Is it Time to Bring Back Glass-Steagall?

By Mike Richardson - June 18, 2012 | Tickers: BAC, C, JPM, WFC | 0 Comments

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The Financial Sector has been a festering boil on the surface of the market over the last four years.  One can argue that the mega banks, and many of their regional brethren, have fallen under the weight of their own gluttony.  The rapid expansion of risky business practices came about from the repeal of the Glass-Steagall Act, and in the 12 years since it was replaced, the Financials have proven that they are incapable of managing their affairs in a manner that does not compromise the country's banking system.

Drilling down further, one can examine the effects of the legislative change on their balance sheets.

The comparative analysis of the major four institutions shows mixed results.  JPM has far outpaced the field by growing their net income 821% since the end of Glass-Steagall.  While all of the banks have seen declines in their return on equity, BAC shows virtually no value in its operations though boasting the second largest asset base.  Despite a roller coaster ride that would cause even the most unshakable daredevil to become nauseous, C has managed to pump a 26.8% increase to its diluted earnings.  Overall, however, WFC has been the steadiest financial firm of the group with 323% growth in net income, a 26.5% rise in diluted earnings, and showing the least reduction in its ROE (-32.1%).

An interesting note from the JP Morgan 10k Annual Report dated March 8, 2000, as the section titled "Outlook for 2000" states that the firm will "... generate growth in client revenues by providing more clients with more services while maintaining a reduced risk profile and leveraging technology and innovation to advance our market leadership."

How curious it is to look at that statement today in the light of the recent $2 billion credit default swap loss by JPM's London office.  What ever happened to "maintaining a reduced risk profile?"

The issues that have plagued the American banking sector boil down to unchecked greed and impotent regulatory enforcement.  Industry leadership needs a more committed long-term vision instead of merely putting lipstick on the quarterly earnings pig.  Perhaps the east coast firms should look west and ask Wells Fargo how they have been successful over the last decade and avoided many of the pitfalls that have snared their own efforts.

The end of Glass-Steagall changed the landscape of the financial sector.  While many will claim the measure allowed better services to become available to consumers, there is more evidence to the contrary.  The continued problems besetting the major banks will likely increase calls to restructure the US banking industry in a manner like Glass-Steagall, which had previously worked for 66 years.   Left in the current environment, the issue of moral hazard will remain critical as firms continue seeking better returns by assuming greater degrees of risk with main street's deposits and the government's obligatory guaranty.

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