Could Glass-Steagall Have Stopped JPMorgan Loss? The banking giant's $2 billion loss has many lawmakers and economists wondering what happened to the 2010 financial overhaul, which was supposed to prevent risky hedging. Many are also looking back further — to a Depression-era law, repealed in 1999, that separated commercial and investment bank activities.
NPR logo

Could Glass-Steagall Have Stopped JPMorgan Loss?

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Could Glass-Steagall Have Stopped JPMorgan Loss?

Could Glass-Steagall Have Stopped JPMorgan Loss?

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


All right. To our cover story now. And the question we're asking today is: In light of the $2 billion-plus trading loss by JPMorgan Chase last week, whatever happened to financial reform? And more importantly, could it have prevented that loss? And even more importantly, should any of us really care if JPMorgan lost all that cash?

UNIDENTIFIED MAN #1: (Unintelligible) come to order.

RAZ: Our story begins on November 4, 1999.

SENATOR MIKE CRAPO: Today, the Senate will resume consideration of the conference report to accompany the Financial Services Modernization bill.

RAZ: It sounds a bit dull, but what was being discussed that day was quite possibly the most profound change to the U.S. financial system in 66 years.

CRAPO: There are approximately six hours of debate remaining under the order.

RAZ: President Bill Clinton and his Treasury secretary, Larry Summers, urged Congress to ease Depression-era regulations that separated commercial banks and investment banks. The law was known as Glass-Steagall, and Congress passed it in 1933 in the midst of the Great Depression. The original intent was to prevent the kind of speculation and bank runs that led to the catastrophic stock market crash in 1929. But by 1999, the overwhelming consensus on Capitol Hill was that it was time for a change.

SENATOR CHUCK SCHUMER: Mr. President, this is a historic moment.

RAZ: That's New York Senator Chuck Schumer. That day, November 4, 1999, speaker after speaker, rose on the Senate floor to call for the repeal of Glass-Steagall.

SCHUMER: If we didn't pass this bill, we could find London or Frankfurt or, years down the road, Shanghai becoming the financial capital of the world.

RAZ: Nebraska Senator Bob Kerrey dismissed the tiny minority of senators who criticized the bill.

BOB KERREY: I think the concerns that we're going to have a meltdown like we had in 1929 is - are concerns that are dramatically overblown, given...

RAZ: Just eight senators voted against the repeal. Republican Richard Shelby was one of them, so as...

BYRON DORGAN: Mr. President...

RAZ: ...North Dakota Democrat Byron Dorgan.

DORGAN: ...I come to the floor to say that I regret that I cannot support the legislation.

RAZ: Byron Dorgan is no longer a senator, but back at the time, Dorgan recalls, there was immense pressure to back repeal. Were you seen as a kind of a, you know, an oddball for opposing this at the time?


DORGAN: Well, I don't know if they saw me as an oddball, but I was sure a pain in the side because I went down to the floor again and again and again to speak against this. I said this is going to fuel consolidations and mergers on Wall Street. Substantial new concentration and mergers in the financial services industry. It's going to raise the likelihood of future massive taxpayer bailouts. And we are deliberately and certainly with this legislation moving towards inheriting much greater risk in our financial services industries.

I said I think we're going to look back. We will in 10 years' time look back and say we should not have done this because we forgot the lessons of the past. I was, you know, very concerned about what this was going to mean to the future of the country.

RAZ: Now, why dig up an old story about something that happened on the Senate floor more than a decade ago? Well, the answer is because there's a small but increasingly vocal group of lawmakers, including Senator John McCain, who want to reinstate Glass-Steagall. Many of them argue that that decision, the repeal of Glass-Steagall, was so consequential, so important that there's a direct link between it and the financial meltdown of 2008 and, more recently, the $2 billion-plus trading loss by JPMorgan Chase last week.

UNIDENTIFIED MAN #2: Today, the Justice Department launched a criminal probe into JPMorgan's $2 billion trading loss.

UNIDENTIFIED MAN #3: Boy, this was a real bomb that dropped on the street.

UNDENTIFIED WOMAN: The analysts are grilling CEO Jamie Dimon...

UNIDENTIFIED MAN #4: JPMorgan down almost 7 percent in after-hours on egregious trading losses of $2 billion.

