Without Glass-Steagall, Bank of America Repeated MFGlobal’s Crime

When John Corzine’s MFGlobal brokerage liquidated, taking hundreds of millions in its clients’ illegally pledged deposits with it, ex-FDIC Chair Sheila Bair wrote a column posing the question, what if a large commercial bank had done this with its depositor’s funds? It was one of Bair’s few public flirtations with calling for the Glass-Steagall Act to be restored.

Then came the “London Whale,” where a large commercial bank (JPMorgan Chase) did just that with its depositors’ funds. Then followed Wall Street’s December 2014 rampage over Congress, forcing repeal of a regulation which prohibited the big banks from backing their riskiest derivatives trades with their FDIC-insured commercial depository units.

Now Bank of America is under investigation by the Securities and Exchange Commission, for executing large, very complex securities transactions directly inside its largest customers’ depository accounts. BoA was doing this by making large loans to its large clients, with which its brokerage unit, Merrill Lynch, then purchased extremely complex securities products for those customers. Why? So that the bank would have lower net liabilities to its big depositors (because ostensibly it had made them loans whose repayment they owed), and therefore the bank would have to set less funds aside under bank regulations to cover its obligations to those clients. BoA would have more funds with which to “trade,” or speculate. In fact, BoA was freeing up its own funds for speculation, by making complex trades with its large clients’ money, and offering those clients a small “cut” of the bank’s resulting profits.

At any moment, the exact fate of MFGlobal’s unfortunate large brokerage clients (many of whom were farmers) was hanging over the heads of these large depositors of Bank of America.

There is no difference between this and the practice of National City Bank in the 1920s, of selling its depositors shares in the bank and its stock speculations — the practice exposed by Ferdinand Pecora which directly spurred passage of Glass-Steagall in 1933.

With the SEC investigation under way, Bank of America now states it ceased this practice two years ago — not likely — and that the Fed, its safety and soundness regulator, knew all about it — likely. At worst, the SEC will extract a civil fine. All the barriers to big bank crime are down until Glass-Steagall is restored.