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Glass–Steagall ActThe Glass–Steagall Act is a term often applied to the entire Banking Act of 1933, after its Congressional sponsors,Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama.[] The termGlass–Steagall Act, however, is most often used to refer to four provisions of the Banking Act of 1933 that limitedcommercial bank securities activities and affiliations between commercial banks and securities firms.[1] This articledeals with that limited meaning of the Glass–Steagall Act. A separate article describes the entire Banking Act of1933.Starting in the early 1960s federal banking regulators interpreted provisions of the Glass–Steagall Act to permitcommercial banks and especially commercial bank affiliates to engage in an expanding list and volume of securitiesactivities.[] By the time the affiliation restrictions in the Glass–Steagall Act were repealed through theGramm–Leach–Bliley Act of 1999 (GLBA), many commentators argued Glass–Steagall was already “dead.”[2] Mostnotably, Citibank’s 1998 affiliation with Salomon Smith Barney, one of the largest US securities firms, waspermitted under the Federal Reserve Board’s then existing interpretation of the Glass–Steagall Act.[3] President BillClinton publicly declared "the Glass–Steagall law is no longer appropriate."[4] Many commentators have stated thatthe GLBA’s repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the late-2000sfinancial crisis.[5][6][7] Some critics of that repeal argue it permitted Wall Street investment banking firms to gamblewith their depositors' money that was held in affiliated commercial banks.[8] Others have argued that the activitieslinked to the financial crisis were not prohibited (or, in most cases, even regulated) by the Glass–Steagall Act.[9]

Commentators, including former President Clinton in 2008 and the American Bankers Association in January 2010,have also argued that the ability of commercial banking firms to acquire securities firms (and of securities firms toconvert into bank holding companies) helped mitigate the financial crisis.[10]

Name confusion: 1932 and 1933 Glass–Steagall Acts

Sen. Carter Glass (D—Va.) and Rep. Henry B. Steagall (D—Ala.-3), theco-sponsors of the Glass–Steagall Act.

Two separate United States laws are knownas the Glass–Steagall Act. Both bills weresponsored by Democratic Senator CarterGlass of Lynchburg, Virginia, a formerSecretary of the Treasury, and DemocraticCongressman Henry B. Steagall ofAlabama, Chairman of the HouseCommittee on Banking and Currency.

The Glass–Steagall Act of 1932 authorizedFederal Reserve Banks to (1) lend to five ormore Federal Reserve System memberbanks on a group basis or to any individualmember bank with capital stock of $5million or less against any satisfactory

collateral, not only “eligible paper,” and (2) issue Federal Reserve Bank Notes (i.e., paper currency) backed by USgovernment securities when a shortage of “eligible paper” held by Federal Reserve banks would have required suchcurrency to be backed by gold.[11] The Federal Reserve Board explained that the special lending to Federal Reservemember banks permitted by the 1932 Glass–Steagall Act would only be permitted in “unusual and temporarycircumstances.”[12]

The entire Banking Act of 1933 (the 1933 Banking Act), which is described in a separate article, is also often referred to as the Glass–Steagall Act.[13] Over time, however, the term Glass–Steagall Act came to be used most

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often to refer to four provisions of the 1933 Banking Act that separated commercial banking from investmentbanking.[1] Congressional efforts to “repeal the Glass–Steagall Act” referred to those four provisions (and thenusually to only the two provisions that restricted affiliations between commercial banks and securities firms).[14]

Those efforts culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisionsrestricting affiliations between banks and securities firms.[15]

Legislative history of the Glass–Steagall ActThe article on the 1933 Banking Act describes the legislative history of that Act, including the Glass–Steagallprovisions separating commercial and investment banking. As described in that article, between 1930 and 1932Senator Carter Glass (D-VA) introduced several versions of a bill (known in each version as the Glass bill) toregulate or prohibit the combination of commercial and investment banking and to establish other reforms (exceptdeposit insurance) similar to the final provisions of the 1933 Banking Act.[16] On January 25, 1933, during the lameduck session of Congress following the 1932 elections, the Senate passed a version of the Glass bill that would haverequired commercial banks to eliminate their securities affiliates.[17] The final Glass–Steagall provisions containedin the 1933 Banking Act reduced from five years to one year the period in which commercial banks were required toeliminate such affiliations.[18] Although the deposit insurance provisions of the 1933 Banking Act were verycontroversial, and drew veto threats from President Franklin Delano Roosevelt, President Roosevelt supported theGlass–Steagall provisions separating commercial and investment banking, and Representative Steagall includedthose provisions in his House bill that differed from Senator Glass’s Senate bill primarily in its deposit insuranceprovisions.[19]

As described in the 1933 Banking Act article, many accounts of the Act identify the Pecora Investigation asimportant in leading to the Act, particularly its Glass–Steagall provisions, becoming law.[20] While supporters of theGlass–Steagall separation of commercial and investment banking cite the Pecora Investigation as supporting thatseparation,[21] Glass–Steagall critics have argued that the evidence from the Pecora Investigation did not support theseparation of commercial and investment banking.[22]

The Glass–Steagall provisions separating commercial and investment bankingThe Glass–Steagall separation of commercial and investment banking was in four sections of the 1933 Banking Act(sections 16, 20, 21, and 32).[1]

Section 16Section 16 prohibited national banks from purchasing or selling securities except for a customer’s account (i.e., as acustomer’s agent) unless the securities were purchased for the bank’s account as “investment securities” identified bythe Comptroller of the Currency as permitted national bank investments. Section 16 also prohibited national banksfrom underwriting or distributing securities.[23]

