The Long Demise of Glass-Steagall

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

De belangrijkste oorzaak dat het mis ging met de banken: tenietdoening van
deze wet.
Overigens praat niemand over het weer invoeren van deze wet of een
soortgelijke wettelijke maatregel.

Wél opvallend dat het de Senaat was die dit jarenlang voor elkaar
probeerde te krijgen.
Geeft toch de indruk dat de goed betaalde lobby-pogingen van de banken het
beoogde doel bereikten.

Groet / Cees

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html
The Long Demise of Glass-Steagall

A chronology tracing the life of the Glass-Steagall Act, from its passage
in 1933 to its death throes in the 1990s, and how Citigroup's Sandy Weill
dealt the coup de grâce.


1933


Glass-Steagall Act creates new banking landscape


Following the Great Crash of 1929, one of every five banks in America
fails. Many people, especially politicians, see market speculation engaged
in by banks during the 1920s as a cause of the crash.

In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall
(D-Ala.) introduce the historic legislation that bears their name, seeking
to limit the conflicts of interest created when commercial banks are
permitted to underwrite stocks or bonds. In the early part of the century,
individual investors were seriously hurt by banks whose overriding
interest was promoting stocks of interest and benefit to the banks, rather
than to individual investors. The new law bans commercial banks from
underwriting securities, forcing banks to choose between being a simple
lender or an underwriter (brokerage). The act also establishes the Federal
Deposit Insurance Corporation (FDIC), insuring bank deposits, and
strengthens the Federal Reserve's control over credit.

The Glass-Steagall Act passes after Ferdinand Pecora, a politically
ambitious former New York City prosecutor, drums up popular support for
stronger regulation by hauling bank officials in front of the Senate
Banking and Currency Committee to answer for their role in the
stock-market crash.

In 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.


1960s-70s


First efforts to loosen Glass-Steagall restrictions


Beginning in the 1960s, banks lobby Congress to allow them to enter the
municipal bond market, and a lobbying subculture springs up around
Glass-Steagall. Some lobbyists even brag about how the bill put their kids
through college.

In the 1970s, some brokerage firms begin encroaching on banking territory
by offering money-market accounts that pay interest, allow check-writing,
and offer credit or debit cards.


1986-87


Fed begins reinterpreting Glass-Steagall; Greenspan becomes Fed chairman


In December 1986, the Federal Reserve Board, which has regulatory
jurisdiction over banking, reinterprets Section 20 of the Glass-Steagall
Act, which bars commercial banks from being "engaged principally" in
securities business, deciding that banks can have up to 5 percent of gross
revenues from investment banking business. The Fed Board then permits
Bankers Trust, a commercial bank, to engage in certain commercial paper
(unsecured, short-term credit) transactions. In the Bankers Trust
decision, the Board concludes that the phrase "engaged principally" in
Section 20 allows banks to do a small amount of underwriting, so long as
it does not become a large portion of revenue. This is the first time the
Fed reinterprets Section 20 to allow some previously prohibited
activities.

In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of
easing regulations under Glass-Steagall Act, overriding the opposition of
Chairman Paul Volcker. The vote comes after the Fed 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. Thomas Theobald, then vice chairman of
Citicorp, argues that three "outside checks" on corporate misbehavior had
emerged since 1933: "a very effective" SEC; knowledgeable investors, and
"very sophisticated" rating agencies. Volcker is unconvinced, and
expresses his fear that lenders will recklessly lower loan standards in
pursuit of lucrative securities offerings and market bad loans to the
public. For many critics, it boiled down to the issue of two different
cultures - a culture of risk which was the securities business, and a
culture of protection of deposits which was the culture of banking.

In March 1987, the Fed approves an application by Chase Manhattan to
engage in underwriting commercial paper, applying the same reasoning as in
the 1986 Bankers Trust decision, and in April it issues an order outlining
its rationale. While the Board remains sensitive to concerns about mixing
commercial banking and underwriting, it states its belief that the
original Congressional intent of "principally engaged" allowed for some
securities activities. The Fed also indicates that it will raise the limit
from 5 percent to 10 percent of gross revenues at some point in the
future. The Board believes the new reading of Section 20 will increase
competition and lead to greater convenience and increased efficiency.

In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and a
proponent of banking deregulation -- becomes chairman of the Federal
Reserve Board. One reason Greenspan favors greater deregulation is to help
U.S. banks compete with big foreign institutions.


1989-1990


Further loosening of Glass-Steagall


In January 1989, the Fed Board approves an application by J.P. 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. This marks a large expansion of
the activities considered permissible under Section 20, because the
revenue limit for underwriting business is still at 5 percent. Later in
1989, the Board issues an order raising the limit to 10 percent of
revenues, referring to the April 1987 order for its rationale.

In 1990, J.P. Morgan becomes the first bank to receive permission from the
Federal Reserve to underwrite securities, so long as its underwriting
business does not exceed the 10 percent limit.


1980s-90s


Congress repeatedly tries and fails to repeal Glass-Steagall


In 1984 and 1988, the Senate passes bills that would lift major
restrictions under Glass-Steagall, but in each case the House blocks
passage. In 1991, the Bush administration puts forward a repeal proposal,
winning support of both the House and Senate Banking Committees, but the
House again defeats the bill in a full vote. And in 1995, the House and
Senate Banking Committees approve separate versions of legislation to get
rid of Glass-Steagall, but conference negotiations on a compromise fall
apart.

Attempts to repeal Glass-Steagall typically pit insurance companies,
securities firms, and large and small banks against one another, as
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.


1996-1997


Fed renders Glass-Steagall effectively obsolete


In December 1996, 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 percent
of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation
of Section 20 of Glass-Steagall effectively renders Glass-Steagall
obsolete. Virtually any bank holding company wanting to engage in
securities business would be able to stay under the 25 percent 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.

