Republican Convention 2016: Donald Trump wants to break up big banks

Australian Financial Review Jul 19 2016 4:19 PM

John Kehoe

Wall Street has descended into a state of shock after Donald Trump's campaign revealed the Republican presumptive presidential nominee would push for the reinstatement of the Glass-Steagall banking law to effectively break up the big banks.

Mr Trump's campaign manager, Paul Manafort, said at the Republican National Convention in Cleveland on Monday that the party's official policy platform would advocate a return of the Depression-era law, which was repealed under President Bill Clinton in 1999.

"We also call for a reintroduction of Glass-Steagall, which created barriers between what big banks can do," he told reporters.

The surprise policy shake-up by a Republican echoes calls by Democratic socialist presidential contender Bernie Sanders for the big banks to be broken up.

It builds on Mr Trump's populist backlash against the business elite, including his criticism of free trade agreements, claims to stop American companies moving offshore and plan to slow immigrant labour.

Risky activities

The Glass-Steagall Act was passed during the Great Depression in 1933. It banned taxpayer-backed deposit-taking institutions from engaging in risky investment banking activities such as trading.

Mr Trump's policy appears aimed at distinguishing himself from rival Hillary Clinton, who has received strong financial backing from Wall Street and whose husband ditched Glass-Steagall.

Mr Manafort said the presumptive Democratic nominee and former secretary of state in the Obama administration was beholden to big banks.

"We believe the Obama-Clinton years have passed legislation that has been favourable to the big banks, which is why you see all the Wall Street money going to her," he said. "We are supporting the small banks and Main Street."

Financial institutions have been lumbered with onerous new regulations since the 2008 financial crisis, when the US government was forced to spend billions of dollars bailing out big banks and insurers.

Small banks have complained the Obama administration's Dodd–Frank Wall Street Reform and Consumer Protection Act has imposed huge regulatory costs and given big lenders a competitive advantage.

Republicans, including Mr Trump, have vowed to repeal Dodd Frank and the Volcker Rule, which severely restricts banks from betting on securities with their own balance sheet.

Regardless of who wins the November 8 election, it seems the large banks will face new regulation. That is unless the Congress, currently controlled by Republicans, thwarts presidential reform efforts.

The Democratic draft policy platform this month called for an "updated and modernised version" of the Glass-Steagall law. Bank bashing senator Elizabeth Warren, who Mrs Clinton is considering for vice-president, and Senator Sanders influenced the Democratic policy.

Among the banks most likely to be affected by the separation of commercial and investment banking activities are Bank of America, Citibank and JP Morgan.

'Dumb politics'

They all have substantial consumer and investment banking units.

Tony Fratto, a bank lobbyist at Hamilton Place Strategies and former US Treasury official, said Glass-Steagall is "dumb politics and dumb economics".

"If Republicans think they can outflank Senator Warren they are delusional," he said in a statement.

"Returning to Glass-Steagall would be destructive and unworkable.

"As every analysis has demonstrated, Glass-Steagall would have done nothing to prevent the crisis."

Better Markets chief executive Dennis Kelleher was cautiously supportive of the policy.

"It's potentially great news for financial reform and protecting taxpayers, as long as it's not another Republican Trojan Horse that looks good, but concealed underneath are killer loopholes and big bank giveaways," he told The Hill in Washington.

Mr Trump has boasted about his close relations with Wall Street bankers, but also called them greedy paper shufflers and urged an end to a tax break for private equity executives known as the carried interest loophole.