As originally published on SeekingAlpha on March 31, 2009.
If the repeal of the Glass-Steagall Act of 1934 is the reason that we got into this financial mess, then the path to destruction began long before the intermingling of banks, brokerages, and insurances companies with the passage of the Gramm-Leach-Bliley Act of 1999. Republicans have justifiably accused the Democrats of the fall of the financial systems by allowing Democrat supported regulators to not do their respective jobs of regulating. Not to be outdone, the Democrats have accused the Republicans for the demise of the banking system through the effort to de-regulate. And in fact, this charge by the Democrats is also true. Acting in a bipartisan manner, the Democrats and Republicans have unanimously undermined the very system that they earlier created.
Now that we’re clear as to who is responsible for our current malaise, let’s look at the other parties that are vital to the repeal of the Glass-Steagall Act. First and foremost is the Federal Reserve. Once the politicians set the ball in motion the Fed picked it up and started running. The Fed’s stance on the matter was, “if anyone is gonna change things it might as well be in our favor.” To preempt any discussion of the matter, the Federal Reserve drew up its own vision of the way things should be. But there were those who didn’t quit agree with this vision.
Along comes the FDIC with an alternate view of the way things should work. The FDIC says, “Why should the Fed write the rules but we have to insure the failures without any input?” This eventually turned into a turf war between regulatory agencies. The question wasn’t about the sensibility of repealing the Glass-Steagall Act, instead the debate was about who was going to get the biggest piece of the regulatory pie.
Recognizing that the only debate regarding repealing Glass-Steagall was who gets the most regulatory power, the insurance, brokerage and banking industries decided to take action. Nothing puts the nail in the coffin more than ignoring the current law in anticipation of the expected change. The string of mergers that followed the Swiss Bank and Dillon, Read and Co. partnership in May of 1997 ensured that Glass-Steagall was effectively repealed.
Finally, the last participant in this process was the American public. The public lacked the understanding, or concern, that the repeal of such a law was holding back the flood that would eventually push our economy to the brink. Advocacy groups who routinely rail against the banks and the Federal Reserve had lost, in the eyes of the public, the credibility necessary to demonstrate why this time, as opposed to all the other times, things were different and we as the public needed to debate the issue of the repeal of Glass-Steagall Act.
Glass-Steagall is officially a relic of a bygone era. It seems that our politicians, both Democrat and Republican, will now have to create a new regulatory framework that will ensure their own viability as a going concern. All that is left is the turf war over who gets the 1% majority to run Congress and the White House. To bad the duopoly in government has a death grip on any and all competing ideas.
Timeline/Sources:
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July 1983: Treasury Secretary presents to the President the proposed bank industry deregulation that includes “both bank and thrift holding companies to engage in a wide range of securities, insurance, and other financial activities.” Rosenstein, Jay. "Reagan hears Treasury's dereg plan; growing opposition causes delay action." American Banker (July 8, 1983)
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July 11, 1983: President sends to Congress the Financial Institutions Deregulation Act. “Deregulation bill is sent to Congress: proposal would expand bank, thrift activities." American Banker (July 11, 1983)
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January 17, 1984: Treasury Secretary feels that competitors to the banking industry are "…chipping away at [the system]. If that continues and banks aren't given the identical opportunities to other financial services companies, the banking system's base will simply erode and could collapse.” Ringer, Richard. "Regan says Bush panel to finish report this week. (Donald T. Regan; George Bush)." American Banker (Jan 17, 1984)
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In February 1985: Acting general counsel Margery Waxman “recommends that Treasury Secretary James Baker add provisions empowering banks to underwrite mutual funds, and to allow bank holding companies to own securities brokerage houses, items missing from last year's [1984] Senate bill.” Naylor, Bartlett. "Will Baker, former bank attorney, fight hard for new banking laws?." American Banker (June 3, 1985)
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November 5, 1985: “George Gould, nominated to be Treasury undersecretary for domestic finance, seeks additional powers for banks to underwrite commercial paper and mutual funds.” Naylor, Bartlett. "Treasury to limit new bank powers quest, nominee says." American Banker (Nov 8, 1985)
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August 14, 1992: “Banking lawyer Peter Wallison, former general counsel at the Treasury Dept, is promoting the same ideas for bank reform he touted in the early days of the Reagan administration. Wallison believes that restrictions on capital should be relaxed and banks allowed to diversify into markets more lucrative than loans. He says Congress is too focused on capital and has weakened good deregulation legislation promoted by the Bush Administration.”Cummins, Claudia. "Former Reagan official still fighting for banks." American Banker (August 14, 1992)
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March 9, 1995: “Federal Reserve Board Chairman Alan Greenspan testified recently in favor of repealing the provisions of the Glass-Steagall Act that prohibit affiliations between investment banking firms and member banks.” Isaac, William M. "Fed plan for securities powers isn't prudence but turf war. " American Banker. (March 9, 1995)
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March 9, 1995: The proposal to repeal the Glass-Steagall Act was submitted to the Federal Deposit Insurance Corporation. The FDIC said that it was in favor of repealing the provision that prohibited banks from affiliating with investment banks. Isaac, William M. "Fed plan for securities powers isn't prudence but turf war. " American Banker. (March 9, 1995)
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May 16, 1997: Swiss Bank Corp. announces that it will buy investment bank Dillon, Read and Co. Ring, Niamh. "Swiss bank to acquire Dillon Read; fate of municipal division is unclear." The Bond Buyer (May 16, 1997)
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June 9, 1997: BankAmerica acquires investment bank Robertson Stephens. Treaster, Joseph B. "BankAmerica to Buy Robertson, Stephens Investment Company." The New York Times (June 9, 1997)
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July 7, 1997: NationsBank acquired investment bank Montgomery Securities. Haber, Carol. "Montgomery goes to NationsBank in rich and risky deal, some say." Electronic News (1991) 43.n2175 (July 7, 1997)
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November 15, 1999: President repeals Glass-Steagall Act by signing the Gramm-Leach-Bliley Act of 1999. Iowa Republican Jim Leach “hailed the successful bipartisan effort after decades of failure.” Anason, Dean. "Clinton Enacts Glass-Steagall Repeal." American Banker 164.219 (Nov 15, 1999)