Section 16, however, permitted national banks to buy, sell, underwrite, and distribute US government and generalobligation state and local government securities. Such securities became known as “bank-eligible securities.”[23]

Section 5(c) of the 1933 Banking Act (sometimes referred to as the fifth Glass–Steagall provision) applied Section16’s rules to Federal Reserve System member state chartered banks.[24]

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Section 20Section 20 prohibited any member bank of the Federal Reserve System (whether a state chartered or national bank)from being affiliated with a company that “engaged principally” in “the issue, flotation, underwriting, public sale, ordistribution” of securities.[25]

Section 21Section 21 prohibited any company or person from taking deposits if it was in the business of “issuing, underwriting,selling, or distributing” securities.[26]

Section 32Section 32 prohibited any Federal Reserve System member bank from having any officer or director in common witha company “engaged primarily” in the business of “purchasing, selling, or negotiating” securities, unless the FederalReserve Board granted an exemption.[27]

1935 clarifying amendmentsSections 16 and 21 contradicted each other. The Banking Act of 1935 “clarified” that Section 21 would not prevent adeposit taking company from engaging in any of the securities underwriting and dealing activities permitted bySection 16. It also amended Section 16 to permit a bank to purchase stocks, not only debt securities, for a customer’saccount.[28]

The Banking Act of 1935 amended Section 32 to make it consistent with Section 20 and to prevent a securitiescompany and bank from having any employee (not only any officer) in common. With the amendment, both Sections20 and 32 applied to companies engaged in the “issue, flotation, underwriting, public sale, or distribution” ofsecurities.[29]

Prohibitions apply to dealing in and underwriting or distributing securitiesThe Glass–Steagall Act was primarily directed at restricting banks and their affiliates underwriting or distributingsecurities. Senator Glass, Representative Steagall, Ferdinand Pecora, and others claimed banks had abused thisactivity to sell customers (including correspondent banks) high risk securities.[30] As particular “conflicts of interest,”they alleged bank affiliates had underwritten corporate and foreign government bonds to repay loans made by theiraffiliated banks or, in the opposite direction, banks had lent to or otherwise supported corporations that used thebank’s affiliate to underwrite their bonds.[31]

Sections 16 and 5(c) meant no member bank of the Federal Reserve System could underwrite or distribute corporateor other non-governmental bonds.[23] Sections 20 and 32 meant such a bank could not own (directly or through thesame bank holding company) a company “engaged primarily in” such underwriting or other securities activities norhave any director or employee that was also a director or employee of such a company.[32]

Senator Glass, Representative Steagall, and others claimed banks had made too many loans for securities speculationand too many direct bank investments in securities.[33] As described in the article on the Banking Act of 1933,non-“Glass–Steagall” provisions of the 1933 Banking Act restricted those activities.[34] Among the Glass–Steagallprovisions, Sections 16 and 5(c) prevented a Federal Reserve member bank from investing in equity securities[35] orfrom “dealing” in debt securities as a market maker or otherwise.[36] Section 16 permitted national banks (andSection 5(c) permitted state member banks) to purchase for their own accounts “marketable” debt securities that were“investment securities” approved by the Comptroller of the Currency. The Comptroller interpreted this to meanmarketable securities rated “investment grade” by the rating agencies or, if not rated, a security that is the “creditequivalent.”[36]

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Even before Glass–Steagall, however, national banks had been prohibited from investing in equity securities andcould only purchase as investments debt securities approved by the Comptroller. Section 16’s major change was(through the Comptroller’s interpretation) to limit the investments to “investment grade” debt and to repeal theMcFadden Act permission for national banks to act as “dealers” in buying and selling debt securities. Section 5(c)applied these national bank restrictions to state chartered banks that were members of the Federal ReserveSystem.[37]

The Comptroller ruled national banks could “trade” investment securities they had purchased, based on a bank’spower to sell its assets, so long as this trading did not cause the bank to be a “dealer.” Section 16 itself required banksto purchase only “marketable” securities, so that it contemplated (and required) that the securities be traded in aliquid market. The Office of the Comptroller, like the Securities and Exchange Commission, distinguished between a“trader” and a “dealer.” A “trader” buys and sells securities “opportunistically” based on when it thinks prices are lowor high. A “dealer” buys and sells securities with customers to provide “liquidity” or otherwise provides buy and sellprices “on a continuous basis” as a market maker or otherwise.[38] The Comptroller of the Currency, therefore, ruledthat Section 16 permitted national banks to engage in “proprietary trading” of “investment securities” for which itcould not act as a “dealer.”[39] Thus, Glass–Steagall permitted “banks to invest in and trade securities to a significantextent” and did not restrict trading by bank affiliates, although the Bank Holding Company Act did restrictinvestments by bank affiliates.[40]

None of these prohibitions applied to “bank-eligible securities” (i.e., US government and state general obligationsecurities). Banks were free to underwrite, distribute, and deal in such securities.[23]

Glass–Steagall “loopholes”

Except for Section 21, Glass–Steagall only covered Federal Reserve member commercial banks

As explained in the article on the Banking Act of 1933, if the 1933 Banking Act had not been amended, it wouldhave required all federally insured banks to become members of the Federal Reserve System.[41] Instead, becausethat requirement was removed through later legislation, the United States retained a dual banking system in which alarge number of state chartered banks remained outside the Federal Reserve System.[42] This meant they were alsooutside the restrictions of Sections 16, 20, and 32 of the Glass–Steagall Act.[43] As described below, this becameimportant in the 1980s when commentators worried large commercial banks would leave the Federal ReserveSystem to avoid Glass–Steagall’s affiliation restrictions.[44]

