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Almost-official 2016 Republican nominee Donald Trump has wanted to “Make America Great Again” for some time now, and since he came away the victor after a brutal primary season, Trump has slowly started to shape his presidential platform.
On Monday, Trump’s campaign manager, Paul Manafort, told a group of reporters that the official GOP platform is set to include a stipulation calling for the breakup of the United States’ biggest banks.
According to American Banker, Manafort said that "There has been some added components to [the platform] that reflect the issues that Mr. Trump has raised during the course of the campaign. We also call for reintroduction of the platform of Glass-Steagall so that would create barriers between what the big banks can do and avoid some of the crisis that led to 2008…The Obama-Clinton years have passed legislation that has been favorable to the big banks, which is why you see all the Wall Street money going to her."
What is the Glass-Steagall Act?
The Glass-Steagall Act (GSA) came in the wake of the 1929 stock market crash, and it separated investment and commercial banking activities. At the time, improper banking activity—i.e. commercial banks’ overzealous involvement in stock market investment—was thought to be the main culprit of the market crash and the following Great Depression.
The GSA created regulatory firewalls between commercial banking and investment banking, which were both separately controlled. The act stipulated that only 10% of commercial banks’ total income could come from securities, while an exception allowed these banks to underwrite government-issued bonds. It also aimed to prevent banks’ use of deposits in the case of a failed underwriting situation.
While debates on whether or not the GSA was an overreaction to the crisis lingered for years, the GSA was repealed in 1999 under President Clinton. Bringing back the act has been on the to-do list of many on the left, including Senator Bernie Sanders. Hillary Clinton, however, has argued for regulation in the so-called shadow banking system, bringing her a lot of grief from progressives.
Banks that should watch out
Trump’s commitment to break up the big banks is an obvious way to both appeal to and capitalize on the skepticism that has remained since the 2008 financial crisis. With the backing of the GOP, a Glass-Steagall revival would have a lot more credibility, but is in stark contrast with long-running Republican opposition to financial regulation in any form.
The repeal of the GSA was seen at the time as a way to help American banks grow larger, as well as better compete in the global economy. The biggest banks today are a lot bigger than they once were, due mostly to mergers and acquisitions that could not have happened before 1999. For example, when JPMorgan merged with Chase Manhattan in September of 2000, its market cap was roughly $156 billion. Today, the company is valued at over $232 billion.
So which big banks should be on the lookout for the GSA reinstatement? America’s biggest, of course.
As the top five biggest banks in the country, JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) , Citigroup Inc. (C - Free Report) , Wells Fargo (WFC - Free Report) , and U.S. Bancorp (USB - Free Report) could potentially be dismantled if Trump wins the presidency.
Investment firms like Goldman Sachs (GS - Free Report) , Morgan Stanley (MS - Free Report) , Credit Suisse , and Barclays Capital (BCS - Free Report) could also face increased regulation along with their commercial banking counterparts.
Currently, these companies fall in either the Banks-Major Regional or Financial-Investment Banks industries on the Zacks Industry Rank, which reside in the bottom 16% and bottom 6%, respectively, of all industries ranked. If the GSA is reinstated, not only will major banks be negatively impacted, but their respective industries could fall even farther.
Bottom Line
While there is a clear anti-Wall Street movement in Election 2016, and Trump is obviously banking on it—pun intended—it’s important to note that the chances of a new version of Glass-Steagall passing in a Republican-ruled Congress are incredibly slim. But the fact that Trump, the Republican standard-bearer, is appearing to be on the left of Clinton, the Democratic standard-bearer, on financial reform is incredible, and something investors in the banking industry should keep an eye on.
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These Big Banks Could Lose If Donald Trump Wins
Almost-official 2016 Republican nominee Donald Trump has wanted to “Make America Great Again” for some time now, and since he came away the victor after a brutal primary season, Trump has slowly started to shape his presidential platform.
On Monday, Trump’s campaign manager, Paul Manafort, told a group of reporters that the official GOP platform is set to include a stipulation calling for the breakup of the United States’ biggest banks.
According to American Banker, Manafort said that "There has been some added components to [the platform] that reflect the issues that Mr. Trump has raised during the course of the campaign. We also call for reintroduction of the platform of Glass-Steagall so that would create barriers between what the big banks can do and avoid some of the crisis that led to 2008…The Obama-Clinton years have passed legislation that has been favorable to the big banks, which is why you see all the Wall Street money going to her."
What is the Glass-Steagall Act?
The Glass-Steagall Act (GSA) came in the wake of the 1929 stock market crash, and it separated investment and commercial banking activities. At the time, improper banking activity—i.e. commercial banks’ overzealous involvement in stock market investment—was thought to be the main culprit of the market crash and the following Great Depression.
The GSA created regulatory firewalls between commercial banking and investment banking, which were both separately controlled. The act stipulated that only 10% of commercial banks’ total income could come from securities, while an exception allowed these banks to underwrite government-issued bonds. It also aimed to prevent banks’ use of deposits in the case of a failed underwriting situation.
While debates on whether or not the GSA was an overreaction to the crisis lingered for years, the GSA was repealed in 1999 under President Clinton. Bringing back the act has been on the to-do list of many on the left, including Senator Bernie Sanders. Hillary Clinton, however, has argued for regulation in the so-called shadow banking system, bringing her a lot of grief from progressives.
Banks that should watch out
Trump’s commitment to break up the big banks is an obvious way to both appeal to and capitalize on the skepticism that has remained since the 2008 financial crisis. With the backing of the GOP, a Glass-Steagall revival would have a lot more credibility, but is in stark contrast with long-running Republican opposition to financial regulation in any form.
The repeal of the GSA was seen at the time as a way to help American banks grow larger, as well as better compete in the global economy. The biggest banks today are a lot bigger than they once were, due mostly to mergers and acquisitions that could not have happened before 1999. For example, when JPMorgan merged with Chase Manhattan in September of 2000, its market cap was roughly $156 billion. Today, the company is valued at over $232 billion.
So which big banks should be on the lookout for the GSA reinstatement? America’s biggest, of course.
As the top five biggest banks in the country, JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corp. (BAC - Free Report) , Citigroup Inc. (C - Free Report) , Wells Fargo (WFC - Free Report) , and U.S. Bancorp (USB - Free Report) could potentially be dismantled if Trump wins the presidency.
Investment firms like Goldman Sachs (GS - Free Report) , Morgan Stanley (MS - Free Report) , Credit Suisse , and Barclays Capital (BCS - Free Report) could also face increased regulation along with their commercial banking counterparts.
Currently, these companies fall in either the Banks-Major Regional or Financial-Investment Banks industries on the Zacks Industry Rank, which reside in the bottom 16% and bottom 6%, respectively, of all industries ranked. If the GSA is reinstated, not only will major banks be negatively impacted, but their respective industries could fall even farther.
Bottom Line
While there is a clear anti-Wall Street movement in Election 2016, and Trump is obviously banking on it—pun intended—it’s important to note that the chances of a new version of Glass-Steagall passing in a Republican-ruled Congress are incredibly slim. But the fact that Trump, the Republican standard-bearer, is appearing to be on the left of Clinton, the Democratic standard-bearer, on financial reform is incredible, and something investors in the banking industry should keep an eye on.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>