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22nd May, 2008

Bill Clinton, Glass-Steagall and the Current Financial and Mortgage Crisis, Part Two of an InDepth Investigative Report

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bill clinton signs repeal of glass-steagall

Bill Clinton Signs Repeal of Glass-Steagall

The banking and financial industry complained about the Banking Act of 1933 even as Congress debated it. As the Act worked its way through Congress, banks vigorously opposed it, causing some doubts about whether it would pass, especially with the provisions Carter Glass advocated that prevented banks from entering into the stock market.

Initial Banking Opposition to Glass-Steagall

The centerpiece of the debate over Glass-Steagall was a three-week filibuster by Louisiana Senator Huey Long, which would stand as the longest filibuster in Congressional History until Strom Thurmond’s filibuster of the Civil Rights Bill. This so incensed Glass that he accused Long of being in the pockets of the banks. The American Banking Association opposed the bill. According to a paper by Jill M. Hendrickson

in 1932, 36 percent of national bank profits came from their investment affiliates (Wall Street Journal 1933b, p. 1).

Glass, in his typical style, made this point more forcefully:

Nobody can conceive of the damage done by these affiliates. They literally loaded the portfolios of interior banks with foreign securities approved by this abominable State Department. [New York Times, December 6, 1933]

Many believe the key moment that changed opposition to Glass-Steagall came with the release of the text of investigative hearings held by New York Senator Ferdinand Pecora. His investigation into banking practices uncovered abuses including:

Reputable investment houses that pushed on unsuspecting investors the securities of a company in which they were closely associated; speculation on the stock exchange; and evasion of income taxes on huge earnings by investment bankers. These questionable activities were aided by the commercial banks as they advised their depositors to use their affiliates’ security salesmen for investment advice.

The hardball tactics by Pecora’s committee seem to come from an America and a Democratic Party the exist only in dim memory, but the Committee’s findings aroused such an outcry that newly-elected President Franklin Roosevelt knew something had to be done. Hendrickson adds that perhaps as instrumental was the impact of the stock market crash itself which made investing in securities less attractive to banks.

Whatever the reason, Glass-Stegall survived Long’s filibuster and became law. Ever since the Act has been a thorn in the side of American financial industry which like the proverbial lion has howled about the thorn in its paw.

Investment Company v Camp

The most notable moment in the attempts to scuttle Glass-Steagall came with the 1971 Supreme Court decision Investment Company Institute v. Camp. In that complex case the Court issued one of the most ringing and unequivocal defenses of Glass-Steagall:

Congress was concerned that commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities.

The legislative history of the Glass-Steagall Act shows that Congress also had in mind and repeatedly focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments.

Many arguments the Supreme Court advanced in support of Glass-Steagall, would prove prophetic three decades later.

Rising Opposition

As the Republican Counterrevolution gained power, the GOP began nibbling away at Glass-Steagall. These challenges had both symbolic and legal implications. The two pieces of New Deal legislation the have most irked the Counterrevolution have been Glass-Steagall and Social Security. One dared assert that the government in the interests of the greater good had the right to regulate the nation’s financial industry and the other established the principal that the government had a duty to help the less fortunate to insure a level playing field.

It would take too long to recite all the actions that chipped away at Glass-Steagall but a few highlights stand out. In the mid-1980s a Federal Reserve Board stocked with Reagan-Bush appointees began reinterpreting Glass-Steagall in a series of actions that slowly expanded the ability of banks to engage in other financial operations. In 1990, the Fed, under former J.P. Morgan director Alan Greenspan, permitted guess who–J.P. Morgan–to become the first bank allowed to underwrite securities. It is noteworthy that if William Jennings Bryan had had his way about the Federal Reserve Act, Greenspan would have never ascended to the position that allowed him to weaken the act named for the father of the Federal Reserve System.

Four legislative attempts were made to weaken or repeal parts of Glass-Steagall from 1988-1996. One reason they failed is because smaller banks feared that opening the doors to allow banks to trade in securities would lead to the domination of larger banks–a fate that has come to pass. The biggest change came in 1996 when Alan Greenspan issued a ruling allowing bank investment affiliates to have up to a quarter of their business in investments.

The Rise of Sandy Weill

In the up-tempo financial atmosphere in the years surrounding the Greenspan ruling, all sorts of financial innovations took place, some ingenious and some illicit. Of the latter the most notorious was Enron. In this go-go market it was all but inevitable that mortgages should be drawn into this activity.

For most Americans prior to the 1990s, subprime mortgage lenders had a reputation not far removed from pawnshops and slum landlords. Like them most subprime lenders preyed on people who had no alternative and like them subprime lenders often operated on that narrow line separating the shady and the illegal. In 1986 a young man named Sanford Weill grew bored with Wall Street and purchased one of these subprime lenders, Commercial Credit, a loan company based in Baltimore. In his paper “Banking on Misery Citigroup, Wall Street, and the Fleecing of the South,” Michael Hudson notes Weill drove employees to sell more. He quotes employee Frank Smith:

Over a period of time, it went from a family, employee-oriented company—doing the right thing, trying to help its customers—to this cutthroat thing of anything that will get us more business. They need the money or by God they wouldn’t be at the finance company. They’d be at a bank.

This kind of practice resulted in multiple lawsuits that surfaced in the late 1990s and early 2000s. Hudson cites one example:

Jackson, Miss., attorney Chris Coffer says, he obtained confidential settlements for about 800 clients with claims against Commercial Credit or its successor, CitiFinancial.

Starting with Commercial, Weill began wheeling and dealing until a little over a decade later he would head the largest financial institution in the world.

