[Temporary: while site is under construction]
The story of the Glass-Steagall Act is one of the clash of two cultures: a) the culture of risk and reward which was inherent the securities business, and b) a culture of protection of deposits which had long been the mainstay of banking.
PRELIMINARY MATERIAL ONLY
1929 Oct: Stock Market crash . Bankers and brokers were sometimes indistinguisable. This was the primary problem with the financial markets that the second Glass-Steagall Act was intended to solve.
1930–31: The Great Depression set in.
1932: The First Glass-Steagall Act — an effort to stop deflation and expanded the Federal Researves ability to offer 'rediscounts' on more types of government bonds as well as commercial paper. (The government can take some of the risk from bank lending through rediscounts, if it has a mind.)
1933: Collapse of a larger portion of the American commercial banking system. One in five US banks failed. Speculation by the banks is believed to be the cause of the problem.
1933: Jan-Feb Run on the Banks. However the lame-duck Hoover Administration did nothing to stop the run.
1933 March: Franklin D Roosevelt becomes President The administration did not change hands from Hoover to Roosevelt until March 1933.
1993 April 5: The USA went off the gold standard when Roosevelt signed Executive Order 6102, the Gold Confiscation Act.
1933: Ferdinand Pecora, a politically ambitious former New York City prosecutor, drumed up popular support for stronger regulation of the banks by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.
1933: the Second Glass-Steagall Act established the Federal Deposit Insurance Corporation , and introduced financial reforms, some of which were designed to control speculation.
It also introduced separation of bank types according to their business (commercial and investment banking) by banning commercial banks from underwriting securities. This forced the banks to choose between being a simple lender or an underwriter (brokerage)
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.
1960 In the 1960s the banks lobby Congress for permission to enter the municipal bond market. A lobbying subculture springs up around Glass-Steagall. Some lobbyists even brag about how the bill put their kids through college.
1970 In the 1970s, some brokerage firms begin to encroach on banking territory by offering money-market accounts that pay interest, allow check-writing, and offer credit or debit cards. This invites retaliation.
1980: Regulation Q , which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980.
1983: The banking industry continued seeking the repeal of Glass–Steagall.
1984: The Senate passes a bill that would lift major restrictions under Glass-Steagall, but the House blocks passage.
1986 Dec: the Federal Reserve Board, which has regulatory jurisdiction over banking, reinterprets the Section 20 of the Glass-Steagall Act which bars commercial banks from being "engaged principally" in securities business. They decide that banks can have up to 5% of their gross revenues come from the previously prohibited investment-banking business.
The Fed Board then permits a commercial bank, Bankers Trust, to engage in certain commercial paper (unsecured, short-term credit) transactions by concluding that the phrase "engaged principally" in Section 20 does allows banks to do a small amount of underwriting. [They are now on the slippery slope]
1987 Feb: - Mar The Federal 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.
1987 March: The Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker who expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public.
1987 Mar: The Fed approves an application by Chase Manhattan to engage in underwriting commercial paper, thus extending the earlier 1987 decisions.
1987 Apr: The Fed's published rationale indicates that, at some point in the future, it will raise the limit from 5% to 10% of gross revenues to increase competition, leading to greater convenience and increased efficiency.
1987 Aug: Alan Greenspan — formerly a director of J.P. Morgan and a proponent of banking deregulation — becomes chairman of the Federal Reserve Board. He favors greater deregulation is to help US banks compete with foreign institutions.
1988: The Senate passes another bill that would lift major restrictions under Glass-Steagall, but the House blocks passage again.
1989 Jan: the Fed Board approves an application by JP 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. Later in the year the limit is raised to 10%. [The slippery slope becomes even more slippery]
1990,: JP Morgan becomes the first bank to receive permission from the Federal Reserve to underwrite securities, as long as its underwriting business "does not exceed the 10% limit".
1991: In the last year of the first term, the first Bush administration puts forward a Glass-Steagall repeal proposal which wins support of both the House and Senate Banking Committees. However the House again defeats the bill in a full vote.
|Who lobbies for what?
Attempts to repeal Glass-Steagall typically pit insurance companies, securities firms, and large and small banks against one another. 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.
