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milpo (44.43)

Repeal of The Glass-Steagall Act OR The Republican Orgy of Greed OR Sandy Weill-The "Good" Soldier

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March 14, 2009 – Comments (7)

 

It's worth reviewing the creation and ultimate destruction of the Glass-Steagall Act.

Gramm-Leach-Bliley Act of 1999.

The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by Republican majorities on party lines by a 54-44 vote in the Senate[12] and by a 343-86 vote in the House of Representatives[13]. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bipartisan bill resolving the differences was passed in the Senate 90-8 (1 not voting) and in the House: 362-57 (15 not voting). Having majorities large enough to override any possible Presidential veto, the legislation was signed into law by President Bill Clinton on November 12, 1999. [14]

A chronology tracing the life of the Glass-Steagall Act, from its passage in 1933 to its death throes in the 1990s, and how Citigroup's Sandy Weill dealt the coup de grâce.

1933

Glass-Steagall Act creates new banking landscape

Following the Great Crash of 1929, one of every five banks in America fails. Many people, especially politicians, see market speculation engaged in by banks during the 1920s as a cause of the crash.

In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall (D-Ala.) introduce the historic legislation that bears their name, seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors. The new law bans commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage). The act also establishes the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits, and strengthens the Federal Reserve's control over credit.

The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drums up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.

In 1956, the Bank Holding Company Act is passed, extending the restrictions on banks, including that bank holding companies owning two or more banks cannot engage in non-banking activity and cannot buy banks in another state.

1960s-70s

First efforts to loosen Glass-Steagall restrictions

Beginning in the 1960s, banks lobby Congress to allow them to enter the municipal bond market, and a lobbying subculture springs up around Glass-Steagall. Some lobbyists even brag about how the bill put their kids through college.

In the 1970s, some brokerage firms begin encroaching on banking territory by offering money-market accounts that pay interest, allow check-writing, and offer credit or debit cards.

1986-87

Fed begins reinterpreting Glass-Steagall; Greenspan becomes Fed chairman

In December 1986, the Federal Reserve Board, which has regulatory jurisdiction over banking, reinterprets Section 20 of the Glass-Steagall Act, which bars commercial banks from being "engaged principally" in securities business, deciding that banks can have up to 5 percent of gross revenues from investment banking business. The Fed Board then permits Bankers Trust, a commercial bank, to engage in certain commercial paper (unsecured, short-term credit) transactions. In the Bankers Trust decision, the Board concludes that the phrase "engaged principally" in Section 20 allows banks to do a small amount of underwriting, so long as it does not become a large portion of revenue. This is the first time the Fed reinterprets Section 20 to allow some previously prohibited activities.

In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies.( Actually, ineffective SEC, stupid and marginalized investors, and fraudulent rating agencies- added by Milpo) Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking.

In March 1987, the Fed approves an application by Chase Manhattan to engage in underwriting commercial paper, applying the same reasoning as in the 1986 Bankers Trust decision, and in April it issues an order outlining its rationale. While the Board remains sensitive to concerns about mixing commercial banking and underwriting, it states its belief that the original Congressional intent of "principally engaged" allowed for some securities activities. The Fed also indicates that it will raise the limit from 5 percent to 10 percent of gross revenues at some point in the future. The Board believes the new reading of Section 20 will increase competition and lead to greater convenience and increased efficiency.

In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and a proponent of banking deregulation -- becomes chairman of the Federal Reserve Board. One reason Greenspan favors greater deregulation is to help U.S. banks compete with big foreign institutions.

1989-1990

Further loosening of Glass-Steagall

In January 1989, the Fed Board approves an application by J.P. Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the Glass-Steagall loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper. This marks a large expansion of the activities considered permissible under Section 20, because the revenue limit for underwriting business is still at 5 percent. Later in 1989, the Board issues an order raising the limit to 10 percent of revenues, referring to the April 1987 order for its rationale.

In 1990, J.P. Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities, so long as its underwriting business does not exceed the 10 percent limit.