The Repeal of Glass Steagall

In the background of the go-go economy, the feeling grew among some economists and the financial community that Glass-Steagall hampered America’s financial competitiveness. Among the many voices favoring this was Alan Greenspan along with former Goldman Sachs partner Robert Rubin, Bill Clinton’s Treasury Secretary. In a 1995 speech and testimony to Congress Rubin signaled the Clinton Administration was ready to repeal Glass-Steagall:

“The banking industry is fundamentally different from what it was two decades ago, let alone in 1933.” He said the industry has been transformed into a global business of facilitating capital formation through diverse new products, services and markets. “U.S. banks generally engage in a broader range of securities activities abroad than is permitted domestically,” said the Treasury secretary. “Even domestically, the separation of investment banking and commercial banking envisioned by Glass-Steagall has eroded significantly.”

Anyone who thinks the repeal of Glass-Steagall was forced on an unwilling Bill Clinton need only read Rubin’s testimony.

A year later Sandy Weill set in motion the forces that would finally end Glass-Steagall. Weill proposed the most audacious financial merger in American history: he would merge one of the largest insurance companies (Travelers), one of the largest investment banks (Salomon Smith Barney), and the largest commercial banks (Citibank) in America. The problem was the merger was illegal in terms of Glass-Steagall.

Independent Community Bankers of America CEO Kenneth Guenther captured the audacity of the deal in an interview with Frontline:

Here you have the leadership — Sandy Weill of Travelers and John Reed of Citicorp — saying, “Look, the Congress isn’t moving fast enough. Let’s do it on our own. To heck with the Congress. Let us effect this.” And so they move towards effecting it, and they get the blessing of the chairman of the Federal Reserve system in early April, when legislation is pending. I mean, this is hubris in the worst sense of the word. Who do they think they are? Other people, firms, cannot act like this. … Citicorp and Travelers were so big that they were able to pull this off. They were able to pull off the largest financial conglomeration — the largest financial coming together of banking, insurance, and securities — when legislation was still on the books saying this was illegal. And they pulled this off with the blessings of the president of the United States, President Clinton; the chairman of the Federal Reserve system, Alan Greenspan; and the secretary of the treasury, Robert Rubin. And then, when it’s all over, what happens? The secretary of the treasury becomes the vice chairman of the emerging Citigroup.

Weill convinced Greenspan, Robert Rubin and Clinton to sign off on a merger that was illegal at the time, with the expectation that Congress would repeal Glass-Steagall. Charles Geisst, a professor of finance at Manhattan College adds in a Frontline Interview:

Part of [Weill's] deal with the Federal Reserve was to get rid of all Glass-Steagall violations in the new Citigroup within two years. Otherwise, he would have been faced with a divestiture of a company which had just been put together, because of an old law which is still on the books. So it clearly behooved him, and many other people in the financial services industry who wanted to accomplish essentially the same sort of thing in the future, to push to get Glass-Steagall repealed. So they pushed hard? Pushed very hard. … They pushed so hard that the legislation, HR10, House Resolution 10, which became the Financial Services Modernization Act, was referred to as “the Citi-Travelers Act” on Capitol Hill. ..

The Gramm-Leach Bliley Act

The ” Citi-Travelers Act” went under the benign-sounding name of the Financial Services Modernization Act of 1999 and, like Glass-Steagall it has become known for the key sponsors of the bill as the Gramm-Leach-Bliley Act, for Republican Senate Banking Committee Chair Phil Gramm, House Banking Committee chair James Leach, and Virginia Representative Thomas Bliley. As the bill took form in Congress, the financial industry, particularly Citibank and Sandy Weill increased the pressure. Charles Geisst notes:

In the year previous to the Financial Services Modernization Act, the thing that overruled Glass-Steagall, Citibank spent $100 million on lobbying and public relations, which is a good indication. Yes. They spent a small fortune, a king’s ransom, if you will, getting rid of Glass-Steagall. In fact, when thrown in with other financial firms’ lobbying, it was closer to $200 million over the short period of time.

To give you some idea of the magnitude of this effort, the Center for Public Integrity reports

The pharmaceutical and health products industry has spent more than $800 million in federal lobbying and campaign donations at the federal and state levels in the past seven years, a Center for Public Integrity investigation has found. Its lobbying operation, on which it reports spending more than $675 million, is the biggest in the nation. No other industry has spent more money to sway public policy in that period. Its combined political outlays on lobbying and campaign contributions is topped only by the insurance industry.

In other words, in one year Sandy Weill and his buddies spent 1/4 of what the next biggest lobbying effort on record spent in 8 years! In a paper on the repeal of Glass-Stegall in the American Journal of Economics and Sociology Jill Hendrickson wrote:

The Industry’s efforts to jump-start progress on the [Senate] bill is a case study in how a well-heeled and well-organized interest group can swiftly prod Congress to move, even on an issue about which most people outside Washington and New York have little knowledge. Nor is it surprising, according to both political science and economic literature, that the interest groups played a vital role in the timing of the 1999 deregulation. Without persistent lobbying by commercial and investment interests it is unlikely that reform would have taken place in this century.

GLB repealed Sections 20 and 32 of the Glass-Steagall Act:

  • Section 20 – prohibited any member bank from affiliating in specific ways with an investment bank;
  • Section 32 – prohibited investment bank directors, officers, employees, or principals from serving in those capacities at a commercial member bank of the Federal Reserve System.

There was only one problem: the bill had to reconcile differences between the House and Senate versions. The House version differed in two important ways: 1) It took regulatory authority from the Federal Reserve and gave it to the Secretary of the Treasury and 2) it refused to extend to insurance companies obligations under the Community Re-investment Act to provide information about their patterns of mortgage lending.