Although Section 21 of the Glass–Steagall Act was directed at preventing securities firms (particularly traditionalprivate partnerships such as J.P. Morgan & Co.) from accepting deposits, it prevented any firm that accepted depositsfrom underwriting or dealing in securities (other than “bank-eligible securities” after the 1935 Banking Act’s“clarification”). This meant Section 21, unlike the rest of Glass–Steagall, applied to savings and loans and other“thrifts,” state nonmember banks, and any other firm or individual in the business of taking deposits.[26] Thisprevented such “depository institutions” from being securities firms. It did not prevent securities firms, such asMerrill Lynch, from owning separate subsidiaries that were thrifts or state chartered, non-Federal Reserve memberbanks.[45] As described below, this became important when securities firms used “unitary thrifts” and “nonbankbanks” to avoid both Glass–Steagall affiliation restrictions and holding company laws that generally limited bankholding companies to banking businesses[46] and savings and loan holding companies to thrift businesses.[47]

Different treatment of bank and affiliate activities

Section 21 was not the only Glass–Steagall provision that treated differently what a company could do directly andwhat it could do through a subsidiary or other affiliate. As described in the Banking Act of 1933 article, SenatorGlass and other proponents of separating commercial banks from investment banking attacked the artificiality ofdistinguishing between banks and their securities affiliates.[48] Sections 20[25] and 32[27] of the Glass–Steagall Act,however, distinguished between what a bank could do directly and what an affiliated company could do.[49]

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No bank covered by Section 16’s prohibitions could buy, sell, underwrite, or distribute any security except asspecifically permitted by Section 16.[23] Under Section 21, no securities firm (understood as a firm “in the business”of underwriting, distributing, or dealing in securities) could accept any deposit.[26]

Glass–Steagall’s affiliation provisions did not contain such absolute prohibitions. Section 20 only prohibited a bankfrom affiliating with a firm “engaged principally” in underwriting, distributing, or dealing in securities.[25] UnderSection 32, a bank could not share employees or directors with a company “primarily engaged” in underwriting,distributing, or dealing in securities.[27]

This difference (which would later be termed a “loophole”) provided the justification for the “long demise ofGlass–Steagall” through regulatory actions that largely negated the practical significance of Sections 20 and 32before they were repealed by the GLBA.[] The fact Sections 16, 20, and 32 only restricted Federal Reserve memberbanks was another feature that made the Glass–Steagall Act less than “comprehensive” and, in the words of a 1987commentator, provided “opportunities for banking institutions and their lawyers to explore (or, perhaps moreaccurately, to exploit).”[50]

Glass–Steagall developments from 1935 to 1991Commercial banks withdrew from the depressed securities markets of the early 1930s even before the Glass–Steagallprohibitions on securities underwriting and dealing became effective.[51] Those prohibitions, however werecontroversial. A 1934 study of commercial bank affiliate underwriting of securities in the 1920s found suchunderwriting was not better than the underwriting by firms that were not affiliated with banks. That study disputedGlass–Steagall critics who suggested securities markets had been harmed by prohibiting commercial bankinvolvement.[52] A 1942 study also found that commercial bank affiliate underwriting was not better (or worse) thannonbank affiliate underwriting, but concluded this meant it was a “myth” commercial bank securities affiliates hadtaken advantage of bank customers to sell “worthless securities.”[53]

Senator Glass’s “repeal” effortIn 1935 Senator Glass attempted to repeal the Glass–Steagall prohibition on commercial banks underwritingcorporate securities. Glass stated Glass–Steagall had unduly damaged securities markets by prohibiting commercialbank underwriting of corporate securities.[54] The first Senate passed version of the Banking Act of 1935 includedGlass’s revision to Section 16 of the Glass–Steagall Act to permit bank underwriting of corporate securities subjectto limitations and regulations.[55]

President Roosevelt opposed this revision to Section 16 and wrote Glass that “the old abuses would come back ifunderwriting were restored in any shape, manner, or form.” In the conference committee that reconciled differencesbetween the House and Senate passed versions of the Banking Act of 1935, Glass’s language amending Section 16was removed.[56]

Comptroller Saxon’s Glass–Steagall interpretationsPresident John F. Kennedy’s appointee as Comptroller of the Currency, James J. Saxon, was the next public officialto challenge seriously Glass–Steagall’s prohibitions. As the regulator of national banks, Saxon was concerned withthe competitive position of commercial banks. In 1950 commercial banks held 52% of the assets of US financialinstitutions. By 1960 that share had declined to 38%. Saxon wanted to expand the powers of national banks.[57]

In 1963, the Saxon-led Office of the Comptroller of the Currency (OCC) issued a regulation permitting nationalbanks to offer retail customers “commingled accounts” holding common stocks and other securities.[58] Thisamounted to permitting banks to offer mutual funds to retail customers.[59] Saxon also issued rulings that nationalbanks could underwrite municipal revenue bonds.[60] Courts ruled that both of these actions violatedGlass–Steagall.[61]

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In rejecting bank sales of accounts that functioned like mutual funds, the Supreme Court explained in InvestmentCompany Institute v. Camp that it would have given “deference” to the OCC’s judgment if the OCC had explainedhow such sales could avoid the conflicts of interest and other “subtle hazards” Glass–Steagall sought to prevent andthat could arise when a bank offered a securities product to its retail customers.[62] Courts later applied this aspect ofthe Camp ruling to uphold interpretations of Glass–Steagall by federal banking regulators.[] As in the Camp case,these interpretations by bank regulators were routinely challenged by the mutual fund industry through theInvestment Company Institute or the securities industry through the Securities Industry Association as they sought toprevent competition from commercial banks.[63]