1992 Nov: Bill Clinton wins the Presidency
1994 Feb: Procter & Gamble sues Bankers Trust claiming the bank's derivatives deals has cost P&G millions. The lawsuit reveals what's really going on in the completely dark and unregulated derivatives market.
1995 Jan 10: Robert Rubin was sworn in by President Clinton as Secretary of Treasury. (prior to that he had been at the White House as Assistant to the President for Economic Policy and director of the President's National Economic Council.) He is a fervent free-marketeer.
1995: The House and Senate Banking Committees approve separate versions of legislation to get rid of Glass-Steagall, but conference negotiations on a compromise bill fall apart.
1996 Dec: 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% of their business in securities underwriting (up from 10%).
The loopholes have now been expanded to the point where the G-S Act is effectively rendered obsolete. The PBS website says:
Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25% 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.
[The slippery slope is now about to become an avalanche]
1997 Aug: The Fed under Greenspan now eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. They state that the risks of underwriting had proven to be "manageable," and say banks would have the right to acquire securities firms outright.
- Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex Brown & Co., becoming the first US bank to acquire a securities firm.
- Summer: Sandy Weill, then head of Travelers insurance company, seeks and nearly succeeds in a merger with JP Morgan (before JP Morgan merged with Chemical Bank). The deal collapses at the last minute.
- Fall: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.
1997–98: Election Cycle leading to the November 1998 mid-term elections.
Lobbying for "financial modernization" creates a fresh round of political fund-raising.
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.
1997: The Clinton Administration's Treasury Secretary, Robert Rubin and the Federal Reserve chairman Alan Greenspan, both strongly opposed the regulation of derivatives, when such regulation was proposed by then-head of the Commodity Futures Trading Commission (CFTC), Brooksley Born.
Former chairman of the Securities and Exchange Commission, Arthur Levitt Jr., explained that in their strong opposition to the regulations proposed by Born, Greenspan and Rubin were "joined at the hip. They were certainly very fiercely opposed to this and persuaded me that this would cause chaos."
1998 Feb: to Mar Sandy Weill of Travelers and Citicorp's John Reed discuss a merger. This would be the biggest corporate merger in history and it was only possible if they can work around regulations in the Glass-Steagall and Bank Holding Company acts which were implemented precisely to prevent this type of company.
The merged company would be a combination of insurance underwriting, securities underwriting, and commecial banking interests.
[The slippery slope has now become a cliff-face]
1998: Mar/E Weill meets with Alan Greenspan and other Federal Reserve officials before the announcement of the merger to sound them out. He later tells the Washington Post that Greenspan had indicated a "positive response."
1998 Mar 30/E: Congress shelved its latest effort to repeal Glass-Steagall.
1998 Apr 3/E: Weill makes a heads-up call Treasury Secretary Robert Rubin to inform him about the merger. He voices no objections.
1998 Apr 5: The day before the announcement, Weill and Reed make a ceremonial call on President Clinton to brief him on the upcoming announcement.
1998 Apr 6: Weill and Reed announce a $70 billion stock swap merging Travelers (with its investment house Salomon Smith Barney) and Citicorp (the parent of Citibank), to create Citigroup Inc., the world's largest financial services company.
The regulators and lawmakers now have only three options:
Under the then current rules, they would have three years to divest. Alternately, they could use that time to lobby Congress to repeal the G-S legislation.
- abandon any pretence at the G-S restrictions and repeal the legislation
- scuttle the Weill/Read Citibank-Travelers deal, or
- force the merged company to divest any business that fails to comply with the law.
1998 April: Fears that the necessary regulatory changes would not happen in time caused the share prices of both Citicorp and Travelers to fall.
The House Republican leadership wanted to enact the regulatory-change measure in the current session of Congress. The Clinton administration generally supported Glass-Steagall "modernization," but there were concerns that the mid-term elections would bring in Democrats less sympathetic to changing the laws.
1998 May: The House passed legislation by a vote of 214 to 213 allowing the merging of banks, securities firms, and insurance companies into huge financial conglomerates.
