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British Finance Minister George Osborne
After a global financial crisis, an epic price fixing scandal, and embarrassing criminal conduct British regulators are considering ending Too Big To Fail Banking. British Finance Minister George Osborne has proposed legislation that if banks do not shield their riskier investment activities from day to day banking they will face restructuring.
Britain is shaking up its system of bank regulation following the 2008 financial crisis, when the government poured 65 billion pounds ($102 billion) of taxpayers’ money into rescues of Royal Bank of Scotland and Lloyds.
The sector has also come under fire for rigging the Libor global interest rate, mis-selling insurance, breaking money laundering laws and paying bonuses widely seen as excessive.
That sounds familiar.
Banks were already expected to have to “ring-fence” operations such as standard bank accounts and payments from their riskier investment banking activities, which will hit major players such as Barclays , HSBC, and RBS.
But Osborne said he was prepared to go further. “If a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether — full separation, not just a ring-fence. In the jargon, we will ‘electrify the ring fence’,” he said in a speech.
The “ring-fence” concept is equivalent to the regulations America enacted in the 1930s to protect commercial banking from investment banking known as Glass-Steagall laws. Those regulations helped keep the financial system safe from a meltdown for generations until the Clinton Administration under Treasury Secretary and former Goldman Sachs CEO Robert Rubin lobbyed to repeal the laws so Citibank could merge with Travelers Insurance Group to form Citigroup. Rubin would later go on to work for Citigroup as Chairman of the Board and make roughly $100 million. Ironically the first Chairman of the newly formed Citigroup, Sandy Weill, would later call for breaking up Too Big To Fail banks, Citigroup included.
Under Minister Osborne’s proposal not complying with the “ring fence” will lead to serious penalties for the banks including a break up and executives of failed banks being banned from the industry.
Under the new rules, the Bank of England will monitor whether banks ensure that risks taken by their investment banking arms do not endanger their retail divisions.
If the central bank finds a breach, the government will make the politically sensitive decision on whether to employ the “nuclear option” of forcing banks to sell one of the two arms.
Osborne said the government could punish directors of failed banks by banning them from the industry. “I want to see how we can strengthen the sanctions regime for senior bankers — for example, should there be a presumption that the directors of failed banks do not work in the sector again?” he said.
Once the British are done with him would Mr. Osborne consider running our Treasury Department? I am sure Jack Lew can find his way back to Citigroup.
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Wiki says that Rubin announced that the Clinton administration supported Gramm, Leach, Bliley, which, of course, was the bill that repealed Glass Steagall. Do we really know for certain though, that Rubin was the one who lobbied for repeal in the first instance?
For example, it might be interesting to know what position the Heritage Foundation, the DLC and its affiliate, the Progressive Policy Institute, took on the bill.
We probably will never know. Among other things, the DLC website has been totally revamped.
Tom Harkin, for one, recalls that both Bill Clinton and Fed Head Greenspan put a lot of pressure on Democrats to vote for Gramm, Leach, Blilely.
For whatever it’s worth, last July, there was a spate of articles claiming that repeal of Glass Steagall had little to nothing to do with global economic collapse. Gramm was among those disclaiming. So was Bloomberg.
Whatever the cause, the U.S. still has not addressed it. And what was too big to fail in 2008 is much bigger today. And trading in mortgage derivatives still goes on. And, of course, greed has always been with us and probably always will be.
Whoa. That guy looks too young to be *serious.* That’s the trouble. Bring in an old boy’s network member to keep this on an even keel, stat.
The “ring-fence,” whether “electrified” or not, is still not equivalent to Glass-Steagall. Glass-Steagall remains the simplest and most effective solution — one that is bitterly opposed by the mega-casino banks.
Delong had a post about six months ago, in which he tried to reconstruct (not deconstruct) the thinking at the Treasury that led to its advocacy of de-regulation. If I recall correctly, the reasoning ran something like this: regulation had led to a kind of oligopoly situation in financial markets in which small investors were being exploited to the benefit of larger ones. De-regulation would increase competition, drive down margins, and increase efficiency in the allocation of capital. We know how all that worked out.
It seems obvious in retrospect that Delong, and possibly Summers (but certainly not Rubin) were extremely naive about the structure and behaviour of actors in high finance. This would be natural, given their academic background. Even so, it was clearly irresponsible to push for a policy without gaming out all the possible plausible consequences. This error is a common one among professional economists. Rubin is a different story altogether. We will have to wait for his memoirs to get a bead on his thinkbg. It is inconceivable that he was in it for the money.
I think I have socks older than him.
OTOH, I gues we have to give the Brits credit where credit is due.
The wiki on Gramm, Leach, Bliley suggest that Citibank might have instigated repeal of Glass Steagall.
http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act
It also says that, while the House was debating GKB, Congressman Dingell argued that it would result in institutions becoming too big to fail, and a bailout would be necessary.
So, they knew or should have known where repeal of Glass Steagall would lead.
Interesting article.
You really don’t know very much about George Osborne, do you? There is a reason that Atrios regularly describes him as The Stupidest Fucking Person on the Face of the Planet.
For whatever it’s worth, last July, there was a spate of articles claiming that repeal of Glass Steagall had little to nothing to do with global economic collapse. Gramm was among those disclaiming. So was Bloomberg
That is up there with “my dog eat my homework” Clinton, Rubin , Gramm are bought crooks and they know it. Hopefully if the UK starts pushing hard on the banks we will respond in kind as the shadow banking system got its start in London in the early 90s maybe this will come full circle?!
I remember reading that Citibank was the instigator for the Glass-Steagall repeal because they had already bought Travelers the year before and needed the purchase to be made legal retroactively. Unfortunately, I don’t remember which specific book that was in, though it could have been Griftopia by Matt Taibbi, The Looting of America by Les Leopold or another of the excellent books that have come out over the last few years dissecting the reasons why the economy was crashed.
To be fair, throughout the 90s Goldman Sachs and other investment banks had started getting regulators to give them letters that authorized some of their shadier activities, so Citibank’s actions were really just the cherry on top of the sundae that others had dished up by that time.
The UK will never end “too big to fail “.If ,for no other reason ,our Wall St. masters would not tolerate such a precedent-setting event ,and with the interconnectedness of global finance ,it would be impossible to settle and clear accounts .The very question of the UK disaggregating these holdings,presupposes an antiquated economic paradigm based upon sovereign autonomy .