1966 to 1980 developments

Increasing competitive pressures for commercial banks

Regulation Q limits on interest rates for time deposits at commercial banks, authorized by the 1933 Banking Act,first became “effective” in 1966 when market interest rates exceeded those limits.[64] This produced the first ofseveral “credit crunches” during the late 1960s and throughout the 1970s as depositors withdrew funds from banks toreinvest at higher market interest rates.[65] When this “disintermediation” limited the ability of banks to meet theborrowing requests of all their corporate customers, some commercial banks helped their “best customers” establishprograms to borrow directly from the “capital markets” by issuing commercial paper.[66] Over time, commercialbanks were increasingly left with lower credit quality, or more speculative, corporate borrowers that could notborrow directly from the “capital markets.”[67]

Eventually, even lower credit quality corporations and (indirectly through “securitization”) consumers were able toborrow from the capital markets as improvements in communication and information technology allowed investorsto evaluate and invest in a broader range of borrowers.[68] Banks began to finance residential mortgages throughsecuritization in the late 1970s.[69] During the 1980s banks and other lenders used securitizations to provide “capitalmarkets” funding for a wide range of assets that previously had been financed by bank loans.[70] In losing “theirpreeminent status as expert intermediaries for the collection, processing, and analysis of information relating toextensions of credit”, banks were increasingly “bypassed” as traditional “depositors” invested in securities thatreplaced bank loans.[71]

In 1977 Merrill Lynch introduced a “cash management account” that allowed brokerage customers to write checks onfunds held in a money market account or drawn from a “line of credit” Merrill provided.[72] The Securities andExchange Commission (SEC) had ruled that money market funds could “redeem” investor shares at a $1 stable “netasset value” despite daily fluctuations in the value of the securities held by the funds. This allowed money marketfunds to develop into “near money” as “investors” wrote checks (“redemption orders”) on these accounts much as“depositors” wrote checks on traditional checking accounts provided by commercial banks.[73]

Also in the 1970s savings and loans, which were not restricted by Glass–Steagall other than Section 21,[45] werepermitted to offer “negotiable order of withdrawal accounts” (NOW accounts). As with money market accounts,these accounts functioned much like checking accounts in permitting a depositor to order payments from a “savingsaccount.”[74]

Helen Garten concluded that the “traditional regulation” of commercial banks established by the 1933 Banking Act,including Glass–Steagall, failed when nonbanking firms and the “capital markets” were able to provide replacementsfor bank loans and deposits, thereby reducing the profitability of commercial banking.[75] While he agreed traditionalbank regulation was unable to protect commercial banks from nonbank competition, Richard Vietor also noted thatthe economic and financial instability that began in the mid-1960s both slowed economic growth and savings(reducing the demand for and supply of credit) and induced financial innovations that undermined commercialbanks.[76]

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Hyman Minsky agreed financial instability had returned in 1966 and had only been constrained in the following 15years through Federal Reserve Board engineered “credit crunches” to combat inflation followed by “lender of lastresort” rescues of asset prices that produced new inflation. Minsky described ever worsening periods of inflationfollowed by unemployment as the cycle of rescues followed by credit crunches was repeated.[65] Minsky, however,supported traditional banking regulation[77] and advocated further controls of finance to “promote smaller andsimpler organizations weighted more toward direct financing.”[78] Writing from a similar “neo-Keynesianperspective, Jan Kregel concluded that after World War II non-regulated financial companies, supported byregulatory actions, developed means to provide bank products (“liquidity and lending accommodation”) morecheaply than commercial banks through the “capital markets.”[79] Kregel argued this led banking regulators toeliminate Glass–Steagall restrictions to permit banks to “duplicate these structures” using the capital markets “untilthere was virtually no difference in the activities of FDIC-insured commercial banks and investment banks.”[80]

Comptroller Saxon had feared for the competitive viability of commercial banks in the early 1960s.[57] The “capitalmarkets” developments in the 1970s increased the vulnerability of commercial banks to nonbank competitors. Asdescribed below, this competition would increase in the 1980s.[81]

Limited congressional and regulatory developments

In 1967 the Senate passed the first of several Senate passed bills that would have revised Glass–Steagall Section 16to permit banks to underwrite municipal revenue bonds.[82] In 1974 the OCC authorized national banks to provide“automatic investment services,” which permitted bank customers to authorize regular withdrawals from a depositaccount to purchase identified securities.[83] In 1977 the Federal Reserve Board staff concluded Glass–Steagallpermitted banks to privately place commercial paper. In 1978 Bankers Trust began making such placements.[84] Asdescribed below, in 1978, the OCC authorized a national bank to privately place securities issued to sell residentialmortgages in a securitization[]

Commercial banks, however, were frustrated with the continuing restrictions imposed by Glass–Steagall and otherbanking laws.[85] After many of Comptroller Saxon’s decisions granting national banks greater powers had beenchallenged or overturned by courts, commercial banking firms had been able to expand their non-securities activitiesthrough the “one bank holding company.”[86] Because the Bank Holding Company Act only limited nonbankingactivities of companies that owned two or more commercial banks, “one bank holding companies” could owninterests in any type of company other than securities firms covered by Glass–Steagall Section 20. That “loophole” inthe Bank Holding Company Act was closed by a 1970 amendment to apply the Act to any company that owned acommercial bank.[87] Commercial banking firm’s continuing desire for greater powers received support when RonaldReagan became President and appointed banking regulators who shared an “attitude towards deregulation of thefinancial industry.”[88]

