Clinton, Rubin and Summers, Graham, Leach and Bliley – thank you

In the early 1900’s, commercial banks began to establish security affiliates that floated bond issues and underwrote corporate stock issues. (In underwriting, a bank guarantees to furnish a definite sum of money by a definite date to a business or government entity in return for an issue of bonds or stock.)

Then the stock market crashed.

In 1930 the Bank of the United States failed, reportedly because of activities of its security affiliates that created artificial conditions in the market, FDR closed the banks for four days, 4000 failed permanently, and Congress created the Glass-Steagall Act of 1932, then amended it in the Banking Act of 1933.

The act forced a separation of commercial and investment banks by preventing commercial banks from underwriting securities, with the exception of U.S. Treasury and federal agency securities, and municipal and state general obligation securities.

More specifically, the act authorizes Federal Reserve banks to use government obligations and commercial paper as collateral for their note issues, in order to encourage expansion of the currency. Banks can also offer advisory services regarding investments for their customers, as well as buy and sell securities for their customers. However, information gained from providing such services cannot be used by a bank when it acts as a lender.

Likewise, investment banks cannot engage in the business of receiving deposits.

A bank is defined as an institution organized under the laws of the United States, any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, or the Virgin Islands, that both accepts demand deposits (deposits that the depositor may withdraw by check or similar means for payment to third parties or others) and is engaged in the business of making commercial loans (12 U.S.C.A. § 1841 (c)(1) [1988]).

Investment banking consists mostly of securities underwriting and related activities; making a market in securities; and setting up corporate mergers, acquisitions, and restructuring. Investment banking also includes services provided by brokers or dealers in transactions in the secondary market. A secondary market is one where securities are bought and sold subsequent to their original issuance.

It also created the Federal Deposit Insurance Corporation (FDIC) to protect depositors in the future.

The Act was passed because it was largely believed, after hearings in Congress, that commercial banks were being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.

Enter the Clinton Era and the Graham-Leach-Bliley Act of 1999, the act which ultimately repealed the Glass-Steagull Act. The final bi-partisan version passed in the Senate 90-8-1 and in the House: 362-57-15. Without forcing a veto vote, this bipartisan, veto proof legislation was signed into law by President Bill Clinton on November 12, 1999, though most of his Democratic colleagues voted against it, initially (Senate 54-44, House 343-86).

The Graham-Leach-Bliley Act sought to “modernize” financial services–that is, end regulations that prevented the merger of banks, stock brokerage companies, and insurance companies. It nullified all prior acts that strictly regulated those who stored your money such as the Bank Holding Company Act that prohibited a bank from controlling a non-bank company which passed in 1956 and the 1982 amendment that further forbid banks from conducting general insurance underwriting or agency activities.

Why is this related to today? According to the Online Law Encylopedia,

The expansion of commercial banks into securities underwriting was substantial until the 1929 stock market crash and the subsequent Depression. In 1930 the Bank of the United States failed, reportedly because of activities of its security affiliates that created artificial conditions in the market.

As a result of the bank closings and already devastated economy, public confidence in the U.S. financial structure was low.

Is this sounding at all familiar? It should be.

The Glass-Steagull Act made all of that history, GLBA repealed it and history, my friends, is repeating itself.

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Fast forward to October 2011 – With unemployment remaining steadily at over 9 percent for the last several years, foreclosures at an all time high and banks squeezing the dimes out of people with fees for everything but walking in the door, groups around the country are occupying financial districts, parks, banks and anywhere they believe they will have an impact. In New York occupiers shut down the Brooklyn Bridge and in Chicago they have been camped out for a couple of weeks on a corner that conveniently houses the Board of Trade, the Federal Reserve Bank of Chicago and Bank of America down the street. A recent rally joined by four other groups including several labor unions, shut down Monroe Street between Michigan and Columbus — ironically on Columbus Day.

Sources GLBA, Glass-Steagull(1), Glass-Steagull(2)

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2 Responses

  1. […] Secretary then? Larry Summers, our current head of Obama’s Council of Economic Advisors. A WordPress blogger, Commonsense, reminds us of the financial criminal history that necessitated Glass-Steagall in the first […]

  2. Post subbed, great post.

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