Glass-Steagal VS Gramm-Leach-Bliley

Commentary By Ron Beasley

It looks like Obama may be getting closer to doing the right think in Afghanistan will we see the same thing on the economy.  If he does he needs to look at what happened and how we got here.  Robert Weissman reminds us that this is the 10th anniversary of the Gramm-Leach-Billey Act which repealed the Glass-Steagal Act and allowed the banks to join the casino economy and create a near depression when they lost.

The repeal of Glass-Steagall removed the legal prohibition on combinations between commercial banks on the one hand, and investment banks and other financial services companies on the other. Glass-Steagall's strict rules originated in the U.S. government's response to the Depression and reflected the learned experience of the severe dangers to consumers and the overall financial system of permitting giant financial institutions to combine commercial banking with other financial operations.

Glass-Steagall protected depositors and prevented the banking system from taking on too much risk by defining industry structure: Commercial banks could not maintain investment banking or insurance affiliates (nor affiliates in non-financial commercial activity).

Two of Obama's leading economic advisers, Robert Rubin and Larry Summers, were advocates for the repeal and remain unapologetic today refusing to admit that the repeal of Glass-Stegall was the path to economic disaster.

Then, in 1998, in an act of corporate civil disobedience, Citicorp and Travelers Group announced they were merging. Such a combination of banking and insurance companies was illegal under the Bank Holding Company Act, but was excused due to a loophole that provided a two-year review period of proposed mergers. The merger was premised on the expectation that Glass-Steagall would be repealed. Citigroup's co-chairs Sandy Weill and John Reed led a swarm of industry executives and lobbyists who trammeled the halls of Congress to make sure a deal was cut.  But as the deal-making on the bill moved into its final phase in Fall 1999, fears ran high that the entire exercise would collapse. (Reed now says repeal of Glass-Steagall was a mistake.)

Robert Rubin stepped into the breach. Having recently stepped aside as Treasury Secretary, Rubin was at the time negotiating the terms of his next job as an executive without portfolio at Citigroup. But this was not public knowledge at the time. Deploying the credibility built up as part of what the media had labeled "The Committee to Save the World" (Rubin, Fed Chair Alan Greenspan and then-Deputy Treasury Secretary Lawrence Summers, so named for their interventions in addressing the Asian financial crisis in 1997), Rubin helped broker the final deal.

The Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act of 1999, formally repealed Glass-Steagall. Among a long list of deregulatory moves large and small over the last two decades, Gramm-Leach-Bliley was the signal piece of financial deregulation.

Repeal of Glass-Steagall had many important direct effects but the most important was to change the culture of commercial banking to emulate Wall Street's high-risk speculative betting approach.

What is necessary is a complete restructuring of the financial system and we have seen no indication of that from this administration and won't as long as Rubin and Summers are calling the shots.  The oligarchs of Wall Street and the financial industry still own the Obama administration.