Reagan Administration developments

State non-member bank and nonbank bank “loopholes”In 1982, under the chairmanship of William Isaac, the FDIC issued a “policy statement” that state charterednon-Federal Reserve member banks could establish subsidiaries to underwrite and deal in securities. Also in 1982the OCC, under Comptroller C. Todd Conover, approved the mutual fund company Dreyfus Corporation and theretailer Sears establishing “nonbank bank” subsidiaries that were not covered by the Bank Holding Company Act.The Federal Reserve Board, led by Chairman Paul Volcker, asked Congress to overrule both the FDIC’s and theOCC’s actions through new legislation.[89]

The FDIC’s action confirmed that Glass–Steagall did not restrict affiliations between a state chartered non-Federal Reserve System member bank and securities firms, even when the bank was FDIC insured.[43] State laws differed in how they regulated affiliations between banks and securities firms.[90] In the 1970s, foreign banks had taken advantage of this in establishing branches in states that permitted such affiliations.[91] Although the International

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Banking Act of 1978 brought newly established foreign bank US branches under Glass–Steagall, foreign banks withexisting US branches were “grandfathered” and permitted to retain their existing investments. Through this“loophole” Credit Suisse was able to own a controlling interest in First Boston, a leading US securities firm.[92]

After the FDIC’s action, commentators worried that large commercial banks would leave the Federal ReserveSystem (after first converting to a state charter if they were national banks) to free themselves from Glass–Steagallaffiliation restrictions, as large commercial banks lobbied states to permit commercial bank investment bankingactivities.[44]

The OCC’s action relied on a “loophole” in the Bank Holding Company Act (BHCA) that meant a company onlybecame a “bank holding company” supervised by the Federal Reserve Board if it owned a “bank” that made“commercial loans” (i.e., loans to businesses) and provided “demand deposits” (i.e., checking accounts). A “nonbankbank” could be established to provide checking accounts (but not commercial loans) or commercial loans (but notchecking accounts). The company owning the nonbank bank would not be a bank holding company limited toactivities “closely related to banking.” This permitted Sears, GE, and other commercial companies to own “nonbankbanks.”[46]

Glass–Steagall’s affiliation restrictions applied if the nonbank bank was a national bank or otherwise a member ofthe Federal Reserve System. The OCC’s permission for Dreyfus to own a nationally chartered “nonbank bank” wasbased on the OCC’s conclusion that Dreyfus, as a mutual fund company, earned only a small amount of its revenuethrough underwriting and distributing shares in mutual funds. Two other securities firms, J. & W. Seligman & Co.and Prudential-Bache, established state chartered non-Federal Reserve System member banks to avoidGlass–Steagall restrictions on affiliations between member banks and securities firms.[93]

Legislative response

Although Paul Volcker and the Federal Reserve Board sought legislation overruling the FDIC and OCC actions, theyagreed bank affiliates should have broader securities powers. They supported a bill sponsored by Senate BankingCommittee Chairman Jake Garn (R-UT) that would have amended Glass–Steagall Section 20 to cover all FDICinsured banks and to permit bank affiliates to underwrite and deal in mutual funds, municipal revenue bonds,commercial paper, and mortgage-backed securities. On September 13, 1984, the Senate passed the Garn bill in an89-5 vote, but the Democratic controlled House did not act on the bill.[94]

In 1987, however, the Senate (with a new Democratic Party majority) joined with the House in passing theCompetitive Equality Banking Act of 1987 (CEBA). Although primarily dealing with the savings and loan crisis,CEBA also established a moratorium to March 1, 1988, on banking regulator actions to approve bank or affiliatesecurities activities, applied the affiliation restrictions of Glass–Steagall Sections 20 and 32 to all FDIC insuredbanks during the moratorium, and eliminated the “nonbank bank” loophole for new FDIC insured banks (whetherthey took demand deposits or made commercial loans) except industrial loan companies. Existing “nonbank banks”,however, were “grandfathered” so that they could continue to operate without becoming subject to BHCArestrictions.[95]

The CEBA was intended to provide time for Congress (rather than banking regulators) to review and resolve theGlass–Steagall issues of bank securities activities. Senator William Proxmire (D-WI), the new Chairman of theSenate Banking Committee, took up this topic in 1987.[96]

International competitiveness debate

Wolfgang Reinicke argues that Glass–Steagall “repeal” gained unexpected Congressional support in 1987 because large banks successfully argued that Glass–Steagall prevented US banks from competing internationally.[97] With the argument changed from preserving the profitability of large commercial banks to preserving the “competitiveness” of US banks (and of the US economy), Senator Proxmire reversed his earlier opposition to Glass–Steagall reform.[98] Proxmire sponsored a bill that would have repealed Glass–Steagall Sections 20 and 32

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and replaced those prohibitions with a system for regulating (and limiting the amount of) bank affiliate securitiesactivities.[99] He declared Glass–Steagall a “protectionist dinosaur.”[100]

By 1985 commercial banks provided 26% of short term loans to large businesses compared to 59% in 1974. Whilebanks cited such statistics to illustrate the “decline of commercial banking,” Reinicke argues the most influentialfactor in Congress favoring Glass–Steagall “repeal” was the decline of US banks in international rankings. In 1960six of the ten largest banks were US based, by 1980 only two US based banks were in the top ten, and by 1989 nonewas in the top twenty five.[81]

