Glass-Steagall Act vs. Gramm Leach Bliley Act Presentation by Lauren Jespersen BA 543 - Lauren Jespersen 11/16/2018

Agenda History of Glass-Steagall History of Gramm-Leach-Bliley Today’s Implications Short video of we have time http://www.youtube.com/watch?v=veAOoQEy0PI&feature=autoplay&list=PL2914563753111555&index=35&playnext=3 BA 543 - Lauren Jespersen 11/16/2018

Introduced banking reform, some designed to stop speculation The Glass Steagall act of 1933 in response to the economic crisis starting in 1929 (now known as the Great Depression) Introduced banking reform, some designed to stop speculation Introduced the separation of banking by business – commercial or investment banking Established the Federal Depository Insurance Corporation (FDIC) to prevent “bank runs” Marked the start of the Keynesian economic era Sen. Carter Glass (D—Va.) and Rep. Henry B. Steagall (D—Ala.-3), the co-sponsors of the Glass–Steagall Act. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Great Depression The causes of the Great Depression are widely speculated, but it is a common belief that the failure of the U.S. stock market was the start of a world-wide economic slide. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Great Depression Speculation is thought to have played a large role in the crash during October of 1929 Insider trading was common practice and the general public was taken for a ride BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Great Depression At the time, financial institutions were allowed to participate in the investment and commercial depository disciplines under the same roof, allowing for widespread speculation and manipulation of the market by individual financial giants. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Stopping Speculation Speculation in the financial markets with the use of commercial deposits as collateral had put a huge burden on the tax payers by putting their accounts at risk. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Stopping Speculation Using commercial deposits as backing for risky investments (real estate development) cause the banking system to collapse in early 1933. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Stopping Speculation Allowing large payers in the financial industry to speculate with commercial accounts gave the players more influence within the market so that one single player could manipulate the entire market in order to maximize profits. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Regulation In the aftermath of the collapse of the banking system, it was apparent that some regulation was needed in order to prevent a future crisis. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Regulation Giants like The House of Morgan were told that they could be not be both a commercial bank and an investment firm. This caused the creation of J.P. Morgan & Co. (commercial) and Morgan Stanley (investment). BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall – Regulation This cause the majority of the nations financial holdings to be spread out over more institutions rather than have them concentrated in a select few. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall -- FDIC Prior to Glass-Steagall, commercial banks were not insured, and while it is common practice to only keep a portion of the banks deposits at the bank, “banks runs” were detrimental to the banking system. BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall -- FDIC Established the FDIC as a temporary government corporation Gave the FDIC authority to provide deposit insurance to banks Gave the FDIC the authority to regulate and supervise state nonmember banks Funded the FDIC with initial loans of $289 million through the U.S. Treasury and the Federal Reserve BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall -- FDIC Extended federal oversight to all commercial banks for the first time Separated commercial and investment banking Prohibited banks from paying interest on checking accounts Allowed national banks to branch statewide, if allowed by state law. Accounts were insured up to $2,500 in 1934 – in 2008, $250,000 BA 543 - Lauren Jespersen 11/16/2018

Glass-Steagall -- Keynesian The Great Depression began a movement for more government regulation and federal expenditures In 1929, federal expenditures made up 3% of the GDP By 1933, the national debt was 40% of the GDP In 2009, the national debt is an estimated 80% of the GDP BA 543 - Lauren Jespersen 11/16/2018

Gramm-Leach-Bliley Act Also known as the Financial Services Modernization Act of 1999 Sen. Phil Gramm (R, Texas), Rep. Jim Leach (R, Iowa), and Rep. Thomas J. Bliley, Jr. (R, Virginia), the co-sponsors of the Gramm–Leach–Bliley Act. BA 543 - Lauren Jespersen 11/16/2018

Gramm-Leach-Bliley Act (GLB Act) Repealed portions the Glass-Steagall Act of 1933, allowing commercial banks, investment banks, securities firms, and insurance companies to consolidate. BA 543 - Lauren Jespersen 11/16/2018

Gramm-Leach-Bliley -- Motivation Repeal of Glass-Steagall was in the works since the 80’s Merger of Citicorp and Travelers Insurance in 1998 was given temporary waiver to circumvent the Glass-Steagall Act BA 543 - Lauren Jespersen 11/16/2018

Gramm-Leach-Bliley -- Arguments For Against Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms. Conflicts of interest characterize the granting of credit (that is to say, lending) and the use of credit (that is to say, investing) by the same entity, which led to abuses that originally produced the Act. http://digital.library.unt.edu/ark:/67531/metacrs9065/m1/1/high_res_d/IB87061_1987Jun29.pdf BA 543 - Lauren Jespersen 11/16/2018

Gramm-Leach-Bliley -- Arguments For Against The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses. BA 543 - Lauren Jespersen 11/16/2018

Today’s Implications Many people point to the Gramm-Leach-Bliley Act as one of the causes of the 2007 subprime mortgage financial crisis BA 543 - Lauren Jespersen 11/16/2018

Today’s Implications  Nobel Prize winning economist Joseph Stiglitz has also argued that the GLB Act helped to create the crisis. “As a result, the culture of investment banks was conveyed to commercial banks and everyone got involved in the high-risk gambling mentality.” BA 543 - Lauren Jespersen 11/16/2018

Today’s Implications Senator Phil Gramm defends his bill by saying "...if GLB was the problem, the crisis would have been expected to have originated in Europe where they never had Glass–Steagall requirements to begin with. Also, the financial firms that failed in this crisis, like Lehman, were the least diversified and the ones that survived, like J.P. Morgan, were the most diversified. BA 543 - Lauren Jespersen 11/16/2018

Today’s Implications Nobel Prize-winning economist Paul Krugman has called Senator Phil Gramm "the father of the financial crisis" due to his sponsorship of the GLB Act. BA 543 - Lauren Jespersen 11/16/2018

Today’s Implications Senator Phil Gramm defends his bill by saying that the country "had become a nation of whiners" in a "mental recession.“ BA 543 - Lauren Jespersen 11/16/2018

Today’s Implications Nobody listened to Senator Byron Dorgan (D, North Dakota) C-SPAN video http://www.youtube.com/watch?v=veAOoQEy0PI&feature=autoplay&list=PL2914563753111555&index=35&playnext=3 BA 543 - Lauren Jespersen 11/16/2018

Questions Thank you for listening BA 543 - Lauren Jespersen 11/16/2018