16 September 2010

The Reforming American Financial Stability Act: A Missed Opportunity to Rein in Big Banks

By Christian Evans, Associate Editor

          In the 1930’s, during the Great Depression, President Roosevelt called on Congress to overhaul the financial sector.  He wanted the regulatory loopholes that contributed to the crisis sealed off.  In response, Congress assembled a bill that was designed to cure a defective banking system and prevent a future financial catastrophe of that magnitude.  It was referred to as the Glass-Steagall Act.

          Over the next 60 years, the financial services industry operated smoothly, free from any serious threats to its stability.  However, in 1999, under intense pressure from bank lobbyists, Congress repealed the Glass-Steagall Act.  Almost instantaneously, banks began to consolidate and form huge bank holding companies.  Nine years later, the United States suffered its worst financial crisis since the Great Depression.
          As the United States economy descended into a recession, the American people became livid as big banks received billions of dollars while average Americans lost their homes.  In January 2010, President Obama seemed to recognize the anger of the American people when he asserted that taxpayers would never again be held hostage by the fat-cats on Wall Street.  He demanded that Congress assemble a bill that would prevent another financial catastrophe from occurring.  The end result was the enactment of the Reforming American Financial Stability Act (RAFSA), which is undoubtedly the most comprehensive economic reform package since the Great Depression.

          Although RAFSA contains many provisions that will certainly help protect consumers in the future, it fails to remedy the ailing financial sector by putting a band aid on a severed artery.  What needed to be addressed in this bill was the problem of too-big-to-fail financial institutions.  These financial behemoths have become so large and so interconnected that another taxpayer bailout is inevitable.  As we saw in 2008, the collapse of just one of these banks has a devastating effect on the entire economy.

          Unlike the Congress of 1933 that seized the opportunity to transform the economic landscape by enacting the Glass-Steagall Act, the Congress of 2010 delivered a watered-down bill that does nothing with regards to reducing the size of financial institutions.  A golden opportunity to repair a broken banking system has resulted in another example of how “business as usual” operates in Washington. Apparently, big banks are not only too interconnected to fail, but they are also too politically powerful to be disintegrated.

Christian Evans is an Associate Editor for Juris.  He is also a Case Note Editor for the Duquesne Business Law Journal.  Christian received his undergraduate degree from Boston University.  He will graduate from Duquesne University School of Law and the Katz School of Business at the University of Pittsburgh in June of 2012.  He can be contacted at ctevans82@gmail.com.