In the late 1980s the United Kingdom and Canada ended their historic separations of commercial and investmentbanking.[101] Glass–Steagall critics scornfully noted only Japanese legislation imposed by Americans during theOccupation of Japan kept the United States from being alone in separating the two activities.[102]

As noted above, even in the United States seventeen foreign banks were free from this Glass–Steagall restrictionbecause they had established state chartered branches before the International Banking Act of 1978 brought newlyestablished foreign bank US branches under Glass–Steagall.[92] Similarly, because major foreign countries did notseparate investment and commercial banking, US commercial banks could underwrite and deal in securities throughbranches outside the United States. Paul Volcker agreed that, “broadly speaking,” it made no sense that UScommercial banks could underwrite securities in Europe but not in the United States.[103]

1987 status of Glass–Steagall debate

Throughout the 1980s and 1990s scholars published studies arguing that commercial bank affiliate underwritingduring the 1920s was no worse, or was better, than underwriting by securities firms not affiliated with banks and thatcommercial banks were strengthened, not harmed, by securities affiliates.[104] More generally, researchers attackedthe idea that “integrated financial services firms” had played a role in creating the Great Depression or the collapse ofthe US banking system in the 1930s.[105] If it was “debatable” whether Glass–Steagall was justified in the 1930s, itwas easier to argue that Glass–Steagall served no legitimate purpose when the distinction between commercial andinvestment banking activities had been blurred by “market developments” since the 1960s.[106]

Along with the “nonbank bank” “loophole” from BHCA limitations, in the 1980s the “unitary thrift” “loophole”became prominent as a means for securities and commercial firms to provide banking (or “near banking”)products.[107] The Savings and Loan Holding Company Act (SLHCA) permitted any company to own a singlesavings and loan. Only companies that owned two or more savings and loan were limited to thrift relatedbusinesses.[47] Already in 1973 First Chicago Bank had identified Sears as its real competitor.[108]Citicorp CEOWalter Wriston reached the same conclusion later in the 1970s.[109] By 1982, using the “unitary thrift” and “nonbankbank” “loopholes,” Sears had built the “Sears Financial Network”, which combined “Super NOW” accounts andmortgage loans through a large California-based savings and loan, the Discover Card issued by a “nonbank bank” asa credit card, securities brokerage through Dean Witter Reynolds, home and auto insurance through Allstate, and realestate brokerage through Coldwell Banker.[110] By 1984, however, Walter Wriston concluded “the bank of the futurealready exists, and it’s called Merrill Lynch.”[111] In 1986 when major bank holding companies threatened to stopoperating commercial banks in order to obtain the “competitive advantages” enjoyed by Sears and Merrill Lynch,FDIC Chairman William Seidman warned that could create “chaos.”[112]

In a 1987 “issue brief” the Congressional Research Service (CRS) summarized “some of” the major argumentsfor preserving Glass–Steagall as:

1.1. Conflicts of interest characterize the granting of credit (lending) and the use of credit (investing) by the sameentity, which led to abuses that originally produced the Act.

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; itsextent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3.3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits.In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to

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collapse as the result of securities losses.4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to

operate prudently in more speculative securities businesses. An example is the crash of real estate investmenttrusts sponsored by bank holding companies a decade ago.

and against preserving Glass–Steagall as:

1. Depository institutions now operate in “deregulated” financial markets in which distinctions between loans,securities, and deposits are not well drawn. They are losing market shares to securities firms that are not sostrictly regulated, and to foreign financial institutions operating without much restriction from the Act.

2.2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending andcredit functions through forming distinctly separate subsidiaries of financial firms.

3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and wouldreduce the total risk of organizations offering them – by diversification.

4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both bankingand securities markets. Lessons learned from their experience can be applied to our national financial structureand regulation.[113]

Reflecting the significance of the “international competitiveness” argument, a separate CRS Report stated banks were“losing historical market shares of their major activities to domestic and foreign competitors that are lessrestricted.”[114]

Separately, the General Accounting Office (GAO) submitted to a House subcommittee a report reviewing thebenefits and risks of “Glass–Steagall repeal.” The report recommended a “phased approach” using a “holdingcompany organizational structure” if Congress chose “repeal.” Noting Glass–Steagall had “already been eroded andthe erosion is likely to continue in the future,” the GAO explained “coming to grips with the Glass–Steagall repealquestion represents an opportunity to systematically and rationally address changes in the regulatory and legalstructure that are needed to better address the realities of the marketplace.” The GAO warned that Congress’s failureto act was “potentially dangerous” in permitting a “continuation of the uneven integration of commercial andinvestment banking activities.”[115]

As Congress was considering the Proxmire Financial Modernization Act in 1988, the Commission of the EuropeanCommunities proposed a “Second Banking Directive”[116] that became effective at the beginning of 1993 andprovided for the combination of commercial and investment banking throughout the European EconomicCommunity.[117] Whereas United States law sought to isolate banks from securities activities, the Second Directiverepresented the European Union’s conclusion that securities activities diversified bank risk, strengthening theearnings and stability of banks.[118]

The Senate passed the Proxmire Financial Modernization Act of 1988 in a 94-2 vote. The House did not pass asimilar bill, largely because of opposition from Representative John Dingell (D-MI), chairman of the HouseCommerce and Energy Committee.[119]