The new chairperson of the Commodity Futures Trading Commission (CFTC), Brooksley Born , sees systemic risk in the virtually unregulated, high-stakes derivatives market. She starts a campaign to regulate the secretive, multitrillion-dollar market.
1998 Sep: The Senate Banking Committee votes 16-2 to approve a compromise bank overhaul bill. This is all happening during the bonfire days of the Monica Lewinsky affair.
1998 Sep: A meltdown begins at Long-Term Capital Management (LTCM) , the darling of Wall Street. It is run by a couple of Nobel Prize winners and some ex Fed people, and it offers its investors 40% returns, so it was able to do business almost exclusivly with 15 of the largest Wall Street banks. The Russian financial climate triggered its collapse; they were dropping asset values of $300 to $500 million a day.
1998 Sep 23: The Fed gives its approval to the Citicorp-Travelers merger (with conditions which might include divestiture) — provided it confirms to the emasculated Glass-Steagall Act as it was now being interpreted by the Fed.
Weill immediately plunged into a public-relations and lobbying campaign to repeal the Glass-Steagall. He promoted new financial-services legislation which became the Financial Services Modernization Act of 1999.
Despite this new momentum, Congress is again unable to pass final legislation before the end of its session.
1998 Nov - Nov 1999 In this year, sub-prime loans were only 5% of all mortgage lending in the USA.
1998 Nov: Mid-term elections
1998 Dec: Brooksley Born's objections were dismissed even after LTCM's near-collapse, and both Congress and the top regulators rejected any pressure to regulate derivatives. See PBS
1999 Jul 1: Robert Rubins was succeeded as Treasury Secretary by his deputy, Lawrence H. Summers who was less gung-ho on free-market reforms. Upon his retirement, Clinton called Rubin's the "greatest secretary of the Treasury since Alexander Hamilton."
1999 Oct 21: The House-Senate conference committee is deadlocked after marathon negotiations over the replacement Gramm–Leach–Bliley Act . 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.
1999 Oct 21: 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.
1999 Oct 22: Sandy Weill calls President Clinton in the evening to try to break the deadlock. Serious negotiations resume, and a deal is announced at 2:45 a.m. in the morning of Oct. 22.
1999 Oct 26: 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.
1999 Nov 4: The House and Senate approve a final version of the Gramm—Leach—Bliley Act and Clinton signs it into law later that month. After 12 attempts in 25 years, Congress has finally repealed 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.
1999 Nov 12: Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm—Leach—Bliley Act . Depository institutions now operated in "deregulated" financial markets in which distinctions between loans, securities, and deposits are not well drawn.
It was the repeal of this part of the act which led to the casino-capitalism among American financial institutions. And this is now accepted to be the direct cause of the global financial crisis (GSC) in 2008-09.
|G-S REPEAL: November 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 a Republican majority, basically following party lines by a 54—44 vote in the Senate and by a bi-partisan 343–86 vote in the House of Representatives.
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 bill resolving the differences was passed in the Senate 90—8 (one not voting) and in the House: 362—57 (15 not voting).
The legislation was signed into law by President Bill Clinton on November 12, 1999.
2000 - 08 By the time the credit crisis peaked in 2008, sub-prime loans were approaching 30 percent of all mortgage lending. Also contributing to the crisis were
- the adoption of mark-to-market accounting,
- implementation of the Basel Accords,
- the rise of adjustable rate mortgages etc
The corporations which were behind the repeal of the act in 1999 are said to have spent $300 million in lobbying costs.
2000: The repeal enabled commercial lenders such as Citigroup, which was in 1999 the largest US bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, which bought those securities.
2000 March: the Tech Bubble Burst (starting in the late 1990s) — fueled by the notion that old rules no longer applied. Investors and the SEC smell a rat in the way investment banks handled those IPO deals.
2000 May: Two Business financial analysts figure out that Bernard Madoff is running a Ponzi scheme. Their warning is ignored.
2000 Nov: George Dubya Bush wins the Presidency
2001 Sep 11: attack on World Trade Center. Urge created to make the USA strong. Alan Greenspan lowers interest rates which fuels a massive housing boom
2002 Apr: Larry Summers becomes Harvard University President, and Robert Rubin is elected to the governing board. They are close and work together as partners.
