Okay, so the title is a bit patronizing to Amanda Lang. Especially when it is the words of Kevin O’Leary which I have concerns with. A few weeks ago, Kevin O’Leary, the CBC co-host, argued that governments cannot “re-impose” any variation of the Glass-Steagall Act and/or the Volcker Rule. Mr. O’Leary has argued against new capital rules that are going to be introduced over the next couple of years and has sided with many like Jamie Dimon of JP Morgan Chase. Simply put, Mr. O’Leary has argued that the deregulation of banks and other financial institutions has, on the whole, benefited and enriched society.
Since the 1980’s, financial institutions have been allowed to merge and we have all benefited, he has argued. These institutions have gotten bigger and bigger and this is only natural. It is a sign that the system is healthy and we should protect that system.
While, this point of view is popular in North American, it is one that I do not share. Over, the last couple of years, we have learned that while, markets are self-correcting, they do not respect “the Other” or the needs of society. Therefore, markets need to be overseen by an instrument that does respect the needs of all stakeholders in society. This is the reason and the very basis of popular government. From my point of view, government looks after us when the market has failed. That failure might come from fraud or from unanticipated events but Government is there to look after the needs of the “Other”. For the Other, some day may be me. With that being said governments – of various stripes – try new ideas. The Deregulation of the Financial Markets was such an idea. However, as we have seen, some aspects to the deregulation did not provide stability. Therefore, in our free and democratic environment, our governments may need to look at old solutions that have worked in the past. Therefore, the imposition or “re-imposition” of solutions to various problems is necessary. That is as long as governments are willing to take the consequences of their actions.
If one remembers the Income Trust debate, one argument of many critics was that “one cannot close the barn door after the horse has left”. The simplistic comment is meant to demonstrate the futility of some policy actions. Or if we take this reasoning literally, once the horse has left closing the door is meaningless. In the same respect by acting, Governments will not accomplish anything because the situation has made the case for change a mute issue.
However, simple reasoning tells us that this phrase is false when it comes to a lot of government policy. For, governments have a lot of power. Their solutions are often imposed by the use of state power. This can include persuasive powers – such as advertising, moral suasion or legal changes – or more aggressive tools like the powers of the police, security services or military. For evidence of this, just look at the Income Trust Debate.
In about 2004, a few financial commentators started to become concerned about the effect Income Trusts were having on the taxation system. Wellington West argued for a review of the Income Trust Corporate Structure. It was one of the few in the financial industry that did. Alongside, Eric Reguly and Prof. Jack Mintz, Wellington West Financial Official Blog noted that “Now that Telus and BCE have made their moves, I hope this debate is rekindled; even if the horse has long since left the barn.”
When the Martin Government brought forth a White Paper before the 2006 election; the Leader of the Opposition, Stephen Harper, argued in a National Post op-ed in October, 2005 that “This reckless action has caused uncertainty… and so has wiped out billions of dollars in market capitalization from Canadian companies and tens of thousands of dollars from the retirement nest eggs of individual investors. Most notable was the damage done to Canadian seniors who may not have the time to recoup their losses.”
Furthermore, Mr. Harper’s Conservative Party at the time said the following in its campaign material: “A Conservative government will…preserve income trusts by not imposing any new taxes on them.” So Mr. Harper agreed with many observers who criticized the Liberal Government by saying that one could not implement any new policy because the horse had already left the barn. And yet by the end of 2006, Mr. Harper changed his tune. As the Hon. Roy Cullen (Etobicoke North, Lib.) noted on October 31, 2007: “Mr. Speaker, I rise today on Halloween to mark the one year anniversary of the Conservative government’s decision to wipe out $25 billion of hard-earned retirement savings of two million Canadians.” For the Harper government changed the Law and closed the barn door.
So I was annoyed when I heard Amanda Lang’s “partner-in-crime”, Kevin O’Leary, argue that Glass-Steagall Act could not be put back into force. History tells us that it can be put back into force. For, the US Congress initially passed the Glass-Steagall Act during a similar economic situation to the one we are suffering from now. While there is some argument about which “straw broke the camels’ back”, the highly leveraged nature of the system bares some similarities to the collapse of the 1930’s and the ensuing Great Depression.
The 73rd and 74th Congresses, in their wisdom, wanted to prevent the reoccurrence of such an event. Therefore, they proposed laws which divided financial risk. Banks were answerable for Credit Risk. Insurance Companies were responsible for Event related risk. While, Trusts Companies administered and held onto assets third parties. Today, we would call that third party or counter-party risk. All the rest was left for the Securities Community: Investment Bankers, Stock Brokers and other Equity Manipulators.
This meant that a stock, for example, could only be sold by someone who had a securities license. With this being said, stock brokers would very rarely hold onto the share certificate. For share certificates were the venue of Trust Companies. Or, an Insurance Company might sell an insurance contract, however, the assets were held by a Trust Company. Each company had a role and each kept the others honest because all of the transactions would eventually be exposed to the public through the participation of regulators, various members or stakeholders in the financial community.
However, over the last number of years, this exposure has decreased. For Financial Companies are now allowed to cross the lines. In various countries, Insurance Companies can now own Banks or Banks can sell insurance products. Coupled with mergers and buy-outs, the gutting of Depression era financial regulation has mean only one thing: more opaqueness in the market. Royal Bank of Canada, SunLife, AIG and ManuLife are just a couple of companies that now do all four functions. So Financial Companies today mimic their cousins of the Pre-Great Depression Era.