1980s-90s

Congress repeatedly tries and fails to repeal Glass-Steagall

In 1984 and 1988, the Senate passes bills that would lift major restrictions under Glass-Steagall, but in each case the House blocks passage. In 1991, the Bush administration puts forward a repeal proposal, winning support of both the House and Senate Banking Committees, but the House again defeats the bill in a full vote. And in 1995, the House and Senate Banking Committees approve separate versions of legislation to get rid of Glass-Steagall, but conference negotiations on a compromise fall apart.

Attempts to repeal Glass-Steagall typically pit insurance companies, securities firms, and large and small banks against one another, as factions of these industries engage in turf wars in Congress over their competing interests and over whether the Federal Reserve or the Treasury Department and the Comptroller of the Currency should be the primary banking regulator.

7 Comments – Post Your Own

#1) On March 14, 2009 at 3:21 AM, milpo (44.43) wrote:

(continued)

1996-1997

Fed renders Glass-Steagall effectively obsolete

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co., becoming the first U.S. bank to acquire a securities firm.

1997

Sandy Weill tries to merge Travelers and J.P. Morgan; acquires Salomon Brothers

In the summer of 1997, Sandy Weill, then head of Travelers insurance company, seeks and nearly succeeds in a merger with J.P. Morgan (before J.P. Morgan merged with Chemical Bank), but the deal collapses at the last minute. In the fall of that year, Travelers acquires the Salomon Brothers investment bank for $9 billion. (Salomon then merges with the Travelers-owned Smith Barney brokerage firm to become Salomon Smith Barney.)

April 1998

Weill and John Reed announce Travelers-Citicorp merger

At a dinner in Washington in February 1998, Sandy Weill of Travelers invites Citicorp's John Reed to his hotel room at the Park Hyatt and proposes a merger. In March, Weill and Reed meet again, and at the end of two days of talks, Reed tells Weill, "Let's do it, partner!"

On April 6, 1998, Weill and Reed announce a $70 billion stock swap merging Travelers (which owned the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank), to create Citigroup Inc., the world's largest financial services company, in what was the biggest corporate merger in history.

The transaction would have to work around regulations in the Glass-Steagall and Bank Holding Company acts governing the industry, which were implemented precisely to prevent this type of company: a combination of insurance underwriting, securities underwriting, and commecial banking. The merger effectively gives regulators and lawmakers three options: end these restrictions, scuttle the deal, or force the merged company to cut back on its consumer offerings by divesting any business that fails to comply with the law.

Weill meets with Alan Greenspan and other Federal Reserve officials before the announcement to sound them out on the merger, and later tells the Washington Post that Greenspan had indicated a "positive response." In their proposal, Weill and Reed are careful to structure the merger so that it conforms to the precedents set by the Fed in its interpretations of Glass-Steagall and the Bank Holding Company Act.

Unless Congress changed the laws and relaxed the restrictions, Citigroup would have two years to divest itself of the Travelers insurance business (with the possibility of three one-year extensions granted by the Fed) and any other part of the business that did not conform with the regulations. Citigroup is prepared to make that promise on the assumption that Congress would finally change the law -- something it had been trying to do for 20 years -- before the company would have to divest itself of anything.

Citicorp and Travelers quietly lobby banking regulators and government officials for their support. In late March and early April, Weill makes three heads-up calls to Washington: to Fed Chairman Greenspan, Treasury Secretary Robert Rubin, and President Clinton. On April 5, the day before the announcement, Weill and Reed make a ceremonial call on Clinton to brief him on the upcoming announcement.

The Fed gives its approval to the Citicorp-Travelers merger on Sept. 23. The Fed's press release indicates that "the Board's approval is subject to the conditions that Travelers and the combined organization, Citigroup, Inc., take all actions necessary to conform the activities and investments of Travelers and all its subsidiaries to the requirements of the Bank Holding Company Act in a manner acceptable to the Board, including divestiture as necessary, within two years of consummation of the proposal. ... The Board's approval also is subject to the condition that Travelers and Citigroup conform the activities of its companies to the requirements of the Glass-Steagall Act."