2003: The PBS Frontline program airs "The Wall Street Fix" (online as "The Long Demise of Glass-Steagall")
2005: An embattled Larry Summers resigns as the President of Harvard University
2006 Feb: Alan Greenspan retires. Replaced by Ben Bernanke
2006 Jul: - Aug. By this time the need for protection was 'terrifyingly apparent'. Collapse in values. Many of the more astute traders at Goldman Sachs and elsewhere had made large profits by shorting mortgage-related securities.
2007 Sep 25/E: CitiGroup begins making presentations to analysts without mentioning the $25 billion of returned liquity-put CDOs (nearly half its subprime-related securities). Chuck Prince decides to resign as CEO.
2007 Nov 4: Robert E. Rubin, Chairman of the Executive Committee of CitiGroup and a member of the Board of Directors, transfered over to the less-controlling position of Chairman of the Board. The company also announced the startling news that it had $55 billion of collateralized debt obligations (CDOs) and other subprime-related securities on its balance sheet and that large write-offs of an estimated $8 billion to $11 billion were imminent. Rubin was paid $17.3 million that year.
2008 Mar: Rumors fly about Bear Stearn's huge exposure to subprime mortgages (later called 'toxic assets') Investors rush to pull their money out of the investment bank.
2008 May: Global Financial Crisis begins.
2008 Sep 7: The US nationalizes Fannie and Freddie May when the two mortgage giants reveal that their $5 trillion in assets are facing "systematic risk".
2008 Sep 12 - 14: Lehman Brothers is near collapse, but Treasuring Secretary Paulson refuses to have the government bail them out. He is a zealous free marketeer.
2008 Sep 13: Merrill- Lynch, the US's second largest investment back also faces collapse, but Paulson, Ken Lewis and John Thain secretly cut a deal for Bank of America to buy Merrill.
2008 Sep 15 - 16: Markets Crash and Credit Freezes.
2008 Sep 18: Paulson asks Congress for $700 billion to unstop the credit markets. He warns that the world's financial system will melt down in days without this funding.
2008 Oct 13: Nine CEOS of the top banks are summoned to Washington. Paulson tells them their banks will get tens of billions, and that the government will become a major stakeholder in their businesses.
2008 Oct 23: Before Congress, Greenspan admits that trusting the markets to regulate themselves was wrong.
2008 Nov: Obama wins the presidential election. Robert Rubin, is an economic adviser on the transition team of the new President.
2008 Dec: Bernie Madoff, head of a prominent Wall Street trading firm confesses to a Ponzi scheme that lost investors $65 billion. Madoff was a pillar of Wall Street, one of the founders of the NASDAQ Exchange and a former Chairman.
See NY Times
2008 Dec: The Bank of America discovers it is facing $15 billion in losses from the acquistion of Merrill, but they are told by Bernanke and Paulson that they can't pull out of the deal.
2009 Jan 9: Citigroup announced that Robert Rubin had resigned as a senior adviser and would not seek re-election as a board director. Press reports noted that Rubin had drawn criticism for his role in the bank's recent problems that drove it to seek federal assistance. (Forbes reported that as of November 2008, Robert Rubin had received over $17 million in compensation from Citigroup and a further $33 million in stock options.)
2009 Jan 23: ? New Obama Administration takes over.
- Credit markets are frozen
- Unemployment is rising
- Housing foreclosures reaching record levels
- The US is fighting two wars
- National debt is skyrocteting
2009 Dec: In a Newsweek article, Robert Rubin described the extraordinary combination of circumstances that led to the global financial crisis, including:
- market and credit excess,
- low interest rates,
- massive increase in the use of complex derivatives,
- misguided AAA ratings,
- stagnant media real wages,
- abusive mortgage practices, and
- the overleveraging of financial institutions
2009 Dec: Senator John McCain (Arizona) and Senator Maria Cantwell (Washington State), jointly proposed re-enacting the Glass-Steagall Act, to re-impose the separation of commercial and investment banking. Legislation to re-enact parts of Glass-Steagall was also introduced into the House of Representatives.
Paul Volcker was also an outspoken advocate of the reenactment of Glass-Steagall.