Brooksley Born, whose effort to regulate over-the-counter derivatives was thwarted in the 1990s, said large lenders should be broken up to separate their investment and commercial banking activities.
Banks must be “tasked with the job of deciding how best to split themselves up” under the supervision of regulators, Born, former chairman of the Commodity Futures Trading Commission, told reporters in Washington today. “There should be rules imposed, perhaps something like Glass-Steagall.”
The Glass-Steagall Act, repealed in 1999, was the Depression-era law separating deposit-taking institutions from investment banking. Obama administration officials including former Treasury Secretary Timothy F. Geithner have said the demise of the law didn’t play a material role in the 2008 financial crisis.
“The Glass-Steagall Act, before it began to be eroded by the bank regulators, was a good idea, and the financial system was protected by that,” said Born, 72, a retired partner of law firm Arnold & Porter LLP in Washington. She was speaking after a panel discussion in Washington today held by advocacy group Public Citizen.
The large banks “have too much political power and too much money to be sufficiently capable of being managed, of being supervised and regulated, and of being permitted to fail,” Born said during the discussion. “This despite the efforts in Dodd-Frank to make sure that we don’t bail out one of these major institutions. I think we would have to if they started to fail.”
The Dodd-Frank financial overhaul law aims to end taxpayer-funded bailouts such as the rescues of American International Group Inc. and Citigroup Inc. in the aftermath of the financial crisis.
Born’s 1998 proposal to consider regulating OTC derivatives was opposed by the Clinton administration and eventually dropped. The OTC market later included the toxic instruments that contributed to the demise of Lehman Brothers Holdings Inc. and the financial crisis.
The global OTC derivatives market mushroomed to a notional value of almost $600 trillion in 2007 from about $28 trillion at the time of Born’s proposal.
Neil Barofsky, former special inspector general for the Troubled Asset Relief Program, said on the panel that the financial services industry prevents tougher rules by using the “same tired, invalid, disproven arguments that any type of financial regulation will destroy the world.”