Democrat Barney Frank was among those who especially opposed the second, telling the BBC

We can we try to do a little bit for those who are being left behind. This is an inappropriate continuation of a pattern of helping those who need a benefit but ignoring those who are left behind.

It was the Community Reinvestment Act provision in particular that threatened to derail the conference committee. Here is the now oft-quoted Frontline description of what happened:

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.

Frontline‘s pregnant pause says it all.

What Happened That Night

So why did Well call Clinton, and what did Clinton do? One take comes from a National Housing Institute article by Malcolm Bush and Katy Jacob.

In an unusual move, the three key Republican Chairmen bypassed the usual conference committee debates by writing a “final compromise” themselves. That bill’s CRA provisions resembled the original Senate bill. (House Banking Committee Chairman Jim Leach had fought in the House for a bipartisan bill with no anti-CRA measures while Senate Banking Chair Phil Gramm had insisted on the Senate’s anti-CRA provisions.)

At this point, tremendous pressure was exerted on the Clinton Administration, which had earlier threatened to veto the Senate version, to sign the legislation, and intense negotiations continued over community reinvestment and consumer privacy provisions.

The Community Reinvestment Act required regulated banks and thrifts to offer loans and banking services throughout their service areas, including lower-income communities. But here is the wrinkle–the CRA essentially served to protect low and moderate income communities from predatory lending–such as subprime mortgages. In 1999, shortly after passage of GLB, National Community Reinvestment Coalition president John Taylor wrote:

We must step up our efforts to identify and eradicate predatory lending. Horror stories abound of minority and low- and moderate-income families losing their homes and wealth due to unfair and deceptive tactics. On a national level, the banking industry increased their subprime mortgage lending from less than 1 percent of all conventional mortgage loans in 1993 to 6 percent in 1998. Our efforts will be to support and promote state and/or federal legislation, similar to that recently passed in North Carolina, that curbs abusive lending.

So we know that the topic of that late night phone call between Bill Clinton and Sandy Weill, the man whose career began in the subprime mortgage business, was the Community Reinvestment Act. We know that Phil Gramm, who was the one most strongly pushing for gutting CRA (Leach actually supported it) threatened to torpedo the legislation if the White House did not reach an agreement.

By the way, Phil Gramm is also currently co-chair of John McCain’s Presidential campaign and one of his chief economic advisors. So if you are thinking about voting Republican because of Bill Clinton’s role in the repeal of Glass-Steagall, remember that the man whose name is on the bill will probably be in John McCain’s cabinet, possibly as Treasury Secretary. Gramm still remains unrepentant about repealing Glass-Steagall. In March Gramm told U.S. News

I see no evidence whatsoever that the subprime problem was in any way caused by making our financial structure more competitive by allowing banks and securities companies and insurance companies to compete against each other. I have seen no evidence whatsoever to substantiate that claim.

So why did Clinton go along? His writings are silent on the subject. He seemingly held the trump card with the threat to veto any legislation that did not meet his approval. And why is it Sandy Weill who makes the phone call to Clinton? Woodward and Bernstein where are you when we need you?

At this point not enough evidence is available to finally connect the dots, but whatever it is, it cannot possibly benefit Bill Clinton. Were the fingers of the leaders of both parties not all over this bill, you would hope a contemporary version of Senator Pecora might investigate the entire matter, but that will probably never happen. For those who believe Wall Street now calls the tune in this country, the story of the repeal of Glass-Steagall certainly fuels their paranoia.

Troubling Sections of GLB

The most troubling aspect of GLB is not only did it repeal Glass-Steagall but it did so in an especially aggressive way that purposely weakened many enforcement provisions, some of them so obscure most of the public is not aware of them. For example:

Governance of the Federal Home Loan Banks is decentralized from the Federal Housing Finance Board to the individual Federal Home Loan Banks. Changes include the election of chairperson and vice chairperson of each Federal Home Loan Bank by its directors rather than the Finance Board, and a statutory limit on Federal Home Loan Bank directors’ compensation.

Other provisions:

Provide for a “jump ball” rulemaking and resolution process between the SEC and the Federal Reserve regarding new hybrid products. Grants regulatory relief regarding the frequency of CRA exams to small banks and savings and loans (those with no more than $250 million in assets). Small institutions having received an outstanding rating at their most recent CRA exam shall not receive a routine CRA exam more often than once each 5 years. Small institutions having received a satisfactory rating at their most recent CRA exam shall not receive a routine CRA exam more often than once each 4 years.

The most troubling section, though, is Section 108, titled USE OF SUBORDINATED DEBT TO PROTECT FINANCIAL SYSTEM AND DEPOSIT FUNDS FROM ‘‘TOO BIG TO FAIL’’ INSTITUTIONS. It provides for a study of:

The feasibility and appropriateness of establishing a requirement that, with respect to large insured depository institutions and depository institution holding companies the failure of which could have serious adverse effects on economic conditions or financial stability, such institutions and holding companies maintain some portion of their capital in the form of subordinated debt in order to bring market forces and market discipline to bear on the operation of, and the assessment of the viability of, such institutions and companies and reduce the risk to economic conditions, financial stability, and any deposit insurance fund.

Note the language of this section. For the first time in the history of the American economy certain financial institutions are being judged “too big to fail.” Think about the implication of that. A company now has such power and influence that the government cannot allow it to fail. This is corporate welfare at its worst. If a company gets to a certain size we will designate it “too big to fail.” How would you like your home to be designated too big to fail or your job?

This language as much as any other speaks of the end of the ideals that powered the new Deal.

