| The Gramm-Leach-Bliley Act (GLBA) of 1999, | | | | the regulatory bodies responsible for the CRA. As a |
| repealed the portion of the Glass-Steagall Act of 1933 | | | | result, banks could not make the seemingly lucrative |
| that prohibited banks from consolidating with | | | | acquisition of investment houses without meeting the |
| investment houses while the GLBA also expanded the | | | | requisite quota of higher risk CRA loans, which only |
| influence of the Community Reinvestment Act of 1977 | | | | added more incentive for banks to make high-risk |
| which requires banks to make loans to higher-risk | | | | loans and delve deeper into the sub-prime mortgage |
| borrowers. Although the lethal economic brew | | | | business. |
| imposed by the GLBA was not exposed immediately | | | | The Creation of the First Financial Supermarket |
| after its passage due to the rapid appreciation of both | | | | Citibank, having been the lead lobbying force behind the |
| the housing and securities markets shortly thereafter, | | | | repeal of Glass-Stegall, had attempted to permanently |
| the financial crises that began to shake the world's | | | | merge with the three investment houses of |
| economic foundations in late 2007 caused many | | | | Smith-Barney, Shearson and Primerica for several |
| experts to begin to point back to this piece of 1999 | | | | years. Upon Glass-Stegall's repeal in late 1999, Citibank |
| legislation as its foremost catalyst. | | | | immediately made the mergers permanent under a |
| The Glass-Steagall Act | | | | new financial supermarket known as Citigroup. Former |
| Enacted in the wake of the Great Depression, the | | | | Clinton Treasury Secretary Robert Rubin was |
| Glass-Steagall Act established the Federal Deposit | | | | immediately rewarded for his efforts as the key |
| Insurance Corporation (FDIC) and established a variety | | | | proponent for the repeal of Glass-Steagall in |
| of banking reforms that including a provision prohibiting | | | | November of 1999 by being appointed to the Board of |
| banks from owning other financial companies. After | | | | Directors at Citigroup just as the Clinton Administration |
| the Untied States Congress held numerous hearings to | | | | was leaving office in December of that same year. In |
| investigate the causes of the 1929 market crash, it | | | | fact, Forbes reported that Rubin received over $17 |
| was determined that the mixing of the commercial and | | | | million in compensation and $33 million in stock options |
| investment banking industries in the 1920s generated a | | | | before resigning as Chairman of the Board for a now |
| high degree of fraud and conflicts of interest in | | | | financially distressed Citigroup in January of 2009. Not |
| securities activities. The 1933 Congress also | | | | so surprisingly, Marketwatch listed Rubin as one of the |
| prophetically reasoned that due to the inherent risks | | | | "10 most unethical people in business" shortly |
| associated with securities markets, securities losses | | | | thereafter. |
| could cause capitalization problems for banks and | | | | Banking Fusion Leads to Economic Fallout |
| threaten the integrity of bank deposits. In turn, because | | | | As feared by the supporters of Glass-Steagall and |
| the federal government insures these deposits, they | | | | critics of the CRA, Citigroup's losses from securities |
| would be responsible for paying tremendous sums if | | | | activities related to the sub-prime mortgage crisis and |
| banks were to deplete deposits as a result of | | | | the rampant financial distress that followed resulted in |
| securities losses. | | | | tens of billions of dollars of federal government |
| The Community Reinvestment Act | | | | support. Unfortunately, Citigroup was not alone in the |
| The purpose of the Community Reinvestment Act of | | | | post-1999 merger, securities losses and government |
| 1977 (CRA) was to encourage commercial banks to | | | | bailout category: Wachovia Bank acquired both A.G. |
| make loans in low and moderate income areas and to | | | | Edwards and Golden West, Bank of America |
| prohibit the discriminatory refusal of banks to lend in | | | | purchased Merril Lynch and Countrywide, J.P Morgan |
| these neighborhoods known as "redlining". Subsequent | | | | bought both Chase and Bear Stearns, and the list goes |
| CRA regulatory changes, such as implementing a | | | | on. |
| quota-based lending requirement system for banks, | | | | When the GLBA removed the protective walls |
| resulted in $467 billion in loans by CRA lenders to low | | | | between commercial and investment banks that |
| and medium income borrowers between 1993 and | | | | Glass-Steagall had previously held firmly in place, there |
| 1998 according to statistics reported by the U.S. | | | | was nothing preventing bank dealmakers from |
| Department of the Treasury in April of 2000. The | | | | colluding with investment house analysts to show |
| Treasury Department further reported that loans to | | | | positive results for clients to enhance their collective |
| these borrowers rose by 39% in the same period of | | | | bottom lines. Banks no longer needed to concern |
| time. In an article for the New York Post, noted | | | | themselves with the scrutiny imposed by neutral |
| economist Stan Liebowitz claimed that the expansion | | | | third-party security analysts when the level of due |
| of the CRA's reach in the 1990s encouraged a | | | | diligence from analysts within their own company is |
| loosening of lending standards throughout the banking | | | | much more favorable. Investment houses could freely |
| industry. Similarly, Austrian economist Russell Roberts | | | | mix sub-prime CRA mortgage debt with normal prime |
| wrote in a Wall Street Journal essay that CRA | | | | loans into a collateralized debt obligations (CDOs) |
| promoted low-income housing by pressuring lending | | | | before selling them off as mortgage-backed securities |
| institutions to lend to people who would otherwise be | | | | through a different arm of the same financial institution. |
| rejected as a bad credit risk. | | | | These financial supermarkets could actually make their |
| The Gramm-Leach-Bliley Act | | | | requisite quotas of high-risk CRA loans and pass them |
| After years of lobbying by the banking industry to | | | | on to investors with greater ease. |
| repeal the provisions of Glass-Steagall that erected a | | | | The transparency and scrutiny created when one |
| wall between commercial and investment banks, in | | | | company investigates, negotiates and ultimately |
| 1999 President Clinton's Treasury Secretary Robert | | | | purchases from another company was dissolved. Only |
| Rubin took the lead in urging fellow liberals in Congress | | | | those with conflicts of interest were permitted to |
| to join their counterparts across the aisle to ultimately | | | | weigh in, but why should they when they all stand to |
| pass the GLBA by bipartisan votes of 90-8 in the | | | | make the enormous profits realized in the financial |
| Senate and 362-57 in the House of Representatives. | | | | industry prior to 2008? Hopefully, once the federal |
| President Clinton signed the bill into law on November | | | | government completes its infusion of trillions of dollars |
| 12, 1999, but did so only after demanding that the | | | | into these ailing financial supermarkets, it can start to |
| GLBA require that mergers between commercial | | | | fix the core problem by repealing the GLBA and |
| banks and investment houses be strictly examined by | | | | rebuilding Glass-Steagall's walls. |