1998-1999

Intense new lobbying effort to repeal Glass-Steagall

Following the merger announcement on April 6, 1998, Weill immediately plunges into a public-relations and lobbying campaign for the repeal of Glass-Steagall and passage of new financial services legislation (what becomes the Financial Services Modernization Act of 1999). One week before the Citibank-Travelers deal was announced, Congress had shelved its latest effort to repeal Glass-Steagall. Weill cranks up a new effort to revive bill.

Weill and Reed have to act quickly for both business and political reasons. Fears that the necessary regulatory changes would not happen in time had caused the share prices of both companies to fall. The House Republican leadership indicates that it wants to enact the measure in the current session of Congress. While the Clinton administration generally supported Glass-Steagall "modernization," but there are concerns that mid-term elections in the fall could bring in Democrats less sympathetic to changing the laws.

In May 1998, the House passes legislation by a vote of 214 to 213 that allows for the merging of banks, securities firms, and insurance companies into huge financial conglomerates. And in September, the Senate Banking Committee votes 16-2 to approve a compromise bank overhaul bill. Despite this new momentum, Congress is yet again unable to pass final legislation before the end of its session.

As the push for new legislation heats up, lobbyists quip that raising the issue of financial modernization really signals the start of a fresh round of political fund-raising. Indeed, in the 1997-98 election cycle, the finance, insurance, and real estate industries (known as the FIRE sector), spends more than $200 million on lobbying and makes more than $150 million in political donations. Campaign contributions are targeted to members of Congressional banking committees and other committees with direct jurisdiction over financial services legislation.

Oct.-Nov. 1999

Congress passes Financial Services Modernization Act

After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic.

On Oct. 21, with the House-Senate conference committee deadlocked after marathon negotiations, the main sticking point is partisan bickering over the bill's effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.

On Oct. 22, Weill and John Reed issue a statement congratulating Congress and President Clinton, including 19 administration officials and lawmakers by name. The House and Senate approve a final version of the bill on Nov. 4, and Clinton signs it into law later that month.

Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, "You're buying the government?"

ALL THE CULPRITS IN THIS FRAUD HAVE BEEN JIGHLIGHTED FOR PURPOSES OF CLARITY by MILPO. NOW, DOES ANYONE KNOW WHERE THEY LIVE SO THAT WE CAN PAY THEM A VISIT?

Sources: FRONTLINE's interviews for "The Wall Street Fix" and published reports by The New York Times, The Wall Street Journal, The Washington Post, Time, Fortune, Business Week, and other publications.

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#2) On March 14, 2009 at 3:32 AM, awallejr (30.20) wrote:

Nice history lesson.  Rec for you.  People should never underestimate the harm that was caused  in 1999.

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#3) On March 14, 2009 at 7:56 AM, rookie02 (52.50) wrote:

This is by far one of the most well written articles i have read on here, and i must say, despite the hint of bias, one of the most informative peices i have ever read period. rec for you! i would hope that you could render more insight and perspective and try to show people that the financial crash today was not caused by overall poor business, but by the clearly immoral actions of a select group, and this group continues to have a hand in the fixing of this problem. yet we as americans are supposed to trust them.

 Great article!

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#4) On March 14, 2009 at 9:13 AM, devoish (67.68) wrote:

2004:

SEC Chairpersons Paul Atkins, Cynthia Glassman, Harvey Goldschmid, William Donaldson, and Annette Nazareth unanimously voted to change the "Net Capital Rule" to exempt the investment firms of Bear Stearns, Merril Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers, to leverage in excess of the 12/1 restriction placed on all other firms because they were big enough to have the resources to not screw it up.

http://www.nytimes.com/2008/10/03/business/03sec.html?pagewanted=2&_r=2&ref=business

 

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#5) On March 14, 2009 at 2:34 PM, devoish (67.68) wrote:

09/14/2008

The (Federal Reserve) Board also adopted an interim final rule that provides a temporary exception to the limitations in section 23A of the Federal Reserve Act. It allows all insured depository institutions to provide liquidity to their affiliates for assets typically funded in the tri-party repo market. This exception expires on January 30, 2009, unless extended by the Board, and is subject to various conditions to promote safety and soundness.