Section 20 affiliatesIn April 1987, the Federal Reserve Board had approved the bank holding companies Bankers Trust, Citicorp, and J.P. Morgan & Co. establishing subsidiaries (“Section 20 affiliates”) to underwrite and deal in residential mortgage-backed securities, municipal revenue bonds, and commercial paper. Glass–Steagall’s Section 20 prohibited a bank from affiliating with a firm “primarily engaged” in underwriting and dealing in securities. The Board decided this meant Section 20 permitted a bank affiliate to earn 5% of its revenue from underwriting and dealing in these types of securities that were not “bank-eligible securities,” subject to various restrictions including “firewalls” to separate a commercial bank from its Section 20 affiliate.[120] Three months later the Board added “asset-backed securities” backed by pools of credit card accounts or other “consumer finance assets” to the list of “bank-ineligible securities” a Section 20 affiliate could underwrite. Bank holding companies, not commercial banks directly, owned

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these Section 20 affiliates.[121]

In 1978 the Federal Reserve Board had authorized bank holding companies to establish securities affiliates thatunderwrote and dealt in government securities and other bank-eligible securities.[122] Federal Reserve BoardChairman Paul Volcker supported Congress amending Glass–Steagall to permit such affiliates to underwrite anddeal in a limited amount of bank-ineligible securities, but not corporate securities.[123] In 1987, Volcker specificallynoted (and approved the result) that this would mean only banks with large government securities activities would beable to have affiliates that would underwrite and deal in a significant volume of “bank-ineligible securities.”[124] ASection 20 affiliate with a large volume of government securities related revenue would be able to earn a significantamount of “bank-ineligible” revenue without having more than 5% of its overall revenue come from bank-ineligibleactivities.[125] Volcker disagreed, however, that the Board had authority to permit this without an amendment to theGlass–Steagall Act. Citing that concern, Volcker and fellow Federal Reserve Board Governor Wayne Angelldissented from the Section 20 affiliate orders.[126]

Senator Proxmire criticized the Federal Reserve Board’s Section 20 affiliate orders as defying Congressional controlof Glass–Steagall. The Board’s orders meant Glass–Steagall did not prevent commercial banks from affiliating withsecurities firms underwriting and dealing in “bank-ineligible securities,” so long as the activity was “executed in aseparate subsidiary and limited in amount.”[127]

After the Proxmire Financial Modernization Act of 1988 failed to become law, Senator Proxmire and a group offellow Democratic senior House Banking Committee members (including future Committee Ranking Member JohnLaFalce (D-NY) and future Committee Chairman Barney Frank (D-MA)) wrote the Federal Reserve Boardrecommending it expand the underwriting powers of Section 20 affiliates.[128] Expressing sentiments thatRepresentative James A. Leach (R-IA) repeated in 1996,[129] Proxmire declared “Congress has failed to do the job”and “[n]ow it’s time for the Fed to step in.”[130]

Following Senator Proxmire’s letter, in 1989 the Federal Reserve Board approved Section 20 affiliates underwritingcorporate debt securities and increased from 5% to 10% the percentage of its revenue a Section 20 affiliate couldearn from “bank-ineligible” activities. In 1990 the Board approved J.P. Morgan & Co. underwriting corporate stock.With the commercial (J.P. Morgan & Co.) and investment (Morgan Stanley) banking arms of the old “House ofMorgan” both underwriting corporate bonds and stocks, Wolfgang Reinicke concluded the Federal Reserve Boardorder meant both firms now competed in “a single financial market offering both commercial and investmentbanking products,” which “Glass–Steagall sought to rule out.” Reinicke described this as “de facto repeal ofGlass–Steagall.”[131]

No Federal Reserve Board order was necessary for Morgan Stanley to enter that “single financial market.”Glass–Steagall only prohibited investment banks from taking deposits, not from making commercial loans, and theprohibition on taking deposits had “been circumvented by the development of deposit equivalents”, such as themoney market fund.[132] Glass–Steagall also did not prevent investment banks from affiliating with nonbankbanks[46] or savings and loans.[47][133] Citing this competitive “inequality,” before the Federal Reserve Boardapproved any Section 20 affiliates, four large bank holding companies that eventually received Section 20 affiliateapprovals (Chase, J.P. Morgan, Citicorp, and Bankers Trust) had threatened to give up their banking charters if theywere not given greater securities powers.[134] Following the Federal Reserve Board’s approvals of Section 20affiliates a commentator concluded that the Glass–Steagall “wall” between commercial banking and “the securitiesand investment business” was “porous” for commercial banks and “nonexistent to investment bankers and othernonbank entities.”[135]

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Greenspan-led Federal Reserve BoardAlan Greenspan had replaced Paul Volcker as Chairman of the Federal Reserve Board when Proxmire sent his 1988letter recommending the Federal Reserve Board expand the underwriting powers of Section 20 affiliates. Greenspantestified to Congress in December 1987, that the Federal Reserve Board supported Glass–Steagall repeal.[136]

Although Paul Volcker “had changed his position” on Glass–Steagall reform “considerably” during the 1980s, he wasstill “considered a conservative among the board members.” With Greenspan as Chairman, the Federal ReserveBoard “spoke with one voice” in joining the FDIC and OCC in calling for Glass–Steagall repeal.[137]

By 1987 Glass–Steagall “repeal” had come to mean repeal of Sections 20 and 32. The Federal Reserve Boardsupported “repeal” of Glass–Steagall “insofar as it prevents bank holding companies from being affiliated with firmsengaged in securities underwriting and dealing activities.”[138] The Board did not propose repeal of Glass SteagallSection 16 or 21. Bank holding companies, through separately capitalized subsidiaries, not commercial banksthemselves directly, would exercise the new securities powers.[14]

