A Hilary Clinton presidency could unwind two 1990s financial laws
Trump and Clinton supporters, or at least the platforms of their respective political parties, have something in common.
Both have said the Graham-Leach-Bliley Act, a 1999 law creating financial supermarkets in which capital and customers were more or less shared among the retail banking, investment banking and insurance arms of financial conglomerates, must be repealed.
In its place, the 1933 Glass-Steagall Act, which placed barriers between those different businesses to ensure a liquidity crisis in one could not destroy the larger institution, would be reinstated.
To be fair, it would have been hard in 1999 to predict the frenzied level of financial mergers that followed GLB’s passage. And Washington watchers have since opined Bill Clinton was ill advised about the law’s merits.
It remains to be seen, though, how quickly any new presidential administration can move on this issue. While chairs of the Securities and Exchange Commission are technically non-partisan appointees, serving terms that overlap incoming and outgoing presidential administrations, most SEC chairs traditionally resign shortly after an election.
If sitting chair Mary Jo White does that, it could seriously delay action on reinstatement of Glass-Steagall. The process requires lengthy public comment periods, as well as Congressional hearings. Worse, the SEC currently has two vacancies that require Congressional consent to fill; and tackling such complex legislation will require a Commission at its full, five-member, compliment.
Assuming Hillary Clinton wins the November ballot, shortening the time it takes to restore Glass-Steagall is critical, because there’s a second piece of needed financial law reform that’s currently on neither party’s radar.
Shortly before leaving office, Bill Clinton signed the Commodity Futures Modernization Act. Nobody outside financial circles paid much attention to this legislation, which deals with the minutiae of Over the Counter derivatives trading.
But the law cracked a window to future problems by preventing states from restricting trading in what it called “eligible OTC derivatives.” And it extended those protections to securities-based derivatives. This ultimately permitted expanded trading in credit-default swaps and mortgage-based securities that played a major role in the 2008 meltdown.
More than three years before the modernization act was signed, then Commodity Futures Trading Commission chair Brooksley Born, spoke out against changes that were then in the discussion phase.
“The deregulation of exchange trading possible under the professional markets exemption would eliminate federal power to protect against manipulation, fraud, financial instability and other dangers,” she told an annual futures industry conference in March, 1997.
“The bills preserve CFTC jurisdiction to bring fraud and manipulation cases after the fact. But that limited authority would provide only the illusion of protection since the Commission would be stripped of regulatory tools designed to prevent those abuses from occurring and to detect them when they do occur.”
While the modernization act was designed to ease trading among so-called “sophisticated parties,” which regulators define as people who understand the transactional risks, the legislative process also included brokering of a jurisdictional spat between the CFTC and the SEC over who should regulate certain derivatives instruments.
Rule relaxations allowing credit default swaps and securities based on risky mortgages to worm their way into retail products purchased by garden-variety investors were added under broker-dealer exemptions pushed for by the SEC’s advocates in Congress.
In hindsight, those changes gave oversized financial institutions too much leeway to create products that weren’t suited to retail investors.
It would be a hallmark of a second Clinton presidency if, after reinstating Glass-Steagall, her administration went to work on a proper reform of laws governing commodity and futures trading.