In August 1997, the Fed eliminates many restrictions imposed on "Section
20 subsidiaries" by the 1987 and 1989 orders. The Board states that the
risks of underwriting had proven to be "manageable," and says banks would
have the right to acquire securities firms outright.

In 1997, Bankers Trust (now owned by Deutsche Bank) buys the investment
bank Alex. Brown & Co., becoming the first U.S. bank to acquire a
securities firm.


1997


Sandy Weill tries to merge Travelers and J.P. Morgan; acquires Salomon
Brothers


In the summer of 1997, Sandy Weill, then head of Travelers insurance
company, seeks and nearly succeeds in a merger with J.P. Morgan (before
J.P. Morgan merged with Chemical Bank), but the deal collapses at the last
minute. In the fall of that year, 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.)


April 1998


Weill and John Reed announce Travelers-Citicorp merger


At a dinner in Washington in February 1998, Sandy Weill of Travelers
invites Citicorp's John Reed to his hotel room at the Park Hyatt and
proposes a merger. In March, Weill and Reed meet again, and at the end of
two days of talks, Reed tells Weill, "Let's do it, partner!"

On April 6, 1998, Weill and Reed announce a $70 billion stock swap merging
Travelers (which owned the investment house Salomon Smith Barney) and
Citicorp (the parent of Citibank), to create Citigroup Inc., the world's
largest financial services company, in what was the biggest corporate
merger in history.

The transaction would have to work around regulations in the
Glass-Steagall and Bank Holding Company acts governing the industry, which
were implemented precisely to prevent this type of company: a combination
of insurance underwriting, securities underwriting, and commecial banking.
The merger effectively gives regulators and lawmakers three options: end
these restrictions, scuttle the deal, or force the merged company to cut
back on its consumer offerings by divesting any business that fails to
comply with the law.

Weill meets with Alan Greenspan and other Federal Reserve officials before
the announcement to sound them out on the merger, and later tells the
Washington Post that Greenspan had indicated a "positive response." In
their proposal, Weill and Reed are careful to structure the merger so that
it conforms to the precedents set by the Fed in its interpretations of
Glass-Steagall and the Bank Holding Company Act.

Unless Congress changed the laws and relaxed the restrictions, Citigroup
would have two years to divest itself of the Travelers insurance business
(with the possibility of three one-year extensions granted by the Fed) and
any other part of the business that did not conform with the regulations.
Citigroup is prepared to make that promise on the assumption that Congress
would finally change the law -- something it had been trying to do for 20
years -- before the company would have to divest itself of anything.

Citicorp and Travelers quietly lobby banking regulators and government
officials for their support. In late March and early April, Weill makes
three heads-up calls to Washington: to Fed Chairman Greenspan, Treasury
Secretary Robert Rubin, and President Clinton. On April 5, the day before
the announcement, Weill and Reed make a ceremonial call on Clinton to
brief him on the upcoming announcement.

The Fed gives its approval to the Citicorp-Travelers merger on Sept. 23.
The Fed's press release indicates that "the Board's approval is subject to
the conditions that Travelers and the combined organization, Citigroup,
Inc., take all actions necessary to conform the activities and investments
of Travelers and all its subsidiaries to the requirements of the Bank
Holding Company Act in a manner acceptable to the Board, including
divestiture as necessary, within two years of consummation of the
proposal. ... The Board's approval also is subject to the condition that
Travelers and Citigroup conform the activities of its companies to the
requirements of the Glass-Steagall Act."


1998-1999


Intense new lobbying effort to repeal Glass-Steagall


Following the merger announcement on April 6, 1998, Weill immediately
plunges into a public-relations and lobbying campaign for the repeal of
Glass-Steagall and passage of new financial services legislation (what
becomes the Financial Services Modernization Act of 1999). One week before
the Citibank-Travelers deal was announced, Congress had shelved its latest
effort to repeal Glass-Steagall. Weill cranks up a new effort to revive
bill.

Weill and Reed have to act quickly for both business and political
reasons. Fears that the necessary regulatory changes would not happen in
time had caused the share prices of both companies to fall. The House
Republican leadership indicates that it wants to enact the measure in the
current session of Congress. While the Clinton administration generally
supported Glass-Steagall "modernization," but there are concerns that
mid-term elections in the fall could bring in Democrats less sympathetic
to changing the laws.

In May 1998, the House passes legislation by a vote of 214 to 213 that
allows for the merging of banks, securities firms, and insurance companies
into huge financial conglomerates. And in September, the Senate Banking
Committee votes 16-2 to approve a compromise bank overhaul bill. Despite
this new momentum, Congress is yet again unable to pass final legislation
before the end of its session.

As the push for new legislation heats up, lobbyists quip that raising the
issue of financial modernization really signals the start of a fresh round
of political fund-raising. Indeed, in the 1997-98 election cycle, 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.


Oct.-Nov. 1999


Congress passes Financial Services Modernization Act


After 12 attempts in 25 years, Congress finally repeals 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.

On Oct. 21, with the House-Senate conference committee deadlocked after
marathon negotiations, 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. Sandy Weill calls President Clinton in the
evening to try to break the deadlock after 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. Serious negotiations resume, and a deal is
announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in
precipitating a deal is unclear.

On Oct. 22, Weill and John Reed issue a statement congratulating Congress
and President Clinton, including 19 administration officials and lawmakers
by name. The House and Senate approve a final version of the bill on Nov.
4, and Clinton signs it into law later that month.

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.
The previous year, Weill had called Secretary Rubin to give him advance
notice of the upcoming merger announcement. When Weill told Rubin he had
some important news, the secretary reportedly quipped, "You're buying the
government?"

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