President Donald Trump is considering breaking up the nation’s biggest banks, a vow he had made during the presidential campaign then seemed to put on the back burner.
In an interview Monday with Bloomberg News, Trump said he is “looking at that right now.”
Major averages slipped as the news broke, then rebounded, while government bond yields hit their highs of the day.
Bank stocks rallied, with investors taking a win-win view: Breaking up the big banks would open business opportunities for smaller institutions, while the large Wall Street firms would be worth more as separate entities than they are combined.
“The theory has always been the sum of the parts is worth considerably more than the whole,” said analyst Dick Bove, vice president for equity research at Rafferty Capital Markets. “You might find a lot of investors who say that (if) they’re going to break up these banks, they’re more [valuable] in pieces than they are together, I’m going to buy them.”
During the presidential campaign, Trump called for a “21st century” version of the 1933 Glass-Steagall law that required the separation of consumer and investment banking. The 2016 Republican party platform also backed restoring the legal barrier, which was repealed in 1999 under a financial deregulation signed by then-President Bill Clinton.
A handful of lawmakers blame the repeal for contributing to the 2008 financial crisis, an argument that Wall Street flatly rejects. Trump couldn’t unilaterally restore the law; Congress would have to pass a new version.
Trump officials, including Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn, have offered support for bringing back some version of Glass-Steagall, though they’ve offered scant details on an updated approach. Both Mnuchin and Cohn are former bankers who worked for Goldman Sachs Group Inc.
The KBW Bank Index of 24 major U.S. lenders had climbed as much as 1.2 percent before Trump’s comment, before dropping about 1 percentage point. It soon recovered most of that, and was up 0.9 percent as of 1:07 p.m. in New York. Firms including JPMorgan Chase & Co. and Bank of America Corp., the nation’s two largest banks, were among companies that swooned.
The Glass-Steagall law essentially split banking into two categories: deposit-taking companies backed by taxpayers that primarily made loans to businesses and consumers, and investment banks and insurers that trade and underwrite securities and create or focus on other complex instruments. Severing those businesses would prevent Americans’ nest eggs from flowing into more volatile capital markets, Congress reasoned at the time.
GRIFFIN: I’M IN FAVOR OF BREAKING UP BIG BANKS!
GRIFFIN: I'M IN FAVOR OF BREAKING UP BIG BANKS. because he competes with them?
— zerohedge (@zerohedge) May 1, 2017