After GLB

After the passage of GLB, the subprime market took off as if someone had attached a booster rocket to it. If anyone has doubts about Sandy Weill’s connections between GLB and the subprime market, just a year after the passage of the bill repealing Glass-Steagall, Citigroup had become the number one subprime lender in the country. Its vehicle for this was the newly formed CitiFinancial. Although he now was one of the wealthiest people in the world, some things had not changed for Sandy Weill since he bought Commercial Credit. CitiFinancial continued many of his original firm’s aggressive practices. Michael Hudson notes:

In 1999, the company agreed to pay as much as $2 million to settle a lawsuit accusing Commercial and American Health & Life of overcharging tens of thousands of Alabamans on insurance. Beasley, Allen, claim[ed] nearly 1,500 clients in Alabama, Mississippi, and Tennessee who had Commercial Credit or CitiFinancial loans.

Hudson notes Weill was especially enthused about the possibilities the repeal of Glass-Steagall had created:

Weill enthused about blending diverse units and creating opportunities for “cross selling,” which allows affiliates to market each other’s products. Primerica boasts more than 100,000 agents who can not only sell life insurance but also steer loan applicants to the parent’s subprime operations. In Weill’s vision, he’d created “a walking, talking bank.”

Not long after Hudson wrote his article and Weill made that statement, the subprime crisis hit America. While there are too many theories to go into here, one notable explanation comes from the Federal Reserve System itself. In a paper for the St. Louis Federal Reserve System, Souphala Chomsisengphet and Anthony Pennington-Cross point out:

The growth of subprime lending in the past decade has been quite dramatic. Using data reported by the magazine Inside Lending, Table 3 reports that total subprime originations (loans) have grown from $65 billion in 1995 to $332 billion in 2003. The structure of the market also changed dramatically through the 1990s and early 2000s…For example, the market share of the top 25 firms making subprime loans grew from 39.3 percent in 1995 to over 90 percent in 2003. Many firms that started the subprime industry either have failed or were purchased by larger institutions.

Meanwhile a few voices began to openly wonder if the repeal of Glass-Steagall had fueled the crisis. Thomas Kostigen of Marketwatch wrote

Glass-Steagall would have at least provided what the first of its names portends: transparency. And that is best accomplished when outsiders are peering in. Glass-Steagall forced separation. Something like it, where conflicts and losses can be mitigated, should be considered again.

Financial Week headlined, “Glass-Steagall Wasn’t Such a Bad Idea After All.” The article stated:

The credit crisis now afflicting the corporate debt and stock markets suggests Congress should revisit the work it did in 1999 that is at the root of much of today’s troubles. That’s right: It’s time to rethink the Gramm-Leach-Bliley Act, otherwise known as “Sandy’s Law” (after then-Citigroup chief executive Sanford “Sandy” Weill), which nailed shut the coffin of the Glass-Steagall Act of 1933.

Did the Repeal Contribute to the Mortgage Crisis?

So are these sources right? From an obvious, common-sense point of view they are. Had Glass-Steagall been in place Citigroup could not have formed CitiFinancial and Bear Stearns would not have needed a bailout. Many in the financial community believe the repeal of Glass-Steagall did contribute to the financial mess we are in. Scott-Cleland, founder and CEO of the Precursor Group, a research boutique for institutional investors, told Frontline

The repeal of Glass-Steagall was an important contributor to the bubble. Well, it added to the frenzy. It added to the investment banking fervor. It added to the amount of money that was staked on this. Essentially, you had a bigger shoulder pushing that rock up the hill.

Former SEC Chair Arthur Levitt is another who worried about the repeal of Glass-Seagall:

The merger of investment bank and commercial bank interests has created conflicts of interest that clearly hurt the public investor. Only extraordinary activity by both the banking and security regulators can begin to address [the] issue.

But what about Gramm-Leach-Bliley helped to fuel the crisis, for it is easy to say that if banks had not been involved in securities we would not be facing the mess we are in. Curiously one of those converts is none other than Robert Rubin who has stated

If Wall Street companies can count on being rescued like banks, then they need to be regulated like banks.

Since it was Rubin who played a major role in the deregulation this statement is nothing short of incredulous. As the record shows, Rubin had a great deal to regret. When the mortgage crisis began to unravel, several of the changes in Glass-Steagall and several of the new provision in GLB came into play.

First, because of changes in the Community Reinvestment Act, banks no longer were examined closely. Had bank examinations continued in the fashion they had before GLB, they might have provided a warning of the crisis.

Second, in what is called the “sunlight provision” that was added to the CRA portion of GLB, 501c3 organizations that had worked as watchdogs to insure that banks followed the law were put under more scrutiny than the banks themselves.

Third, Section 20 of Glass-Steagall was gutted by Alan Greenspan’s ruling. LB buried it for good. Bill Clinton could have confronted Greenspan over his order or opposed the repeal of Section 20, but chose not to. The repeal of Section 20 enabled big players like Citi to gobble up the smaller banks covered by CRA. Depending on how the acquisition was structured, those newly-acquired smaller banks now came under the new liberal examination rules of GLB.

Fourth, in emphasizing the impact of the repeal of Glass-Steagall it is important to note that GLB repealed TWO of Carter Glass’ four sections: Section 20 and section 32. Much emphasis has been placed on Section 20, but Section 32 may be equally or more important in the current crisis because it forbid interlocking directorships. The repeal of Section 32 allowed interlocking directorships that made policing and unraveling the crisis like untangling a fishing reel backlash.

Fifth, the “Too Big to Fail” section of GLB–an idea that both William Jennings Bryan and Carter Glass would have found reprehensible–changed the business playing field in America for good. For all their worship of “the market,” the Republican Counterrevolutionaries had in one stroke of a pen made the market irrelevant for the likes of Bear Stearns.

