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Columbia University Professor John Coffee argues the Glass-Steagall act would not work if brought back.
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Was -- but -- when you look at those banks.
And saw the mall on the screen -- you thought think is well.
About regulation we've talked about this last few years really it continues.
To be a hot points effort discussion and with those discussions it becomes increasingly comedy here about.
Glass-Steagall -- Glass-Steagall act well it was repeal the 1999.
As many of you probably know but some believe the financial collapse in 2008 could have been avoided.
If it was still in place separating investment banking firms from commercial banking firms that's basically what the last few days now.
Let's see what John Coffee -- expert opinion there from professor of law at Columbia University justify out of Capitol Hill many times.
Over the years about accounting issues investor protection issues and knows a thing -- -- I would think.
Professor coffee about Glass-Steagall what should we basically the basic question is should we go back to the future with this I know it's been asked before but I think it's worth bringing up again given what we're going through -- -- My answer is simple it's an antique and it should remain very OK have to understand that it may have worked in the 1930s but it was then.
Intended to protect against conflict of interest it was not about protecting the solvency of banks.
And to give you two simple reasons why won't work today.
You're right it separates investment banking from commercial banking.
But the problem is today that financial institutions are too interconnected.
And the failure of a large free standing investment bank think Goldman Sachs -- Morgan Stanley could also set off financial contagion.
It's not enough just keep them separate.
Secondly.
What -- they -- really did was prevent banks from engaging in underwriting.
Today we -- underwriting is not that interest it's not with the real risks are the real risks are and things like proprietary trading and credit default swaps.
And that's why Dodd-Frank tries to restrict those areas in the important question for the future.
Is how rigorously things like the Volcker Rule will be implemented because that's where the real danger of bank failing -- Let me go back to the first point on being too interconnected because when you were saying that I'm thinking to myself.
Well if we put Glass-Steagall back into place wouldn't we be less interconnected and wouldn't that may be solved the problem to some extent -- that not true.
Because if you -- that investment bank doing something like writing credit default swaps and someone else and AIG or Citigroup.
We're writing credit default -- flops the risk would flow through.
Even though the commercial bank is not engaged in underwriting securities.
It can still be at risk for the failure of a major investment bank that's the problem interconnection.
And again the key thing about Glass-Steagall with the prevented banks from underwriting today that doesn't look dangerous at all it's low risk.
What is risky is proprietary trading and banks do that on their room to -- it also.
I would think prevented banks from being just plain and simply to -- that phrase too big to fail comes up a lot over the last few years and what would be wrong with going back to an era where banking was for lack of a better term -- -- many people use this last few years boring.
-- better to be boring and less risky to be darned if we put this back in place we'd be boring again.
I agree that there's a case for making bank smaller and more -- But Glass-Steagall is the wrong -- to get here.
Which you want to do is say that the truly high risks activities for banks such as writing credit default swaps proprietary trading -- kinds of exotic trading.
Those are things that need to be very closely circumscribed so that a bank can't take the kind of risk didn't cause it to fail.
We've just seen all this in a perfect object lesson.
MF global failed because a determined CEO.
Can't override any system of internal controls we've got to make sure that banks that are too big to fail can't take along those kind of -- okay.
And we might see it again or we have the risk of seeing it again if something were to happen in Europe.
Not exactly like what we saw here in 2008 but similar in some ways -- -- under control Schwab was on earlier saying this probably.
A 20% chance of a big blow up in Europe otherwise -- we skate by.
Still that's pretty big the possibility if it does is this system that we have in place now and the regulations that are being worked and has -- affected.
Hey -- affect because about Dodd-Frank can we withstand it can we withstand it better than we could then.
I think we need more and agreed to strongly implement Basil three to make banks have more equity more capital more of a buffer against shock.
And we need to say that if you're too big to fail there's some businesses that are too risky for you engage him.
And had the -- with the Volcker Rule and some of the provisions about owning hedge funds or trading over the counter derivatives also try to address.
But you got -- identify the real risks.
All right and we will continue to do that we'll have you back on again to do it we're gonna wrap it up for today but we're taking this topic back up it's not.
As if we haven't been covering it but it's sort of went away for a little while and now we're gonna be back on especially with what's happening in Europe and as you said would happen did and -- global John --
