What Was Glass Steagall and Why Should We Bring It Back?
As TV Explains It:
NY Stock Exchange
America’s credit and commercial banking system was the brainchild of our first president’s treasury secretary, Alexander Hamilton. We started down the right road and the result was that we became the world’s leading industrial and agriculture power over the course of two centuries.
But as time went by, we strayed from the true path blazed by our forefathers and found ourselves economically mired in The Great Depression of the 1930s. More than four thousand banks in America closed their doors forever between 1929 and 1933 leaving depositors with more than four million dollars in losses. The Glass-Steagall Act of 1933 was a return to Hamilton’s principles of banking, which separated commercial banks that take deposits and make loans from investment banks that sell bonds and stocks. It was passed as a result of a congressional investigation that exposed recklessness, cronyism, and fraud in banking practices.
Playing fast and loose with banking practices again brought the country’s economy to the brink of collapse after Glass-Steagall's repeal in 1998. The resulting instability of U.S. financial institutions cost taxpayers almost twenty trillion dollars in bailouts and subsidies that were paid out in a desperate attempt to keep us from plunging headlong over the fiscal cliff.
Why was it repealed?
By the early 1980s, anti-regulation advocates from both political parties were enjoying a field day in Washington. Bit by bit they were kicking the props out from under our safeguards in our financial structure. Crisises like what happened to savings and loans establishments in mid-decade have not been completely salvaged even today. By early 1987, the Federal Reserve Board voted three to two to let banks once again engage in a range of securities underwriting activities. You would have thought this decision would have set off alarms for anyone who ever heard their fathers tell horror stories of what their families had lived through just fifty years earlier. But nobody was listening for alarms. There was simply too much money to be made.
Several members of the George H.W. Bush administration including Federal Reserve Chairman Alan Greenspan and Treasury Secretary James Baker may not have set out to weakened Glass-Steagall, but they certainly did. For example they let banks underwrite municipal bonds with an explanation that stated they were safe by definition. In 1991, the President Bush called on Congress to repeal the law outright. Although that effort was voted down in the House of Representatives, the anti-Glass-Steagall movement was underway.
During the presidency of Bill Clinton, Greenspan convinced regulators to raise the ceiling from ten to twenty-five percent on securities underwriting for bank holding companies that owned investment-bank affiliates. Treasury Secretary Robert Rubin clearly supported bigger and more diversified banks supposedly in order to increase the nation's global competiveness. Rubin went on to become the chairman of Citigroup Chairman.
A Republican-led Congress and Democratic President Bill Clinton in the mid 1990s introduced a new age of “full service,” "too-big-to-fail" financial institutions. November 12, 1999, Clinton signed the Financial Modernization Act into law, basically a repeal of Glass-Steagall, leading to the end of the longest crisis-free period in U.S. financial history. At the time, industry lobbyists argued that this modern experiment in deregulation would bring greater stability and competitiveness to the financial services industry.
Some House Democrats initially argued that the banks should not be given so much unregulated freedom. Most of them changed their minds after the bill added provisions that modestly expanded the Community Reinvestment Act, an effort to make lending products available to their low-income constituents. In the final count of votes, only eight Senators voted no: seven Democrats; Byron Dorgan, Barbara Boxer, Barbara Mikulski, Tom Harkin, Richard Bryan, Russ Feingold, Paul Wellstone; and one Republican, Richard Shelby of Alabama.
Some of the loudest voices for repeal were among its most conspicuous beneficiaries. Senator Phil Gramm, after retiring in 2002, went to work for UBS AG, a Swiss commercial bank that moved into investment banking. Rubin, the former Treasury Secretary, took that Citigroup chairmanship with a reported initial annual compensation of $40 million. Citigroup lost $27.7 billion in 2008 and is second only to AIG in the huge sums of taxpayer money it ended up receiving in a desperate effort to keep its doors open.
Another advocate of repeal, Lawrence Summers, succeeded Rubin as Treasury Secretary and now heads President Obama’s White House Council of Economic Advisors.
Economists have laid most of the damage to the country at the feet of pure investment banks such as MorganStanley, Bear Stearns, and Lehman Brothers, and insurance company, AIG.
Commercial banks played their part as well as buyers and sellers of mortgage-backed securities, credit-default swaps, and other explosive financial derivatives. Without the weakening and ultimate repeal of Glass-Steagall, the banks would have been barred from most of these activities. The market and appetite for derivatives would then have been far smaller, and Washington might not have felt a need to rescue the very institutions that created the crisis.
Greenspan, while not outright defending the regulations of Glass-Steagall, has stated since the financial fall-out of 2008 that if financial institutions are truly too big to fail, they just might be too big to exist. We can only hope our legislators are listening and learning from the mistakes of the not-so-distant past. The Great Depression might be too long ago for them to learn from, but we are still reeling from this last debacle. Surely our elected officials can recall the events of just a couple of years ago.
Three bills to restore Glass-Steagall are now pending in Congress. A bipartisan group of four senators including Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) have introduced an updated version of the landmark act aimed at reining in risk at America's largest banks.
The new bill is also cosponsored by Senators Maria Cantwell (D-Wash.) and Angus King (I-Maine). Cantwell and McCain previously introduced the plan as an amendment to the 2010 Dodd-Frank financial reform bill, but that bill was never approved. Believe it or not, after the economic crisis of recent years, most federal regulators are still opposed to reinstating Glass-Steagall. They argue it would force big banks to spin off hundreds of billions of dollars worth of business into independent firms. But the four legislators who have authored this pending bill don’t see that result as a bad thing.
"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," Warren said. "The four biggest banks are now thirty percent larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk."
If readers of this hub have a strong opinion on this legislation, I would encourage them to contact their own senators and congressmen/women and express that opinion while this issue is being debated. Someone once said, "It is never too late to do the right thing." And sometimes our only option is to rebuild from the ashes.
Points of View - Senator Elizabeth Warren
President Bill Clinton
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