R-AZ) today delivered the following remarks on the Senate floor regarding the 21stCentury Glass-Steagall Act. Senator McCain joined Senators Elizabeth Warren (D-MA), Maria Cantwell (D-WA), and Angus King (I-ME) to introduce the legislation today.
View press release HERE.
View legislation HERE.
“Mr. President, I am pleased to be joining my colleagues, Senator Warren of Massachusetts, Senator Cantwell of Washington, and Senator King of Maine, in introducing the bipartisan 21st Century Glass-Steagall Act, which will restore the much needed wall between investment and commercial banking to lessen risk, restore confidence in our banking system and better protect the American taxpayer.
“The original 1933 Glass-Steagall Act was put into place to respond to the financial crash of 1929. Like the 21st Century Glass-Steagall Act that we are introducing today, it put up a wall between commercial and investment banking with the idea of separating riskier investment banking from the core banking functions like checking and savings accounts that Americans need in their everyday life.
“Commercial banks traditionally used their customers’ deposits for the purpose of main street loans within their community. They did not engage in high-risk ventures. Investment banks, however, managed money for those who could afford to take bigger risks in order to get a bigger return, and who bore their own losses.
“Unfortunately, core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks. Since that time, we have seen a culture of greed and excessive risk-taking take root in the banking world; where common sense and caution with other people’s money no longer matters.
“When these two worlds collided, the investment bank culture prevailed, cutting off the credit lifeblood of main street firms, demanding greater returns that were achievable only through high leverage and huge risk taking, which ultimately left the taxpayer with the fallout.
“Leading up to the 2008 financial crisis, the mantra of ‘bigger is better’ took over and sadly it still remains. The path forward focused on short-term gains rather than long-term planning.
“Banks became overleveraged in their haste to keep up in the race. The more they lent, the more they made. Aggressive mortgages were underwritten for unqualified individuals who became homeowners saddled with loans they couldn’t afford. Banks turned right around and bought portfolios of these shaky loans.
“Now, I know the 2008 financial crisis did not happen solely because the wall of Glass-Steagall was knocked down. But, I strongly believe the repeal of these core provisions have played a significant role in changing the banking system in negative ways that contributed greatly to the 2008 financial crisis and I believe this culture of risky behavior is still in play.
“For example, the Senate Permanent Subcommittee on Investigations, on which I serve as Ranking Member, held a hearing in March of this year to discuss the findings of the Subcommittee investigative report entitled ‘JPMorgan Chase Whale Trades: A Case History of Derivatives Risks and Abuses.’ The hearing and the findings of the investigation describe how traders at JPMorgan Chase made risky bets using excess deposits that were partly insured by the federal government.
“This investigation revealed startling failures and shed light on the complex and volatile world of synthetic credit derivatives. In a matter of months, JPMorgan was able to vastly increase its exposure to risk while dodging oversight by federal regulators. The trades ultimately cost the bank a staggering $6.2 billion in loss.
“This case represents another shameful demonstration of a bank engaged in wildly risky behavior. The ‘London Whale’ incident matters to the federal government and the American taxpayer because the traders at JPMorgan were making risky bets using excess deposits, portions of which were federally insured. These excess deposits should have been used to provide loans for main-street businesses. Instead, JPMorgan used the money to bet on catastrophic risk.
“The 21st Century Glass-Steagall Act will return banking ‘back to the basics’ by separating traditional banks that offer savings and checking accounts, and are insured by the Federal Deposit Insurance Corporation, from riskier financial institutions that offer other services, such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. Now, I believe big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits.
“The bill also addresses depository institutions’ use of products that did not exist when Glass-Steagall was originally passed, such as structured and synthetic financial products including complex derivatives and swaps. Finally, the bill provides financial institutions with a 5-year transition period to separate their activities.
“There are many prominent individuals in the banking world that support returning to a modern day Glass-Steagall banking system including FDIC Vice Chairman Thomas Hoenig. Last year, in his opinion piece in The Wall Street Journal entitled: ‘No More Welfare For Banks: The FDIC and the taxpayer are the underwriters of too much private risk taking’ he lays out his plan ‘to strengthen the U.S. financial system by simplifying its structure and making its institutions more accountable for their mistakes’ which he calls the ‘Glass-Steagall for today.’ He ends his piece by stating that ‘capitalism will always have crises and the recent crisis had many contributing factors. However, the direct and indirect expansion of the safety net to cover an ever-increasing number of complex and risky activities made this crisis significantly worse. We have yet to correct the error. It is time we did.’ I couldn’t agree more.
“Almost three years ago, Congress passed Dodd-Frank with the intent to overhaul our nation’s financial system. I did not vote for Dodd-Frank because it did little, if anything, to tackle the tough problems facing our financial sector. What Dodd-Frank did do was create thousands of pages of new and complicated rules and the problem with ‘Too big to Fail’ still exists. Is there any member in this body who believes that Dodd-Frank has resulted in the end of ‘Too big to Fail?’
“The 21st Century Glass-Steagall Act may not end ‘Too Big to Fail’ on its own, but it moves the large financial institutions in the right direction by making them smaller and safer. This bill would rebuild the wall between commercial and investment banking that was successful for over 60 years and reduce risk for the American taxpayer.”