Glass-Steagall/Gramm-Leach-Bliley Andrew Pape

Agenda History and lead up to Glass- Steagall About Glass-Steagall (Banking Act of 1933) Unwinding of Glass-Steagall Gramm Leach Bliley Act

History During the 1920’s commercial banks became heavily involved in the stock market Speculation ruled Stock market crashed in October 1929 By 1933 11,000 banks had either failed or had to merge

Pecora Commission Began March 4th, 1932 Purpose was to investigate the causes of the 1929 stock market crash Concluded that conflicts of interest between commercial and investment banking contributed to the crash.

Pecora Commission cont. Common ownership of commercial and investment banks created problems including Jeopardizing depositors by investing their money in the stock market Loss of the public’s confidence in banks, which lead to bank runs The making of unsound loans Inability to provide honest investment advice to depositors because banks were conflicted by their underwriting relationship with corporations

Conflicts of Interest played out Banks were investing customers deposits in securities they underwrote Unsound loans were made to improve the price of securities or the financial position of a company in which the bank had invested its own assets Banks persuaded their customers to invest in securities they were under pressure to sell.

http://www. thefreemanonline http://www.thefreemanonline.org/featured/the-rise-and-fall-of-glass-steagall/

Provisions of Glass-Steagall Established Regulation Q Limited interest rate banks paid depositors Separated commercial and investment banking Established the FDIC Allowed Federal Reserve Board to vary reserve requirements as it wished

Arguments against Glass-Steagall Glass-Steagall restrictions were becoming obsolete Financial deregulation in foreign countries put American institutions at a competitive disadvantage Domestic firms would take capital abroad Banks are losing market share to strictly regulated independent securities firms Conflicts of interest can be prevented by enforcing regulation against them Combinations of commercial and investment banks would lead to diversification, decreasing overall risk

An Era of Deregulation Banks began lobbying congress in the 1960’s to loosen the restrictions under Glass-Steagall In 1986 Congress reinterpreted Glass-Steagall for the first time, allowing banks to derive 5% of gross revenues from investment banking In 1987, the Fed allowed banks to handle commercial paper, municipal bonds, and mortgage backed securities Re visit- “engaged principally”

Turning Point In 1998 banking behemoth Citicorp and insurance giant Travelers group merged. GLB had not passed yet. Citigroup had between 2-5 years to divest prohibited assets. Executives of Citigroup were confident that full repeal of Glass-Steagall would come soon.

http://banking.senate.gov/conf/

Provisions of Gramm-Leach-Bliley Allows securities firms and insurance companies to purchase banks Banks allowed to underwrite insurance and engage in real estate activities OCC regulates bank subsidiaries engaged in securities underwriting Fed oversees bank holding companies under which all real estate, insurance and large securities operations are housed

Phil Gramm’s take "The hallmark of the bill is that it will make an array of financial services available to every American consumer that will provide lower prices and one-stop shopping at financial supermarkets in every city and town in the country.

Financial Services Industry post Glass-Steagall Some large banks merging with securities market institutions to increase economies of scale (e.g. Chase and J.P. Morgan) In general much more overlap between banks and securities market institutions

Harbinger of evil?

Sources http://banking.senate.gov/prel99/1022fsm.htm http://en.wikipedia.org/wiki/Citigroup#Citicorp_and_Travelers_merger http://law.jrank.org/pages/7165/Glass-Steagall-Act.html http://firedoglake.com/2009/06/17/pecora-in-perspective-a-glossary-of-useful-terms/ http://www.thefreemanonline.org/featured/the-rise-and-fall-of-glass-steagall/ http://www.openthegovernment.org/sites/default/files/otg/dereg-timeline-2009-07.pdf