Sixth, Glass-Steagall required member banks to keep a percentage of their deposits in reserve to cover a bank run. That percentage was sustantially changed in GLB so in the event of a crisis like Bear Stearns, the funds to cover the disaster were inadequate.

The Key to it All

GLB created a financial Brave New World where institutions have become “too big to fail,” even if they skirted or even violated regulations and the financial entanglements of banks, investment companies and insurers have become difficult to sort out and virtually impossible to regulate. The reason TBTF has placed the United States economy at risk is perhaps best stated by Ed Mierzwinski at the U.S. Pirg Consumer Blog:

The reason for the bailout, from the regulator point-of-view is simple: everything is now connected to everything else. Regulators thought that the interconnected economy would absorb and diffuse risks. Instead, these interconnections and use of exotic financial instruments no one understands — coupled with the moral hazard created by the repeal of Glass-Steagall, which allows would-be lords of the universe on Wall Street (their term, not mine) to play with taxpayer-insured deposits at commercial banks — has force-multiplied local or individual financial problems into world-wide financial crises.

So now we find ourselves in the midst of a Presidential campaign in which the chief financial advisor to one candidate authored the bill that repealed Glass-Steagall and another candidate’s husband acquiesced in the deal. The third candidate has already stated he would not reinstate Glass-Steagall. When asked if he would restore Glass-Steagall Barack Obama notes

Well, no. The argument is not to go back to the regulatory framework of the 1930′s because, as I said, the financial markets have changed substantially.

I would be remiss by not adding four of Obama’s top six contributors include Goldman Sachs, J.P. Morgan and–guess who–Citigroup.

None of this promise the next four years will be any easier on the American consumer. And meanwhile I am still waiting after six months for some reporter to ask Hillary Clinton what she thinks of her husband’s repeal of Glass-Steagall and whether she would favor rolling it back.

The reason for the silence may be that for the Clintons the repeal of Glass-Steagall may prove far more embarrassing in the long run than Monica Lewinsky.

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Responses

Those who cannot learn from history are doomed to repeat it.
George Santayana,

Thanks for the history lesson. You more than confirmed my suspicions about the role of repealing Glass-Steagall and our present credit calamity; you showed once again how wealth and influence pervade all flavors of our politics. Hopefully, Obama will reconsider the need for a “regulatory framework.”

I had heard commentators decrying the CRA. Now it is eating US alive. There is no easy fix for this because the financial gobblers are “politicos” who have no desire to benefit the country or consumers, it appears. But whom have the attitude of a mercinary….”it’s for the money” not the cause. Regulatory functions need to be in place, not really in power but regulating as a dam is used to regulate water flow. My final thought. This is a single function of CHAOS in our society. Social/Religious/financial and Socio-politcal chaos. Heaven help us.

What this shows is that our present financial woes are a Bill Clinton issue. I have said that Clinton will go down (pardon the pun!) in history as the worst president in history! You mention Phil Gramm as being complicit, and I agree. Nevertheless, Clinton had the power to veto this repeal, yet he did nothing. Gramm was but ONE senator in this mess. And we have Dodd and Obama taking “mad” money from both Fannie and Freddie. Obama will provide lots more “hot air” on the subject, and no real answers. And if there is a God, (and I believe there is…yes, one of those knuckleheads who has this disturbing belief system), NObama will get no where near the White House!

Mr. Jackson should have done some minor research before responding with only his political gut. Bill Clinton’s signing of the repeal of Glass-Steagall would have been unavailing, since the Senate was 55-45 Republican and the House was 223 to 211, also Republican and the the final bill resolving the differences was passed in the Senate 90-8-1 (McCain not voting) and in the House: 362-57-15.

Excellent Article

Mr. Jackson is an idiot. The reference was Clinton being complicit, Gramm was the AUTHOR.

Great article. Well written. You have too much time on your hands.

There is plenty of blame to go around for both parties. For now, we should focus on fixing the problem. After we’ve stabilized the market and re-instituted some common sense regulations, then we can start playing the blame game. Wasting time on finger pointing will only make the problem worse.

This does not mean that we should ignore WHAT caused the problem, just that we should, at least for the time being, ignore WHO caused the problem. WHAT is about fixing, WHO is about sentencing. The victim is still alive, let’s perform CPR before we worry about the murder trial.

Cliff,

Couldn’t agree more, that’s why I’ve been running the latest series of essays about what to do. Great analogy.

As for time on my hands, don’t I wish. These get written in the middle of the night when the pain of my disability makes it impossible to sleep, so I figure why no do something.

Hope you come back. Like to have comments like yours.

The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The bills were passed by Republican majorities on party lines by a 54-44 vote in the Senate[11] and by a 343-86 vote in the House of Representatives[12]. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bipartisan bill resolving the differences was passed in the Senate 90-8 (1 not voting) and in the House: 362-57 (15 not voting). Having majorities large enough to override any possible Presidential veto, the legislation was signed into law by President Bill Clinton on November 12, 1999.

Bill Clinton was obligated to sign the bill into law because it was VETO PROOF… This article is twisted history.

Clinton pushed the law through. There is an old New York Times article I read that referred to a midnight meeting where Clinton pushed it through. Gramm insisted that there be further regulation on the community banks, Clinton and others did not want that since they wanted more not less lending to low income and disadvantaged.

Gramm got some of what he wanted and the bill passed.

Clinton admits that he had no problem with the bill and still doesn’t have a problem with it. The reality is that apparently the rest of the world did not have the restrictions. There should have been stronger regulation but the fear was that stronger regulation would interfere with low income home loans. Much the same as the Fannie Mae, Freddie Mac mess. Read some old articles and some old Congressional committe reports. Those attempting to “help” low income people by providing them loans they could not afford long term were not doing them any favor. Sometimes I wonder if our government is as ignorant as they act or they plan it that way.

