Washington
President Donald Trump said he’s actively considering a break-up of giant Wall Street banks, giving a push to efforts to revive a Depression-era law separating consumer and investment banking.
“I’m looking at that right now,” Trump said of breaking up banks in a 30-minute Oval Office interview with Bloomberg News. “There’s some people that want to go back to the old system, right? So we’re going to look at that.”
Trump also said he’s open to increasing the US gas tax to fund infrastructure development, in a further sign that policies unpopular with the Republican establishment are under consideration in the White House. He described higher gas taxes as acceptable to truckers — “I have one friend who’s a big trucker,” he said — as long as the proceeds are dedicated to improving US highways.
Glass-Steagall
During the presidential campaign, Trump called for a “21st century” version of the 1933 Glass-Steagall law that required the separation of consumer and investment banking. The 2016 Republican Party platform also backed restoring the legal barrier, which was repealed in 1999 under a financial deregulation signed by then-President Bill Clinton.
A handful of lawmakers blame the repeal for contributing to the 2008 financial crisis, an argument that Wall Street flatly rejects. Trump couldn’t unilaterally restore the law; Congress would have to pass a new version.
Trump officials, including Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn, have offered support for bringing back some version of Glass-Steagall, though they’ve offered scant details on an updated approach. Both Mnuchin and Cohn are former bankers who worked for Goldman Sachs Group Inc.
Wall Street has repeatedly shrugged off politicians’ calls for bank break-ups in recent years.
Market reaction
The KBW Bank Index of 24 major US lenders was up about 1.2 per cent on Monday before Trump’s comment sent it tumbling about a percentage point. It soon recovered most of that, and was up 0.9 per cent as trading closed in New York. Firms including JPMorgan Chase & Co. and Bank of America Corp., the nation’s two largest banks, were among companies that swooned.
The Glass-Steagall law essentially split banking into two categories: deposit-taking companies backed by taxpayers that primarily made loans to businesses and consumers, and investment banks and insurers that trade and underwrite securities and create or focus on other complex instruments. Severing those businesses would prevent Americans’ nest eggs from flowing into more volatile capital markets, Congress reasoned at the time.
Large banks see little interest in Congress for reviving the prohibition between commercial and investment banking, especially since lawmakers are currently bogged down with more pressing issues like repealing Obamacare and passing a tax overhaul.
Only one Republican in the Senate, John McCain of Arizona, has endorsed a proposal by Democratic Senator Elizabeth Warren of Massachusetts to reinstate Glass-Steagall. That signals that passing any legislation will be an uphill battle. During meetings with bank executives at the Treasury Department about Trump’s February executive order on financial rules, the topic of Glass-Steagall has rarely come up.
“This isn’t a near or even medium term threat,” said Ian Katz, an analyst at Capital Alpha Partners LLC who follows bank regulation.
Economic boost
Promoting the tax overhaul outline his administration released last week, Trump said the tax cuts he’s seeking would, along with renegotiated trade agreements, serve as badly needed stimulus for the economy.
The president called first-quarter economic growth, which the Commerce Department said declined to a 0.7 per cent annual rate, “really bad.”
Although he’s taken credit for monthly job growth figures and stock market gains since entering office on Jan. 20, Trump said he’s not responsible for the GDP number.
“The first quarter, second quarter really isn’t my quarter. That’s really a leftover from — in all fairness, I just got here,” he said. “So you’re growing at 1 per cent or less in the country, so we need something, we need a stimulus.”