After years of financial reforms, the deregulatory movement reached a zenith with a multi-million dollar financial services industry subsidized lobbying effort in support of a proposed merger of Citicorp and the Travelers Group. The anticipated merger was in direct violation of the existing banking law. Kenneth Guenther, President and CEO of Independent Community Bankers of America, in a PBS Frontline broadcast “The Wall Street Fix”, offered his description of events:
“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.”
[Citicorp and Travelers] pulled this off with the blessing 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 when it’s all over, what happens? The Secretary of the Treasury becomes the Vice Chairman of the emerging Citigroup.”
The Financial Services Modernization Act, universally known by the surnames of the key sponsors as the Gramm, Leach, and Bliley Act (GLBA) received strong bipartisan support. When signing GLBA into law on November 12, 1999, President Clinton called the legislative the most important changes to the structure of the U.S. financial system since the 1930s.” Because the “removal of barriers to competition will enhance the stability of our financial services system. Financial services firms will be able to diversify their product offerings and thus their source of revenue. They will also be better equipped to compete in global financial markets.” The reaction of Senator Phil Gramm was cited in Gretchen Morgenson and Joshua Rosner book Reckless Endangerment:
In the 1930s, at the trough of the Depression when Glass-Steagall became law, it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets. 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 answer. We have learned that we promote growth and we promote stability by having competition and freedom.
Based on the reporting in Reckless Endangerment, “In a photograph in the New York Times memorializing the passage of GLBA:
President Clinton sits at the table, leaning back in his chair. He beams at a semicircle of lawmakers and regulators who are laughing, cheering, and clapping. Among them is the maestro, Alan Greenspan, chairman of the Federal Reserve Board, and of course Gramm himself….The party atmosphere continued later when Leach, the chairman of the House Banking Committee, hosted an event for those who helped push through the legislation. Greenspan and other luminaries, including Treasury Secretary Lawrence H, Summers; John D. Hawke Jr., the Comptroller of the Currency; and Gary Gensler, an undersecretary of the Treasury, shared champagne and cake with reports, lobbyists, and staffer to celebrate passage of the historic law.
Gramm-Leach-Bliley had been designed not to create a new set of rules to keep up with a changing financial world but rather to kill off an old set. The inscription on the celebratory cake took note of this distinction: GLASS-STEAGALL, R.I.P. 1933-1999.
“Opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly. ‘I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that which is true in the 1930’s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. ”I wasn’t around during the 1930’s or the debate over Glass-Steagall. But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
By March 31, 2003, fifty-seven of the largest banking holding companies, including Bank of America, Citigroup, and JP Morgan Chases, became financial holding companies (FHC) as defined by GLBA. The legislation removed all remaining financial services restrictions imposed by the Banking Act of 1933. Subtitle B, a weak regulatory oversight system known as “Fed-lite,” severely restricts the ability of the Federal Reserve, or any other agency, to examine, mandate capital restrictions or obtain reports from holding companies or their subsidiaries. Other financial institutions including, AIG, GE Capital, Merrill Lynch, Lehman Brothers, and Mortgage Stanley, acquired thrifts for the main purpose origination residential mortgages. In addition, two major foreign banks, Credit Suisse and UBS, acquired U.S. securities firms. These holding companies added the purchases of subprime mortgage origination and securitization units, and subprime mortgage-related assets management units to their portfolios with restricted financial regulatory oversight.
Next Section: Growth of the Subprime Industry