Originally posted at Naked Capitalism
I’ve seen some pretty brazen performances over the years, but this one is a standout in a bad way. Steve Mnuchin tells Elizabeth Warren, with a straight face, that Trump’s campaign pledge to implement Glass Steagall has nada to do with breaking up banks. He also makes the utterly false claim that separating commercial and investment banks would hurt small bank lending. The integration between small business activities and investment banking is nada, save at most for brokerage and investmetn management targeting the more successful small business owners. That has bupkis to do with lending.
In fact, we’ve discussed repeatedly that large and even medium sized banks have exited small business lending almost entirely. Nothing Trump can do will bring it back because they don’t have the infrastructure and don’t want to rebuild it. In the hoary old ages of my youth, the big banks had tow year credit officer training programs. Among other things, some graduates of those courses would eventually become branch manager, which in those days had more autonomy than now. One of their big jobs was to review and approve more complex, character-based loans, meaning to small businesses and local developers.
Thanks to Wall Street poaching more credit officers during the debt market boom of the 1980s, the rise of securitization, and the tender ministrations of consultants like McKinsey, banks moved away from the model of the branch manager as expert in his local economy and accordingly having some latitude to extend credit to branches as retail stores offering standardized products, and lending based on FICO scores. Lending to small businesses in this model dwindled to lending against collateral, like the owner’s residential or business real estate or other company assets that have resale value. Cash flow based lending has become rare save for much larger businesses than in the past.
So what is the real reason for refusing to break up the banks? The big reason is is deprive the very large capital markets players of the ability to use bank deposits to fund derivative positions.
Do watch this exchange with Warren. As the lawyers like to say, res ipsa loquitur.