By Ethan Forman
---- — Congressman John Tierney teamed with Republican Congressman Walter Jones of North Carolina this week to introduce a bipartisan bill designed to protect the public from “too big to fail” banks that roll the dice with their money.
The Salem Democrat, who represents greater Newburyport, introduced the 21st Century Glass-Steagall Act in the U.S. House, a bill Tierney says is designed to protect consumers from large financial institutions that take on too much risk.
Democratic Sen. Elizabeth Warren of Massachusetts and Republican Sen. John McCain of Arizona filed the Senate version of the bill in July.
It’s a move that is being applauded by some area financial experts.
The bill would not prevent investment banks from taking risks with investors’ money; instead, it would prevent banks with federally insured deposits from acting like investment banks. That would shrink large financial institutions because they would have to separate their traditional, commercial deposit banking units from their more risky investment-banking ones.
It is also designed to protect taxpayers who must foot the bill when large financial institutions fail, and the government steps in to bail them out.
Congress repealed key provisions of the Depression-era Glass-Steagall Act in 1999. The original Glass-Steagall Act, passed in 1933 in response to the Wall Street crash in 1929, had created a firewall between investment and depository banking.
The 21st Century Glass-Steagall Act would prohibit banks that offer savings and checking accounts insured by the Federal Deposit Insurance Corporation from offering investment banking, insurance, swaps dealing, hedge fund and private equity activities.
“One of the largest drivers of the most recent financial crisis was the reckless behavior of financial institutions that led to consumers losing their hard-earned money through no fault of their own,” Tierney said in a statement.
Rob Lutts, president and chief investment officer of Cabot Money Management in Salem, said this new bill is “what needs to be done.”
While there may be complicated issues involved in what nearly brought down the U.S. financial system five years ago, Lutts said the crisis was directly related to banks’ risky behavior, which is pretty simple to understand.
“Banks were allowed to take on much more risk than in the past, and the result was the meltdown of 2008,” Lutts said. In a sense, banks were allowed to act like trading shops. The former Lehman Brothers, a prime example of that, took on a huge amount of risk in the mortgage market, and its bankruptcy in September 2008 nearly took down the U.S. economy.
“Banks have one goal,” Lutts said, “to make money.” And given the opportunity, they will do so “any way they can,” even if it means taking on too much risk. That is why it is important to rein in risky behavior, he said.
“A bank should be a bank,” Lutts said. It should take in deposits, make loans and make money on the spread. “Banks should not be like a casino.”
Julie Livingston, president and CEO of Marblehead Savings Bank, said, “Anything that differentiates community banks from Wall Street banks is probably a good thing.”
Livingston had not read the bill so she could not comment on its specifics, but she said: “I never felt Glass-Steagall should have been repealed in 1999.” It led to what evolved five years ago, she added.
Tierney said the bill has “good sympathy across the board,” but he does not have a timetable for it. He said it will be a struggle to line up support given the gridlock in Congress.