You wingnuts don’t get it do you! If you are going to comment on THIS blog CITE your sources. Don’t be like your hero Rush Limbaugh and just spout undocumented BS. An “old New York Times” article will not cut it here like it does with Rush. Either cite the source or further comments will be rejected.

For readers who stumble across this BS, do not believe a word of it unless the commenter cites his source.

I guess it is true they don’t teach reading in school anymore. READ the articles in the series before you write. I have commented on this before and will not dignify it with repetition.

If you did read the series I guess you forgot that it was Robert Rubin who signaled the Clinton Administration’s support for the repeal BEFORE GLB was even WRITTEN. It was Rubin who allowed Citi’s merger to go through without objection. And it was Clinton who took that late night phone call and arm-twisted Democrats. There was a veto=proof majority because the President had already signaled there was no veto. Sorry but the Clinton Administration is guilty as charged.

And until Barack Obama gets rid of Geithner, Summers and the other who repealed Glass-Steagall we are unfortunately in for more of the same.

Winzy, do a search for Clinton and the New Bourbonism if you wish more enlightenment.

I share the view that the repeal of the Glass-Steagall Act has helped lead us to the present crisis. In fact I was so upset, when the Financial Moderization Act was passed by Congress, that I sent President Clinton a letter advising him not to sign it, but of course he did, and I received no repy.
What is not widely understood is that major life insurance companies along with banks were behind the repeal of Glass-Steagall. Evidence of this can be found within the new law itself, which permits life insurance companies, which are regulated by the States, to change domicile, if their
charter State does not permit demutualization. Mutual companies have no stockholders and are theoretically owned by the policyholders. Even though Mutual Companies have proven themselves through history to be more financially stable (all survived every American financial crisis, including the Great Depression), many of these companies began the demutualization process with diversification starting in 1968 leading to the many demutualizations by the year 2000.
Factors are several, but primary is the decline in the life insurance market and the passage of the Social Security Act in 1935, which destroyed the then very large sale of small life insurance policies know as Industrial Insurance. Companies slowly began to seek new markets, such as the sale of varible life insurance which requires heavy investment in the stock markets contrary to traditional conservative but safe investments once guaranteed by State Law. Also life insurance leadership in the late 1960–early 70′s feared movements to organize policyholders to challenge Management nominations and election of Boards. These kind of fears go back to the election of 1896, when these Companies first began to give political contributions to Federal Candidates adding to their domination of the political landscape.
It is to the good that we now have proposals for new financial regulation, including possible Federal or even International control of Life Insurance Companies. Web Sites such as yours seem ready to encourge such developments.
Sincerely,
Richard A. Norton
Brooklyn NY

Thanks for the enlightenment and the kind words. You represent the kind of reader I hope to attract.

My understanding is that what you refer to is part of the so-called ILC loophole in Gramm-Leach-Bliley, which I have written about in the past.

Hope you will come back to the site.

I have not followed the “ILC loophole” but understand that it permits commercial companies to purchase banks or insurance companies. This encourages the creation of conglomerates, which through history have often failed, at least for the life insurance business.
Another path to this same end is for insurance companies, such as Metropolitan and Principal Financial Group, to purchase brokerage houses which then sell non-insurance products such as mutual funds. These entities have been criticized for not providing unbiased information to their customers harming both the individual and the reputation of these companies, which in tern leads to a further decline in the life insurance market. A reduction of sales can be seen as a serious problem for the economy, for the marketing of life insurance encourages personal savings vital to our mutual future.
Insurance companies have also created their own entitities within their corporate structures to market non-insurance products, such as the now infamous credit default swaps.
The A.I.G. debacle already is creating informed calls for renewed financial regulation, a hopeful sign.

You might read another article on the ongoing series on the financial crisis.

Glass-Steagall repeal? Before we rewrite history and give undue credits let us note that Mc Cain was for it’s repeal (deregulation) before he was against it. He intentionally let the horse out of the barn and now wants to lobby for better locks. For history’s sake note the party lines & drafters of it’s repeal
http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00105#state

wasn’t the purpose of the repeal of GSA to allow banks to be more competitive on the world stage? What would have happened had it not been repealed? STAGNATION!

Francisco, the result would not have been stagnation, but stability, the same stability that America experienced from 1933 until conservative governments began chipping away at regulation.

The separation of commercial and investment banking in Glass-Steagall was profound, because the two types of banks have different business models. Commercial banking is principal times interest over time. It is stable and amasses wealth slowly and carefully. This is where mom-and-pop had their money. Investment banking looks for short-term gain. It is risky and the rewards, if they materialize, are great. It is for people with money that they can gamble with, at least they don’t need it for day-to-day expenses. When the separation between the two banking systems was eliminated, the investment branch of the combined banks gambles with mom-and-pop’s money. The distaster we are experiencing now are the direct result.

The “world competitiveness” argument is essentially the one Rubin presented to Congress when he argued for repeal of Glass-Steagall and is still being presented today by Rubin’s disciples in the Obama Administration as their excuse for not taking banking reform further.

That argument has been pretty well debunked by a former World Bank official (I will cover this in my upcoming piece on the House bill). In addition, you have to realize that the banking structures of other countries are not like ours. Germany allows banks to engage in a broad range of financial activities, but it also has a central bank, the Bundesbank, that has no parallel in our system, along with a federal agency charged with supervising all financial affairs, which we also lack.

