While it's true that, over the years, most of the provisions in the Glass Steagall Act had been eroded, the Gramm-Leach-Bliley Act (GLB), otherwise known as Financial Services Modernization Act , was really the final nail in the coffin.
An Introduction to Investment Banks, Hedge Funds and Private Equity, by David Stowell, gives us this summary:
On November 12, 1999, the US Congress passed the Gramm-Leach-Bliley Act, which overturned the mandatory separation of commercial banks and investment banks required by the Glass-Steagall Act of 1933. The original reason for the separation was the concern that depositors' holding would be used aggressively in risky endeavors by the investment banking side of the firms. The argument for joining the two types of firms is that it would provide a more stable business model irrespective of the economic environment.Another argument.. was that non US headquartered universal banks, such as Deutsche Bank, UBS and Credit Suisse, were not encumbered by the Glass Steagall Act. The banks had a competitive advantage over US-headquartered banks, such as Citigroup, JP Morgan, and stand-alone investment banks, such as Goldman Sachs and Morgan Stanley, because the non US headquartered banks could participate in both commercial banking and investment banking activities.
But it didn't take a genius to predict the possible problems. Back in 2000 only a few months following the bill's passage, J . Alfred Broaddus, president of the Hampton Roads Chapter of the Robert Morris Associates, a risk management firm, writing an analysis of the legislation, observed:
This brings me to the question of regulating and supervising the new structure the Gramm--Leach--Bliley Act (GLBA) will create. I think it's worth noting at the outset that GLBA broadens the opportunities for diversification for large financial companies. Therefore, not all of the Act's fallout will necessarily increase risks. But the potential size and complexity of at least some of the new financial holding companies could well increase risks in some cases, including not only risk to the company and its shareholders, but broader risks to the financial system and the economy. Too-big-to-fail is already a major public policy issue - perhaps the major public policy issue in banking and finance - and GLBA is not likely to change this.
On that occasion, the jubilant Phil Gramm declared to the American public:
We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.
After that bill was signed into law by Bill Clinton, it took less than a decade to demonstrate what some economists had known all along and what our grandfathers had learned the hard way. Regulations, while they might seem to restrict an industry, serve to protect and prevent abuse; in this case a curb on wild speculation and, in turn, a disastrous collapse.
Passage of the bill set off a wave of mega-mergers among banks, insurance and securities companies. The party had really begun and after the celebration was finished, the country would be faced with the biggest economic hangover in its history. By then, however, this champion for regulation would have moved on to greener pastures in the private sector.
For Phil Gramm personally, the passage of the bill justified the $4.6 million he reportedly received by the Finance, Insurance, and Real Estate industries over the previous decade. And, furthermore, Phil Gramm hadn't even hit his peak yet.
In part two of the series, I will examine Gramm's adventures in the private sector, following his retirement as Senator.
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