RAZ: Now, the connection between Glass-Steagall and the loss of JPMorgan Chase is by no means definitive. And later, we'll hear from a former Reagan official who says any attempt to make that connection is nonsense. But first to someone who has vowed, if elected to the U.S. Senate, to bring Glass-Steagall back. Her name is Elizabeth Warren. She's a Harvard Law professor and the architect of the Consumer Financial Protection Bureau. That was created as part of a series of financial reforms passed in 2010, known as Dodd-Frank. We'll get to that in a few moments.

Elizabeth Warren is now running for the U.S. Senate for Massachusetts, and she's a lightning rod for opponents of tougher financial regulation. When I spoke with her this week, the first question I asked, why should any of us care whether JPMorgan Chase lost its shirt on a bad bet? After all, the CEO of the company, Jamie Dimon, isn't asking for a taxpayer bailout.

ELIZABETH WARREN: Because he's not asking this time. But the point is he's taking on those risks. And, look, this isn't personal to Jamie Dimon and JPMorgan Chase. This is really about the large financial institutions saying it's business as usual. We will make the decisions how much risk we want to take on. We'll figure out the gambles. We'll juice our bottom-line profits by just betting some extraordinary sums of money. And we don't want the regulators to have anything to do with it.

But what we all learned in 2008 is when they get that - they may get all the profits in the good times, but when they get it wrong, it's the taxpayers, it's everybody else who comes in and has to pick up the pieces. And that means the deal doesn't work. If they want to be in the banking business, they have to have - they have to be willing to submit to effective regulation.

RAZ: You have recently announced that you would want to reinstate the Glass-Steagall bill, that you would want to reintroduce this bill that was repealed in 1999. How would reintroducing that have prevented what happened with JPMorgan last week?

WARREN: Well, the key on Glass-Steagall is that it makes banking boring. It says if you want to do all those exciting things, like take $100 billion bets or lose $2 billion or maybe three, you need to do that over in the Wall Street trading kind of business, not in a basic commercial bank that takes deposits and, you know, checking accounts and savings accounts. Glass-Steagall says there needs to be a wall between those two kinds of activities.

Congress, I hope, sees the writing here and says it's not going to work to let the biggest financial institutions just go out and do what they want. We can't turn these guys loose.

RAZ: My understanding was that the so-called Volcker Rule, named after Paul Volcker, the former Fed chairman, was supposed to address this, that this is part of the Dodd-Frank financial reform that was passed two years ago. Why not just work on strengthening that?

WARREN: Well, and that is an approach. Look, I supported the Volcker Rule. But remember what the heart of the Volcker Rule is about. It says, hmm, these biggest financial institutions can continue to engage in both kinds of activities - that is the boring taking deposits and all that sort of thing - at the same time that they're also doing the high-risk activities so long as we keep careful watch over them.

If that's not working, if we don't have regulators who are able to be strong enough, who can write tough enough rules to keep that distinction in place, the Volcker Rule won't be able to do its job.

RAZ: That's Elizabeth Warren. She's a candidate for U.S. Senate from Massachusetts. By the way, her opponent in the race, Senator Scott Brown, was one of just three Republicans who backed the financial reform bill known as Dodd-Frank back in 2010.


Back to our cover story now and the tangled trials of financial reform on Wall Street. Back in 2010, when Congress passed what's become known as Dodd-Frank, the president hailed it as a turning point.

PRESIDENT BARACK OBAMA: So all told, these reforms represent the strongest consumer financial protections in history, in history.


RAZ: Dodd-Frank was supposed to do things like prevent predatory lending, ban big banks from taking risky bets through taxpayer money and limit speculators from inflating prices of commodities. Some of that is happening, but according to an article on the latest issue of Rolling Stone, Wall Street has been mounting a massive campaign to roll back key parts of the law. Reporter Matt Taibbi wrote that story.

MATT TAIBBI: The easiest way to see that is in the issue that most directly bears upon this Chase incident, which is the whole issue surrounding the Volcker Rule. Now, the Volcker Rule was designed to prevent what they call proprietary trading, which is a bank trading for its own account. But before the Volcker Rule was even passed in the original version of Dodd-Frank, industry insisted on a wave of exemptions and loopholes, and there were so many. Basically anything could be exempted under the rule, including this particular trade that got Chase in trouble.