Why doesn’t someone talk about 1913? That’s when The Federal Reserve Act with it’s phoney money system, the 16th amendment with it’s violation of Article I, Sec 2, clause 3; Sec 9, clause 4 and 7; 4th amendment, and the 17th amend-ment that prohibits Congress from changing the places of elections of senators in Art. I, sec 4, clause 1 of the Constitution that took away state control over the senators and gave control to the FED over the senators happened. All 3 acts should be repealed and since the governors were given power to nominate temporary senators until the next meeting of the state legislature in Art I, sec 3, cl 2, all they had to do is change it to the next selection of the state legislature and no state would ever have to be without representation. The reason for the two houses is to give the people representation and also each state to have equal representation.

IMHO, we don’t do a very good job of learning from history. We had a junk bond crisis and recently nobody seemed to recognize that bundled subprime mortgages are no different (except rating agencies gave them AAA ratings instead of BB – and shouldn’t ‘junk’ or ‘subprime’ really be rated C, D, or F?). There was a blow-up in the mutual fund world – many commercial banks were able to convert their in-house collective funds (governed by bank regulation) to mutual funds (governed by SEC) and ultimately did not understand all the risks and regulations. Now we have ‘funds’ that are feeders into multi-billion hedge funds and private equity funds, but the investing public does not know that their supposedily safe investment is flowing into a high risk/reward situation. In the 1920s people borrowed on margin to invest never thinking market would go down; recently this has been housing. Today, even after Enron and WorldCom where employees lost all their life savings due to heavy company holdings, there is still ‘silo’ investing – example: banks and companies that invested heavily in Lehman and/or Fannie Mae/Freddie Mac are being taken over or closed by regulators.
The current world market is multi-layered and multi-faceted so trying to find transparency is nearly impossible for the investor and trying to put adequate laws in place is nearly impossible for regulators.
Logic is thrown out the window when people hear of ‘big’ returns. No matter how many times the public is told to not put all your eggs in one basket and only invest in what you understand, there are still stories of people losing their life savings.
While partial repeal of GLB to draw better lines between commercial and investment banking will help, there will be in a few years another financial crisis due to risk taking. My guess would be the insurance industry which may step in to provide products not covered by the current regulatory movement.

Tom,

It seems like I keep having to repeat this over and over again. But for the record Bill Clinton was far from being the worst President in American history and he is not the sole cause for the repeal of Glass-Steagall.

I believe his successor was the one who allowed the abuses that occurred after the repeal of Glass-Steagall to get out of control and then rewarded the abusers with his so-called bailout. And this is only the start of a long list of Bush screw-ups.

As for Obama, the guy has only been in office a year and already people are writing him off because he is having difficulty dealing with the mess Bush left him. Herbert Hoover at least only left FDR with a Depression, George W left his successor with two wars, a depression, and the most heavily-tilted playing field since William McKinley.

Looking at the timeline of recessions and depression in the US you can see this is history repeating itself. See Ohio Insurance failure, Savings and loan Failure and others. Usually caused by influential businesses effecting changes in regulations that were put there as a result of previous greed related theft. The Crisis, and the resulting bailout was the predictable result of the repeal and the HOPE that either parties current representatives will somehow do the right thing is foolish.
Its time for a real change, elect a president outside of the party system who is only responsible to the people as the founders intended, see G.Washington, letters 1789

This was well researched and you were fair to point out complicity even among Liberals. It would have been more well rounded to also point out that the Bush administration approached the Senate Finance Committee 17 times during the last two years of his term regarding this very situation and the looming crisis. Could politics have played a role in the fact that the Democratic controlled Senate Finance Committee ignored these overtures? After all, the party of the sitting president always loses seats when a financial crisis starts, regardless of which party propagated the crisis.

It’s a shame that people use these comments to support one party or the other. This is a well written article with little bias toward either party. Both Republican and Democratic leaders played parts, and are called out on both sides. While the author levels some blame clearly at Clinton, he also notes how Mr. Gramm played a role. He comments several times how the Republican party repeated chipped away at the legislation. He also compliments Democrat Barney Frank with his opposition.

Why is it only the people so bent on defending one party or the other rule over the political blogs. As this article points out, both parties are to blame. Please wake up. If you are so closed minded to think only one side is to blame for the countrys woes, you are perpetuating the problem.

Dan,

You are on to something when you say, “Why is it only the people so bent on defending one party or the other rule over the political blogs.” As the title of this blog says it is about Liberal America which is defined as a belief in the level playing field. What many people are wondering is what has happened to that value.

B,

Now you have done it. I will have to research more fully those finance committee overtures. Feel free to comment back with more info and links to sources.

You know, subprime lending is not predatory lending. And the report you lean on to support the claim that Glass-Steagall repeal caused the subprime lending boom, from the St Louis Fed Res, doesn’t support the claim: It shows subprime lending had been growing for several years before the repeal, and no relationship to the repeal. Oh, and it also does talk about predatory lending—not using subprime lending as an example, because subprime lending is not predatory lending.

Maybe you should read the following study “The Neighborhood Impact of Subprime Lending, Predatory Lending and Foreclosure.” It states:

we
find that predatory lending and subprime lending appear to be intertwined

As for the rest of your comment, you appear to have not read the article very carefully. There are several other sources cited to back up the assertion that the gutting of Glass-Steagall was a mistake. Just do an online search and you will find plenty more. Among the most prominent is Nobel Laureate Joseph Stiglitz.

There also are several other pieces of evidence that show that after the repeal of Glass-Steagall the subprime market did increase dramatically. That there is an increase in the year before the repeal of Glass-Steagll I believe is due to the fact the Clinton Administration and Congress had already signaled they would repeal Glass-Steagall more than a year before the law was repealed. The Citi meger that prompted the repeal of the law–and at the time was in violation of it=also occurred before the repeal, so Citi was making those investments even before the repeal.