This exemption allows combined Investment/banking institutions to transfer deposits from highly regulated FDIC guaranteed bank savings accounts to the lightly regulated investment sister bank. It means the combined bank can use your savings account money to invest in high risk equities and US treasuries will guarantee those losses at taxpayer expense should the bank and the FDIC be unable to pay. The bank gets the profit, the CEO gets the bonus, the taxpayer gets the risk.

 

09/21/2008: 

Goldman Sachs and Morgan Stanley, the last two independent investment banks, will become bank holding companies, the Federal Reserve said Sunday night, a move that will fundamentally alter the landscape of Wall Street.

[snip]

Now, Goldman and Morgan Stanley, which have been the subjects of merger speculation in recent weeks, can become direct competitors to larger firms like Citigroup, JPMorgan Chase and Bank of America. Those firms combine investment-banking operations with the larger capital cushions that come with retail deposits, giving them a stability that pure investment banks lack.

 

10/23/2008:

The FDIC raises its guarantee on bank deposits from $100k to $250k in order to encourage peole to leave deposits in banks. Should the bank funded FDIC fail to pay the guarantee the deposits are backstopped by the US Treasury (Taxpayer).

 

02/06/2009:

Board of Governors of the Federal Reserve System extends the sec 23a exemption until 10/30/2009. It also requires a risk profile no worse than that which existed in the member bank on 09/12/2008. (which I think is now considered to have been excessive risk?)

 

03/06/2009:

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

The Connecticut Democrat's effort -- which comes in response to urging from FDIC Chairman Sheila Bair, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner -- would give the FDIC access to more money to rebuild its fund that insures consumers' deposits, which have been hard hit by a string of bank failures.

[snip]

"I'm the kind of person that likes to be prepared for all contingencies," - FDIC Chairman Sheila Bair

 

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#6) On March 17, 2009 at 10:31 PM, TheGarcipian (33.29) wrote:

Hey Milpo,

Good find. One REC for you.

I'd blogged about this 6 months ago, 8-9 weeks before the national election, because there was so much fear & hype in the air about how the Democrats were bad for the economy, how they were bad for Business, etc. Here's my blog entry if you care to read it. I still find it humorous that so many people believed McCain (with the very same Sen. Phil Gramm in his right-hand pocket!) was going to be good at thinking outside the economic box that his advisor helped put us in. Enjoy the read here:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=87606&t=01009471911616523983

It's not as detailed as the Frontline report you pulled, and--wow!--that is a ton of great detail. Quite a history lesson indeed! Thanks for putting it all down in one place.

Now, if anyone wants to move forward and claim the Republicans are better Capitalists than the Democrats or that they are any better at economy building via their absolute faith in their banshee cry of "No Regulation for Big Business!", then let this be their epitaph. Granted, Americans have gradually been getting fatter and fatter (debt-wise and waist-wise), and Messrs. Greenspan & Bernanke has made the discretionary-spending addict that much more addicted to his Consumerism, but the Republicans have really screwed us big this time. They own well more than half the blame for this collosal failure in judgement and, ultimately, giving in to their greed. I'm beginning to wonder if the Democrats even have a chance at fixing this. And I'm dismayed that both parties are not taking this seriously enough (the Dems not putting enough money towards infrastrucutre and bailing out too many lousy banks, and the Repubs doing nothing more than whining and pointing fingers, offering very little real constructive alternatives). It's a really fouled-up mess.

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#7) On March 18, 2009 at 5:09 PM, helicopterfool (97.22) wrote:

Outstanding Post !!!!!  Big rec.  I just wish someone from Congress would read it.

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