Stripped Financial Regulation And The Road To Ruin

What is commonly known today as the Glass-Steagall law is actually the Bank Act of 1933, containing the provision that erects a wall between the banking and securities businesses. Congressional hearings conducted in early 1933 seemed to show that the presumed leaders of American enterprise (the bankers and brokers) were guilty of disreputable and seemingly dishonest dealings and gross misuses of the public's trust. The Act established new approaches to financial regulation, particularly the institution of deposit insurance, and the legal separation of most aspects of commercial and investment banking. It was believed that bank involvement with securities was detrimental to the Federal Reserve system, contrary to the rules of good banking, and responsible for stock market speculation, the Crash of 1929, bank failures, and the Great Depression.

Curbing banks' ability to grow too large has been a common theme in legislation through the years. During the 1930s and 1940s, banks stuck to the basics of taking deposits and making loans. Congress didn't intervene again until 1956, when it enacted the Bank Holding Company Act to keep financial-services conglomerates from amassing too much power. That law created a barrier between banking and insurance in response to aggressive acquisitions, Congress thought it improper for banks to risk possible losses from underwriting insurance.

In 1971 the U.S. Supreme Court ruled that banks were prohibited from offering a product that is similar to mutual funds. In an often quoted decision, the Court found that the Act was intended to prevent banks from endangering themselves, the banking system, and the public from unsafe and unsound practices and conflicts of interest.  Since 1985 the regulators have allowed banks to offer discount brokerage services through subsidiaries, and these more permissive rules have been upheld by the courts. Thus, more recent court decisions and regulatory agency rulings have tended to soften the 1971 Supreme Court's apparently strict interpretation of the Act's prohibitions.

Commercial bank affiliations forbid member banks from affiliating with a company 'engaged principally' in the 'issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities'. In June 1988 the U.S. Supreme Court upheld a lower court's ruling accepting the Federal Reserve Board's April 1987 approval for member banks to affiliate with companies underwriting commercial paper, municipal revenue bonds, and securities backed by mortgages and consumer debts, as long as the affiliate does not principally engage in those activities. 'Principally engaged' was defined by the Federal Reserve as activities contributing more than from 5 to 10 per cent of the affiliate's total revenue. In 1987, the DC Court of Appeals affirmed the Federal Reserve Board's 1985 ruling allowing a bank holding company to acquire a subsidiary that provided both brokerage services and investment advice to institutional customers. Alan Greenspan Chairman of the Federal Reserve Board testified to Congress in December 1987, that the Board supported a Glass-Steagall repeal.

The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in speculative securities but entered the business of investment banking in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.

(1) Banks were investing their own assets in securities with consequent risk to commercial and savings deposits. The concern of Congress to block this evil is clearly stated in the report of the Senate Banking and Currency Committee on an immediate forerunner of the Glass-Steagall Act.

(2) Unsound loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.

(3) A commercial bank's financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction.

In 1999 the Glass–Steagall Act was repealed by the Gramm-Leach-Bliley Act. Then signed by President Bill Clinton, who publicly declared, "The Glass-Steagall Act is no longer relevant." The Gramm-Leach-Bliley Financial Modernization Act of 1999 (GLBA), as it came to be known, permitted “super-banks” to “re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s”, which were characterized as “lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way.

After less than 10 years, the American financial system had a massive meltdown in 2008. Highlighted by bank bailouts from the Federal Government, and the collapse of the housing market, perpetuated by the exact practices Glass-Steagall was passed to prevent. While President Clinton, (a Democrat) signed into law the ultimate demise of Glass-Steagall, every effort to weaken it since 1971 was initiated by Republicans. Deregulation began in the 1980's with President Reagan, and ultimately succeeded with (GLBA), in 1999.

After the bottom fell out in 2008, in an effort to stop further abuses by Wall Street, the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted. Passed as a response to the late-2000s recession, the Act brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It represents a significant change in the American financial regulatory environment affecting all Federal financial regulatory agencies and almost every aspect of the nation's financial services industry. And who do you think wants to gut this law, and let Wall Street go back to business as usual? Republicans. As long as fat cat investment bankers, and hedge fund managers, can rape and pillage the American people's hard earned savings, life is good. To add insult to injury after we bailed out the big banks they sat on the money, futher stagnating an already weak economy. They're sitting on $2 Trillion dollars, and refuse to lend it out, on the off chance efforts to gut Dodd-Frank prove successful. These modern day Wall Street robber barons ARE Mitt Romney's crowd, and their greed has us locked in a stagnant economy, and weak job creation. Blame Obama if you want, but this nightmare was a decade in the making, maybe more. The road ahead is rough, but letting Wall Street go back to business as usual is absolute madness.