piggy bank

Bank profits are soaring.
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Elizabeth Warren launched a campaign recently week to make banking “boring”.  Warren took to the Twitterverse and her political followers to rally support for the 21st Century Glass-Steagall Act, which would reinstate a previous law that separated personal bank accounts from being used for investing activities.  Many people blame the 2008 financial crisis on the repeal of Glass-Steagall in 1998, because it allowed for big financial institutions to engage in risky banking behavior, such as selling junk mortgages as investment packages.

  The new bill is co-sponsored by Senators John McCain (R-AZ), Maria Cantwell (D-WA) and Angus King (I-Maine).  The bill would not stop investment activities from institutions like Bank of America of JP Morgan, but it would restrict banks from using FDIC insured deposits for funds.  While Warren herself says that Glass-Steagall may not have prevented the financial crisis, she says the new law would force banks to downsize and help prevent future bailouts.

Critics of the bill say it is irrelevant, as the banks that received the biggest bailouts, like Goldman Sachs or Lehman Brothers, did not have FDIC-backed accounts.  However, it allowed them to buy the investments from banks who did, and increased risky activity.  Banks have taken great pains to block new regulation since the crisis, and the bill will be met with much resistance.  Regardless, Warren remains optimistic, citing the creation of Consumer Financial Protection Bureau in spite of the strong opposition it faced.

What would this mean for banks at a time when profits are soaring?  This quarter, bank profits for Wells Fargo are up 19% and JP Morgan is a staggering 32% more profitable.  Momentum like that in a time of economic worry may be enough to kill the bill by itself.  Big banks are resisting regulation that would prevent them from being “too big to fail”, a concept Warren and her supporters are trying to eliminate.