The financial crisis of 2007-09 caused the Great Recession, the most severe global economic downturn since the Great Depression. The financial crisis began with the collapse of the subprime mortgage market in the U.S. and spread to financial markets around the world. Similarly, the disastrous financial events of the Great Depression began with the Great Crash on Wall Street in October 1929 and spread throughout the U.S. and Europe during the early 1930s.
Congress responded to the Great Depression by passing the Glass-Steagall Banking Act of 1933. Two of Glass-Steagall’s key provisions – Sections 20 and 32 – separated … Read more
The financial crisis of 2007-2009 caused the most severe global economic downturn since the Great Depression. The recent crisis has generated renewed interest in the Glass-Steagall Banking Act of 1933, which Congress adopted in response to the collapse of the U.S. banking system and the freezing of U.S. capital markets during the Great Depression. Glass-Steagall was designed to stabilize the U.S. financial system by separating commercial banks from the capital markets and by prohibiting nonbanks from accepting deposits.
Since the financial crisis, scholars have debated the question of whether the removal of Glass-Steagall’s structural barriers during the 1980s and 1990s … Read more
Financial regulation after the Dodd-Frank Act was enacted in 2010 has produced a blizzard of acronyms, many of which revolve around the basic “too big to fail” problem. OLA, OLF, SPOE, and TLAC are new regulatory tools that seek to build a regime for resolving failures of systemically important financial institutions. “Resolution” is the financial industry’s favored term for what most people would simply call “bankruptcy” or, more politely, “restructuring.”
The explicit goal of this new “resolution” regime is to enable a large financial institution (or SIFI, to use another favored acronym) to go bankrupt without a government bailout. Just … Read more
In two previous posts, I described the financial industry’s “single point of entry” (SPOE) strategy for resolving failed megabanks. The SPOE approach – which has been endorsed by the Federal Reserve Board (Fed) and other regulators – could be implemented under the Orderly Liquidation Authority (OLA) established by Title II of the Dodd-Frank Act or under a proposed new “Chapter 14” of the Bankruptcy Code. As I explained in my previous posts and a forthcoming law review article, an SPOE resolution would involve only the parent holding company of a failed megabank and would impose losses only on … Read more
In a recent post, I summarized my forthcoming article critiquing the financial industry’s plan for resolving failed megabanks under Title II of the Dodd-Frank Act. My article describes the industry’s “single point of entry” (SPOE) strategy for recapitalizing and reorganizing failed megabanks. I argue that the industry’s SPOE strategy is designed to provide full protection for Wall Street creditors of failed megabanks while imposing the costs of rescuing those banks on ordinary investors and/or taxpayers.
The financial industry has also proposed a new “Chapter 14” of the Bankruptcy Code, which would authorize federal bankruptcy courts to adopt an … Read more
The high-risk business model of large financial conglomerates (frequently called “universal banks”) was an important cause of the financial crisis. Universal banks rely on cheap funding from deposits and shadow banking liabilities to finance their speculative activities in the capital markets. By combining deposit-taking and short-term borrowing with underwriting, market making, and trading in securities and derivatives, the universal banking model creates a strong likelihood that serious problems occurring in one sector of the financial industry will spread to other sectors. To prevent such contagion, federal regulators have powerful incentives to bail out universal banks and protect all of their … Read more
The following comes to us from Arthur E. Wilmarth, Jr., Professor of Law at GW Law and Executive Director of the Law School’s Center for Law, Economics and Finance. This is a synopsis of his article Turning a Blind Eye: Why Washington Keeps Giving In to Wall Street (81 University of Cincinnati Law Review 1283-1446, 2013).
As the Dodd–Frank Act approached its third anniversary in mid-2013, federal regulators failed to meet statutory deadlines for more than 60% of the required implementing rules. The financial industry has undermined Dodd–Frank by lobbying regulators to delay or weaken rules, by suing to overturn … Read more