Took me time to read all the comments, but I really enjoyed the article.

Your article is very informative. My opinion is that banking was completely different 80 years ago and the repeal of section 20 & 32 would have helped increase prosperity in the long run. The CRA and regulation expansion that spurred the sub-prime loans derailed our economy. Emotionally I can understand why Clinton wanted to help the under-privileged but practically it should have been obvious that there would have been a cost to all. To be real, why would you want to lend money to anyone who had bad credit, or no money.

“There also are several other pieces of evidence that show that after the repeal of Glass-Steagall the subprime market did increase dramatically. That there is an increase in the year before the repeal of Glass-Steagll I believe is due to the fact the Clinton Administration and Congress had already signaled they would repeal Glass-Steagall more than a year before the law was repealed. ” This is absurd. Correlation does not imply causation. Further, several of the companies who became diversified financial conglomerates (AKA benefited from the Glass-Steagall repeal,) fared pretty well through the crisis. For example, JPMorgan and Bank of America.

J.P. Morgan and Bank of America are currently in violation of the Riegle-Neal Act, in part because of the repeal of Glass-Steagall. If ou are in favor of companies breaking the law, go for it.

I am trying to locate the people who are making a concerted effort to inform citizens about the need for reinstating the Glass-Steagall act in the Concord, MA area. Some of them appeared at a Nicki Tsongas/Concord Coalition program onJuly 29.
Can you help?

[...] Events by Marc Chamot -NEW – Zimbio Clinton's Signing NAFTA/GATT Cut America's Economic Throat Bill Clinton, Glass-Steagall and the Current Financial and Mortgage Crisis, Part Two of an InDepth I… Both the republicans and democrats are bought off and work for the same team. When someone says [...]

It is good to hear people like you are trying to keep this issue alive. I applaud your for your work. Unfortunately I do not know anyone in the Concord area.

As a suggestion a related cause is the lack of enforcement of the Riegle-Neal Act which forbids any bank from controlling more than 10% of the market. Right now the top five control significantly more than half.

We are rapidly returning to the days of J.P. Morgan.

[...] it is our taxes that ended up being raised in the end.  This is why it reminds me of when former President Clinton said that he was going to tax the tobacco industries to “make them [...]

[...] The prohibition was altogether repealed in 1999 by the bipartisan Gramm-Leach-Bliley bill, which allowed commercial banks, investment firms, and insurance companies to merge, and importantly, to issue their own securities.  But while this repeal certainly did play a role in inflating the credit bubble of the 2000’s, it does not tell the whole story. [...]

[...] Wall Street pay higher taxes sort of reminds me of when former President Clinton said that he was going to tax the tobacco industries to “make them pay,” which [...]

President Bush sent a message to Congress early in his term suggesting strongly that the policy of lending to people with no ability to pay would seem to pose some danger to the system…and the Democratic congress told him to take a hike as I recall. With 9/11, wars and hurricanes…he may not have had a chance to make it a bigger issue…until too late. What I want to know is why Dems operate with a different set of numbers and info all of the time. Is it because their party doesn’t tell the truth?? In the past what we called a lie, they called politics…and i think it has come back to bite them. There will be another great sweeping of these people who do not tell the truth out of office in the next election. And my hope is that we will make a new policy for college professors…you not only don’t get tenyear if you lie…you get fired.

[...] news > Bill Clinton, Glass-Steagall and the Current Financial and Mortgage Crisis, Part Two of an InDepth I… ~S~ __________________ Klaatu barada [...]

[...] but some info nis in there about that repeal and fanny and freddy and Clinton signing the repeal: http://thestrangedeathofliberalameri…ve-report.html Last edited by slavenomore; 9 Hours Ago at 03:02 [...]

[...] Bill Clinton and Glass-Steagall [...]

[...] Wall Street pay higher taxes sort of reminds me of when former President Clinton said that he was going to tax the tobacco industries to “make them pay,” which [...]

[...] to Congress Rubin signaled the Clinton Administration was ready to repeal Glass-Steagall: Bill Clinton, Glass-Steagall and the Current Financial and Mortgage Crisis, Part Two of an InDepth I… Glass Steagall was destroyed by the Clinton Administration, Greenspan, and the banks. It is the [...]

[...] This is the same Sandy Weill, who was the one time CEO of Travelers Insurance, one of the world’s largest insurance companies. He cooked up a scheme in 1998 to merge his company with Salmon Smith Barney, one of the largest investment banks and John Reed’s Citicorp, one of the world’s largest commercial banks. The result was a super-bank called Citigroup. In 1998 Federal Reserve Chairman Alan Greenspan, President Bill Clinton and Treasury Secretary Robert Rubin approved the merger, even though it violated prohibitions enacted in the Glass-Steagall act of 1933. [...]

Is there any wonder why people of this country have had enough? The most corrupt in the country’s history-what else is going on?To big to fail. Another bad joke on the taxpayers.

Getting ready to write what may be the final post of this blog: Is Democracy Dead?

[...] Wall Street pay higher taxes sort of reminds me of when former President Clinton said that he was going to tax the tobacco industries to “make them pay,” which [...]

[...] straw that broke the camel’s back for many of us was when Clinton went along with the Republicans to repeal the Glass-Steagall Act back in 1999, which ultimately led to conditions that enabled the Great Recession of [...]

Here is the make-or-break debate question for Hillary: Does she support enforcement of the Riegle-Neal Act? Look that one up, then write a post on it.

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Theme is largely my own, but based on the now-defunct Ocean Mist Theme. Some of the artwork comes from the cover of The Strange Death of Liberal America (the book). The background that uses the actual Star-Spangled Banner that flew over Fort McHenry took mucho work, so I appreciate you comments.

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