McCain and Cantwell Want a New Glass-Steagall Law | Newsweek Voices – Michael Hirsh | Newsweek.com

The blinding complexity and interconnections created by modern capital markets—especially because of the way nearly half a trillion dollars in derivatives trades linked the firms to each other—demanded that there be strong firewalls and capital buffers between Wall Street institutions and their affiliates, and between banks and nonbanks and insurance companies. Otherwise there would be no islands of safety—no healthy institutions left to come and rescue the day, as commercial banks traditionally had done since the days of J. P. Morgans famous bailout in 1907. The repeal of Glass-Steagall took things in precisely the opposite direction, eliminating most of the firewalls and inviting staid commercial banks into the buccaneering world of Wall Street trading. Representative Hinchey says it “was a recipe for disaster because these banks were empowered to make large bets with depositors money, and money they didnt really have. When many of those bets, particularly in the housing sector, didnt pan out, the whole deck of cards came crumbling down and U.S. taxpayers had to come to the rescue.”Today the walls between firms still seem low indeed, and trading in derivatives that are “over the counter” that is, out of public sight continues at an astonishing pace, having risen back up to nearly $600 trillion worth. One big danger sign ahead is that the biggest banks have gotten even bigger in the aftermath of the catastrophe, and under the new rules requiring swap dealers to post capital for margin requirements, the big banks are likely to monopolize even more of this derivatives market and become that much richer and more powerful.

via McCain and Cantwell Want a New Glass-Steagall Law | Newsweek Voices – Michael Hirsh | Newsweek.com.

via McCain and Cantwell Want a New Glass-Steagall Law | Newsweek Voices – Michael Hirsh | Newsweek.com.

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