A long debate on the Glass-Steagall Act in the House of Lords Nov. 26-27 saw the U.K.’s Cameron government battling on behalf of City of London banks, to avoid the prospect that Glass-Steagall bank separation be set up as the near-term successor to Britain’s so-called “ring-fencing” bank policy. The Cameron government and its supporters, using lying arguments very much like those in the American Banking Association’s anti-Glass-Steagall letters, fought efforts by Labour and Conservative Lords that “full Glass-Steagall separation” should result from any review of the “electrified ring-fencing” system in the next few years, which finds that system is not ending speculation with bank deposits or “too-big-to-fail” banking.
Winning the vote only by 226-217, the government demanded that such Glass-Steagall separation could not be embedded as a “reserve power” in the Financial Services Bill being enacted, but would require completely new legislation. “Glass-Steagall is not a supplement to ring-fencing, it is a separate alternative which would replace it; it is a game-changer” insisted Treasury Commercial Secretary Lord Deighton in the debate.
As the Lords were debating, a new Royal Bank of Scotland (RBS) Bank scandal emerged which cries out for Glass-Steagall. Reuters and BBC broke the story that RBS — nationalized for the past five years — and Lloyds Bank have been using “interest-rate swap” derivatives (not permitted to banks under Glass-Steagall) to force small and medium-sized businesses (SMEs) into bankruptcy liquidation, in order to speculate in those companies’ assets with their securities divisions (prohibited by Glass-Steagall).
An example from Reuters’ report: “Eddie and Cheryl Warren bought the Bold hotel in Southport for £3.7 million, with a loan from RBS. In the U.K., mortgages are floating-rate, and the bank forced them to take out an interest-rate swap to protect them against rising rates. When rates fell, they had to pay penalties on the swap of £120,000 per year; but even so, they always remained current on all their payments. That notwithstanding, RBS declared that thanks to the rate swap, the Warrens were deeply underwater. The bank declared the hotel to be worth just £1.8 million, forced the Warrens into insolvency, and then ended up selling the hotel to — yes — West Register, for the bargain-basement price of £1.4 million. The Warrens lost everything, including their home; they are now divorcing. As it happens, West Register is RBS’s own property division.”
Supporters in the Lords of Andrew Tyrie, chairman of the House of Commons Treasury Committee, argued for Glass-Steagall separation; they included Lord Barnett, Lord Eatwell, Baroness Cohen of Pimlico, Lord Nigel Lawson, Lord Hamilton of Epsom, and the Archbishop of Canterbury. Lord Hamilton said, “I know that many people in the City today are, as we speak, working on ways to get round the ring-fence and to make sure that money held in clearing [commercial] banks can be used in investment banks. The problem is that there is an enormous financial incentive to get round this ring-fencing. If that incentive remains when you do not have separation, it is only a matter of time.”
The government “gave ground” by agreeing to a review of ring-fencing in three years, and raising the possibility of a British “Volcker Rule.” These concessions were emphasized by the media, but dismissed as irrelevant by the Glass-Steagall advocates.