1. Glass-Steagall/Gramm-Leach-Bliley
Andrew Pape

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

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

5. 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.

6. 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

7. 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.

8. http://www. thefreemanonline

9. 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

10. 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

11. 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”

12. 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.

14. 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

15. 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.

16. 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

17. Harbinger of evil?

18. Sources http://banking.senate.gov/prel99/1022fsm.htm