PHILADELPHIA — The resurrection of Glass-Steagall has proven surprisingly popular among the rank and file of both political parties, but the lawmakers who would theoretically implement the Depression-era law's reinstatement appear wary of the idea.
Much like their Republican colleagues last week, Democratic lawmakers at the convention here were skeptical of embracing such a plan, unsure of what it would look like.
"The old Glass-Steagall wasn't an effective law," said Rep. Brad Sherman D-Calif., noting it mainly separated commercial and investment banking. "You show me a small bank that also has an affiliation with an auto insurance company and I will show you an institution that combined does not pose a risk to our economy."
While the GOP platform simply calls for a return to Glass-Steagall, the Democratic one does allow for more leeway, calling for a modernized version of the 1930s law. But lawmakers — even those within the same party — are miles apart on what that should be.
Sherman favors legislation he introduced along with Sen. Bernie Sanders, D-Vt., that would require the Treasury secretary to identify systemically risky commercial banks, investment banks, hedge funds and insurance companies in the first 90 days of the next administration and break them up into smaller pieces.
"It is size that should matter," Sherman said. "It is 'too big to fail' … not 'too multifaceted to fail.' "
But other Democrats said the Dodd-Frank Act of 2010 already effectively counted as a modern version of Glass-Steagall, pointing to the Volcker Rule, which bans banks from proprietary trading and investing in hedge and equity funds.
"I feel that Dodd-Frank was a more modernized version, along with the Volcker Rule, that inhibited proprietary trading, proprietary investments and so forth," said Rep. Carolyn Maloney, D-N.Y. "I feel that the Volcker Rule is a modernized version of Glass-Steagall."
Rep. Ed Perlmutter, D-Colo., meanwhile, supports a different bill that would give banks a break from Basel III capital standards and company-run stress tests if they maintain a 10% simple leverage ratio and have a more traditional business model.
"Those banks that are simply staying in the commercial banking sphere and not getting into the investment banking, underwriting bigger risks, I want to give them some additional relief," Perlmutter said. "So it isn't Glass-Steagall, but kind of."
Rep. Jeb Hensarling R-Texas, who chairs the House Financial Services Committee, has proposed a bill that would also allow banks that have a 10% simple leverage ratio to be able to choose an alternative, simpler regulatory regime. But Perlmutter said holding a lot of capital doesn't go far enough.
"He has the capital piece, but he doesn't look at the investment banking versus commercial banking component," Perlmutter said. "He just says, 'Look, I don't care how big you are, I don't care what you are doing, you have this much amount of capital that is enough.' I am saying no, there has got to be an additional component, which is this recognition of the additional risk that you take when you go into underwriting a risk instead of just making a traditional loan."
Policy experts, including Larry Summers, who served as Treasury secretary under President Bill Clinton and helped repeal Glass-Steagall in 1999, said bringing it back would do very little to curb systemic risk.
"If you are looking at preventing another 2008, you have to ask what it is you are preventing," he said during an event sponsored by Politico here. "If you are preventing another Lehman, it wasn't implicated at all by Glass-Steagall and was smaller. … If you are looking at preventing another AIG, it wasn't implicated by Glass-Steagall either."
Summers said he was not trying to protect big banks, "but the argument [that] the place to start is with Glass-Stegall legislation from 1933 in a very different world, it is very hard for me to see."
Summers said he supports Democratic presidential nominee Hillary Clinton's call to regulate the so-called shadow banking sector more effectively.
"I think there is a very aggressive agenda that needs to be pursued, particularly with respect to shadow banking; also with respect to assuring resolvability; also with respect to making sure that the capital and liquidity cushions are not just large in measured form, but are very carefully monitored in realistic ways," he said.
While Democratic policymakers were perplexed by Glass-Steagall, the delegates on the floor of the convention were not. That was particularly true for supporters of Sanders, who nearly succeeded in helping the progressive candidate become the Democratic presidential nominee.
"I do support" breaking up the banks because "banking has gotten very monopolized, the same way the airlines have gotten monopolized, and that has gotten to be a very serious threat to entrepreneurship and to democracy," said Devante Lewis, a delegate and Sanders backer from Louisiana.
It's better, he added, when "you have more competition and smaller banks" and "I can go down the street to the mom-and-pop shop and I know the bankers personally."