Glass- Steagall /Gramm-Leach-Bliley

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 1933 11,000 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.org/featured/the-rise-and-fall-of-glass-steagall/http://www.thefreemanonline.org/featured/the-rise-and-fall-of-glass-steagall/

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

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.

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

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 • 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