The Repeal of the Glass Steagall Act - Right Or Wrong

Historical Factsact was in direct opposition of the goals of the Glass
The Glass-Steagall Act of 1933 established theSteagall Act and the Bank Holding Company Act of
Federal Deposit Insurance Corporation (FDIC) and1956 which prevented the combining of securities,
became effective on January 1, 1934 for the purposeinsurance, and banking. The Gramm-Leach-Bliley Act
of banking reform. It was created in response to thewas passed to legalize these mergers on a
stock market crash when people lost everything theypermanent basis, known today as the "financial
had. Encouraging people to start saving again and toservices industry". The bills were passed by a
build confidence in the American banking system, thisRepublican majority, and the legislation was signed into
act set more stringent capital requirements andlaw by President Bill Clinton on November 12, 1999. This
provided depositors with insurance on their depositsvictory for the banking industry which worked
beginning at $2,500 worth of coverage. Today,vigorously since 1980 to have the Glass-Steagall Act
depositors have $100,000 coverage on their depositsrepealed now had unprecedented power in uncharted
per account. The Glass-Steagall Act also banned anyterritory.
connection between commercial banks andConclusion
investment banking for the purpose of preventingElizabeth Warren co-author of ALL YOUR WORTH:
market speculation and causing future banking failures.The Ultimate Lifetime Money Plan (Free Press, 2005)
(ISBN 0-7432-6987-X) is one of the five outside
- The first Glass-Steagall Act was passed in Februaryexperts who constitute the Congressional Oversight
1932 in an effort to stop deflation, and expanded thePanel of the Troubled Asset Relief Program, has
Federal Reserve's ability to offer rediscounts on morestated that the repeal of this act contributed to the
types of assets such as government bonds as well asglobal financial crises of 2008-2009.
commercial paper and providing financing to banks orSenator Byron Leslie Dorgan (D) North Dakota was
other financial institutions. One of the provisions of theand is one of the very few national political leaders
Glass-Steagall Act is Regulation Q which allowed thewho said, and is now saying, that the de-regulation of
Federal Reserve to regulate interest rates in savingsthe financial system signed into law by Clinton on Nov.
accounts. It also prohibited bank holding companies12, 1999 was a horrible mistake.
from owning other financial companies. For example, aSenator Byron May 6, 1999 on the deregulation of
stock brokerage firm could not own an insurance1999 said, "This bill will, in my judgment, raise the
company or a bank and vice versa.likelihood of future massive taxpayer bailouts". The
- The second Glass-Steagall Act, passed on June 6,New York Times reported that Senator Dorgan
1933, was officially named the Banking Act of 1933stated, "I think we will look back in 10 years' time and
and introduced the separation of bank types accordingsay we should not have done this but we did because
to their business (commercial and investment banking).we forgot the lessons of the past, and that which is
Hence, the FDIC was established and provided andthrough in the 1930's is true in 2010".
insured bank depositors with coverage.The year before the repeal, sub-prime loans were just
Repealing the first Glass-Steagall Actfive percent of all mortgage lending. The repeal
On March 31, 1980, President Carter signed into law theallowed the creation of mortgage banking products
Depository Institutionsthat were aggressive in nature with no underwriting
Deregulation and Monetary Control Act of 1980, thecommon sense. By the time the credit crisis peaked in
most important federal legislationrelating to the financial2008, sub-prime loans were approaching thirty percent.
community since the 1930s. The act has nine titlesAs a mortgage banker and with extensive knowledge
covering a wide range of subjects, including reserveof the Glass Steagall Act of 1933, and the repealing of
requirements, access to and pricing of Federalit in 1999, I conclude that repealing the Glass-Steagall
Reserve services, and a phase-out of Regulation QAct had a direct negative impact and was a major
and new powers for thrift institutions.contributor to the collapse of the financial market in
Repealing of the second Glass-Steagall Act2008-2009. The subsequent boom in the sub-prime
The bill that ultimately repealed the Act in its entiretymarket allowed many unqualified individuals to become
was introduced in the Senate by Phil Gramm, (R)homeowners and were saddled with ridiculous loans
Texas and in the House of Representatives by Jimmade available by the aggressive products that
Leach, (R) Iowa and Tom Bliley, (R) Virginia which wasgreedy financial institutions invented to line their own
known as The Gramm-Leach-Bliley Act. Passing thispockets with no warning to prospective homeowners.
bill gave control to banks, securities firms and insuranceThe laws that previously guarded against such wanton
companies to affiliate under common ownership whichpractice conveniently vanished. Many unscrupulous
was previously prohibited under the Glass-Steagall Act.agents, brokers and lenders worked together to rake
For example, Citicorp (a commercial bank holdingin huge profits while unwitting would be homeowners
company) merged with Travelers Group (an insurancethought they were getting a piece of the "American
company) in 1998 to form the conglomerate Citigroup,dream". Laws governing the separation of institutions
a corporation combining banking, securities andthat deal with capital markets and the traditional
insurance services under a house of brands thatdeposit-taking and working-capital finance markets
included Citibank, Smith Barney, Primeria and Travelers.must exist in order to create stability, accountability and
This combination was announced in 1993 and finalizedsafeguard against such economic disaster from
in 1994. The Gramm-Leach-Bliley Act established thehappening again.
Federal Reserve as an umbrella supervisor. The new