Divest Investment Banking from Financial Institutions

Abstract:     
Congress must be applauded for the corporate governance reforms enacted in Sarbanes-Oxley Act of 2002, although some areas involving Banks and Brokerage houses need further reform. This paper argues that we need to cancel the spirit of the 1999 repeal of the 1933 Glass-Steagall Act by forcing Banks and Brokerages to divest their investment banking divisions. The repeal was justified in 1999 during the bubble phase of the stock market on the grounds that the Glass-Steagall Act was outdated in the era of the Internet and new derivative financial instruments. In light of Enron and numerous accounting scandals we argue that a divestiture of financial institutions will benefit (i) the stockholders of financial institutions, (ii) employees of financial institutions, (iii) stockholders of other corporations, (iv) management of other corporations, and (v) general public. It will curb some powers of the top management of financial corporations, and hence we expect them to oppose any breakup. We ague that the divestiture will be simpler, low cost and much easier to enforce than complex "Chinese Wall" type separations and self regulations proposed by the top management of financial corporations. Divestiture will remove a basic conflict of interest embedded in their structure. It will let SEC focus on finding the crooks and not get bogged down in micromanaging internal memos going back and forth within financial institutions.

Number of Pages in PDF File: 6

Keywords: banking, Enron, fraud

JEL Classification: G34, G28, D21, D43, D73, F36, M41

working papers series