Beyond that, the Volcker Rule took so long to write because they had to craft all these very, very careful and detailed exemptions. Now the Volcker Rule is not going to into effect until 2014. If it does, which I have serious doubts, I think there'll be a lawsuit, there'll be new legislation. Something will happen, and we'll just never get that rule.

RAZ: And there are all of these banks that are basically taking parts of Dodd-Frank and challenging it in court, right?

TAIBBI: Yes. And that's happening across the board with all different parts of the bill. You know, we had a lot of volatility with commodities, thing like oil and food prices. And a lot of this is because there's been this huge influx of speculative money that's poured into these markets.

And Dodd-Frank theoretically addressed this by saying essentially that no one speculator could dominate more than a quarter of the market at any time while industry filed a lawsuit, which challenge the legality of that rule on the basis that the government did not perform a cost-benefit analysis of the law. And so that's being tied up in the courts now. And my guess is that that'll be overturned.

RAZ: You describe the situation where you have a lot of critics saying, look at these financial regulations - 17,000 pages of these Dodd-Frank law - but they're also the same people, you argue, who created these 17,000 pages by lobbying for them.

TAIBBI: That's absolutely the case. I think if the proponents of Dodd-Frank had had their way, just like what FDR did, you would have had just a couple of simple but very hard rules. For instance, you can't be too big to fail. There was a lot of movement to pass a law that said that if a bank got to be a certain size that it just had to be a broken up. But they managed to overturn that. Originally, they were going to create an FDI cease file fund the banks would pay into ahead of time to pay for future bailouts.

But that was defeated, and what they created instead was this incredibly convoluted process by which the state would put up the money for bailouts first, and then they would have to recoup the money from Wall Street later over the course of a process that could take 10 years or more.

So this is kind of an example of how Dodd-Frank worked in general. You start it off with a very simple concept. And by the time industry was done with it, it was 1,000 pages long every time.

RAZ: That's Rolling Stone magazine's Matt Taibbi. Peter Wallison was the general counsel for the Treasury Department under President Ronald Reagan. He believes Dodd-Frank is a bad law that imposes layers of unnecessary bureaucracy on the financial system. And he also argues that proponents of regulation are just trying to take advantage of the JPMorgan trading loss to push for more regulation.

PETER WALLISON: I think this had been wildly exaggerated. This is not something that taxpayers ought to be worried about. The bank will earn probably this year somewhere between 15 and $20 billion. So again, $2 billion hurts the shareholders, but it doesn't do very much to damage the position of the bank or its health. So the one thing that I think might have changed the way this has developed would have been to educate members of the media who took a $2 billion loss on a $2 trillion bank and treated it as though it was some kind of indication that banks are not being properly managed.

RAZ: I mean, there are two separate narratives here. And one narrative says 1999, Glass-Steagall was repealed, and there's a direct link between what happened then and what happened 2008. There's another narrative that says that's just not the case. 2008 would have happened anyway. It had nothing to do with that.

WALLISON: Yeah. Well, look, I - even if we give credit to the narrative that says that what happened in 2008 was a result of lack of regulation of the banks, there really is no connection between Glass-Steagall at all in what happened with the banks, because the banks made bad loans in 2008. They have always been permitted to make loans. Glass-Steagall had nothing to do with whether they make loans. That's what banks are supposed to be doing. And the fact that they were able to affiliate with firms that underwrote or dealt in securities makes no difference at all.

RAZ: Let me go back to JPMorgan for a moment, because the market value of the company initially fell by 15 billion or so. It's still way up what it was before. What do you think other banks will take out of that episode? I mean, do you think they will become less likely to take chances that could lead to profits?

WALLISON: You know, most of what has been said about this is that it was a trade for the purpose of earning profits. This was a trade or a series of trades that were intended to protect the bank against losses. Now, any trade that is a hedge is potentially a loss. That only means that banking and any kind of financial activity of the kind that banks do is always going to be somewhat risky.

Will this keep other banks from hedging their assets? One would hope not. That would probably contribute substantially to additional losses. So I think the only thing that it might do is to make sure that every complicated trade is gone over by many more people and followed much more carefully than this one was.

RAZ: That's Peter Wallison, a former Treasury official in the Reagan administration. By the way, last month, under industry pressure, the SEC agreed to exempt thousands of Wall Street firms from oversight on derivatives trading if they earn less than $8 billion a year. By one estimate, that could affect up to 85 percent of financial firms.

Copyright © 2012 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.