Would Glass-Steagall Have Saved JPMorgan from their $2 Billion Loss?

As noted by the president of the Federal Reserve Bank of Kansas City, the Glass-Steagall Act (“GSA”) was intended to “separate the higher risk, often more leveraged, activities of investment banks from activities tied to the nation’s payments system and related role of trusted intermediary of the commercial banking system.” JP Morgan’s recent loss was based on synthetic securities i.e. derivatives, investments more typically made by an investment bank rather than a commercial bank. Some commentators have argued that if GSA was still in place, JP Morgan would not have been able to make such an investment and the loss, therefore, would have been avoided.

Prior to the repeal of GSA by the Gramm-Leach-Biley Act (“GLBA”), however, the line between investment banks and commercial banks was already blurred, with commercial banks permitted to a certain extent to engage in such activities.  GLBA did, however, facilitate the growth of banks and arguably precipitated the too-big-too-fail problem faced today. However, the existence of the GSA itself may have prevented losses like JP Morgan’s recent debacle.

Of note, the Commodity Future Trading Commission (“CFTC”) is hosting a public roundtable to discuss the proposed Volcker Rule, frequently compared to GSA, and proposed exemptions. The CFTC is currently accepting comments online and will provide a telephone hotline for those who want to listen live, as well as publish a transcript of the event for those unable to attend.

For additional information about the repeal of GSA or the Volcker Rule, the CFTC roundtable or any other compliance concern please contact Andrew Deddeh at andrew.deddeh@corecls.com or (619) 278-0020.