The only difference is that politicians today are weak-kneed. In the 1930’s, the implementation of Glass–Steagall meant that financial conglomerates were broken up. Just look at the Morgan name in the US Financial Sector. Part of the reason it spread was because J.P. Morgan & Co. separated its investment banking from its commercial banking operations. Or put differently, Morgan Stanley in part is a result of the break-up of financial institutions. However, the Morgan banking Empire was not unique. A number of companies were forced to separate in the 1930’s. These changes led to significant capital mobility and made the US became a model for modern financial market regulation. In fact, the US had financial stability up until the Savings and Loans Crisis of the 1980’s. Few countries in the modern world could claim to have fifty years of financial stability. Yet, the four pillar model provided that.
One of the reasons, I would argue, why Canada did not join the financial quagmire enjoyed by Western Europe and the US, was the maintenance of some of the 1930’s principles. In Canada, our Banking and our Insurance Industry is for the most part separate. To my surprise, I found out four big insurance players – SunLife, ManuLife, Industrial Alliance and Great West Life – were just as big as the big six banks. This does not even count the number of midsize financial players. They include Vancity Credit Union, Laurentian Bank, E-L Financial Corporation, Desjardins and Equitable Life. By keeping to their original fields of expertise, Canada has to some extend maintained the “Four Pillar System” – insurance, banking, trust companies and securities firms.
Furthermore, while large parts of the Trust and Securities Market were gobbled up by larger players in the 1990s, the few remaining independent competitors – including Caledon Trust Company, Concentra Trust, ResMor Trust Company and Caldwell Securities – do provide a competitive environment.
This reality makes Canada unique. For example, our dominant financial players can still be described as banks, insurance companies, trusts or securities firms. Consequently, they cannot find a weak regulator to monitor the activities of their dominant business line. This cannot be said of the United States of America. In the US, “Regulator Shopping” is a regular part of business. One can look at the Wall Street Times commentary for clarification:
“The financial crisis had no single cause. But everyone knows that regulatory failure played a role and that one of the biggest mistakes was to allow “regulatory shopping” — in which banks and other financial firms were permitted to choose their own regulator.
What resulted was a race to the bottom. Many firms switched at will among various overseers, in search of the loosest rules and laxest regulators.
And yet, legislation recently introduced in the House would allow insurance companies, currently regulated by the states, to opt for federal regulation instead — and, in general, if they don’t like that, to switch back after a spell. If the bill were enacted, the race to the regulatory depths would continue, and the nation would be headed in exactly the wrong regulatory direction.” (Editorial, New York Times, Regulator Shopping, Published: May 20, 2009)
Europe too had similar regulatory issues. In fact, some might argue that they have had even more trouble than the US. So it is not a surprise that euractiv.com described the “largely unregulated financial sector” as being “widely blamed for inflating asset bubbles which popped and brought the global economy to a standstill.” Nor, would one be incorrect in saying that “one of the biggest crashes in the financial system revealed wayward lending policies, poor credit checks and wholesale gambling on financial markets, policymakers have started to come down hard on many aspects of banking, trading and conduct.” (Financial regulation: The EU’s agenda; Published 01 April 2009 – Updated 22 December 2011). So yet again, as Canadians, we have to come to one conclusion: our system was saved from financial collapse because our financial players look like Glass-Steagall era institutions. So Mr. O’Leary’s suggestions are not as strong as they might seem at first blush.
I have heard some might argue that size provides market stability. However, large players like AIG, Lehman Brothers, ING and AEGON either failed or took bailouts to avoid failure. ING, for example, in response to the 2008 Financial Crisis, took a capital injection from the Dutch Government. This support meant that ING’s capital ratio increased to more than 8%. Yet, as a condition of Dutch state aid, the EU demanded a number of changes to the company structure. This resulted in the divestiture of a number of businesses around the world including those in Canada, Australia, New Zealand and the US. In other words, if ING did not need the money why would it have taken it? Why would they have divested in great operations around the world, if they could have survived without government support? In my mind, the answer was obvious. Like other European and American Financial Players, ING was in trouble and they knew it. Size, big or small, is not the solution.
Greece, Austria, Hungary, England, Ireland, Iceland, Japan and the US are just a number of places where the market was rocked. Worldwide, stock markets lost a minimum of 30% of their value. Governments and Central Banks intervened into various markets and few safe havens existed. One needs to ask why. I would argue that the loss of Glass–Steagall era market structure made the world a riskier place.
Conservatives and Libertarians hate to use government to look out for one’s neighbours. However, by using Government for this purpose, I get to protect myself. Glass–Steagall was brought in to discipline financial institutions because they proved that they were willing to take on more risk than they could handle. It was their huberous which was their down fall. Our “world” has proven, in this way, to be very similar to the 1930’s. It might be a Liberal thing to say; but, sometimes my “friends” need to be protected from their own worst behaviour. This is especially true when their behaviour can have an effect on me. So by protecting the “Other” – my brother or sister, my friend or fellow citizen – I can protect myself. With this being said, I say to Kevin O’Leary: Yes, Kevin, the Glass–Steagall Act can, and should, be resurrected. It should be the way that society protects itself from financial risk for it is a proven model and we, as a society, need more security.