Banks and bank holding companies had already gained important regulatory approvals for securities activities beforePaul Volcker retired as Chairman of the Federal Reserve Board on August 11, 1987.[139] Aside from the Board’sauthorizations for Section 20 affiliates and for bank private placements of commercial paper, by 1987 federalbanking regulators had authorized banks or their affiliates to (1) sponsor closed end investment companies,[140] (2)sponsor mutual funds sold to customers in individual retirement accounts,[141] (3) provide customers full servicebrokerage (i.e., advice and brokerage),[142] and (4) sell bank assets through “securitizations.”[143]

In 1982 E. Gerald Corrigan, president of the Federal Reserve Bank of Minneapolis and a close Volcker colleague,published an influential essay titled “Are banks special?” in which he argued banks should be subject to specialrestrictions on affiliations because they enjoy special benefits (e.g., deposit insurance and Federal Reserve Bank loanfacilities) and have special responsibilities (e.g., operating the payment system and influencing the money supply).The essay rejected the argument that it is “futile and unnecessary” to distinguish among the various types ofcompanies in the “financial services industry.”[144]

While Paul Volcker’s January 1984, testimony to Congress repeated that banks are “special” in performing “a uniqueand critical role in the financial system and the economy,” he still testified in support of bank affiliates underwritingsecurities other than corporate bonds.[123] In its 1986 Annual Report the Volcker led Federal Reserve Boardrecommended that Congress permit bank holding companies to underwrite municipal revenue bonds,mortgage-backed securities, commercial paper, and mutual funds and that Congress “undertake hearings or otherstudies in the area of corporate underwriting.”[145] As described above, in the 1930s Glass–Steagall advocates hadalleged that bank affiliate underwriting of corporate bonds created “conflicts of interest.”[31]

In early 1987 E. Gerald Corrigan, then president of the Federal Reserve Bank of New York, recommended alegislative “overhaul” to permit “financial holding companies” that would “in time” provide banking, securities, andinsurance services (as authorized by the GLBA 12 years later).[146] In 1990 Corrigan testified to Congress that herejected the “status quo” and recommended allowing banks into the “securities business” through financial serviceholding companies.[147]

In 1991 Paul Volcker testified to Congress in support of the Bush Administration proposal to repeal Glass–SteagallSections 20 and 32.[] Volcker rejected the Bush Administration proposal to permit affiliations between banks andcommercial firms (i.e., non-financial firms) and added that legislation to allow banks greater insurance powers“could be put off until a later date.”[148]

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1991 Congressional action and “firewalls”Paul Volcker gave his 1991 testimony as Congress considered repealing Glass–Steagall sections 20 and 32 as part ofa broader Bush Administration proposal to reform financial regulation.[149] In reaction to “market developments” andregulatory and judicial decisions that had “homogenized” commercial and investment banking, RepresentativeEdward J. Markey (D-MA) had written a 1990 article arguing “Congress must amend Glass–Steagall.”[150] Aschairman of a subcommittee of the House Commerce and Energy Committee, Markey had joined with CommitteeChairman Dingell in opposing the 1988 Proxmire Financial Modernization Act. In 1990, however, Markey statedGlass–Steagall had “lost much of its effectiveness” through market, regulatory, and judicial developments that were“tantamount to an ill-coordinated, incremental repeal” of Glass–Steagall. To correct this “disharmony” Markeyproposed replacing Glass–Steagall’s “prohibitions” with “regulation.”[151] After the House Banking Committeeapproved a bill repealing Glass–Steagall Sections 20 and 32, Representative Dingell again stopped House action. Hereached agreement with Banking Committee Chairman Henry B. Gonzalez (D-TX) to insert into the bill “firewalls”that banks claimed would prevent real competition between banks and securities firms.[152] The banking industrystrongly opposed the bill in that form, and the House rejected it. The House debate revealed that Congress mightagree on repealing Sections 20 and 32 while being divided on how bank affiliations with securities firms should beregulated.[153]

1980s and 1990s bank product developmentsThroughout the 1980s and 1990s, as Congress considered whether to “repeal” Glass–Steagall, commercial banks andtheir affiliates engaged in activities that commentators later linked to the late-2000s financial crisis.[154]

Securitization, CDOs, and “subprime” credit

In 1978 Bank of America issued the first residential mortgage-backed security that securitized residential mortgagesnot guaranteed by a government-sponsored enterprise (“private label RMBS”).[69] Also in 1978, the OCC approved anational bank, such as Bank of America, issuing pass-through certificates representing interests in residentialmortgages and distributing such mortgage-backed securities to investors in a private placement.[] In 1987 the OCCruled that Security Pacific Bank could “sell” assets through “securitizations” that transferred “cash flows” from thoseassets to investors and also distribute in a registered public offering the residential mortgage-backed securities issuedin the securitization.[155] This permitted commercial banks to acquire assets for “sale” through securitizations underwhat later became termed the “originate to distribute” model of banking.[156]

The OCC ruled that a national bank’s power to sell its assets meant a national bank could sell a pool of assets in asecuritization, and even distribute the securities that represented the sale, as part of the “business of banking.”[157]

This meant national banks could underwrite and distribute securities representing such sales, even thoughGlass–Steagall would generally prohibit a national bank underwriting or distributing non-governmental securities(i.e., non-“bank-eligible” securities).[158] The federal courts upheld the OCC’s approval of Security Pacific’ssecuritization activities, with the Supreme Court refusing in 1990 to review a 1989 Second Circuit decisionsustaining the OCC’s action. In arguing that the GLBA’s “repeal” of Glass–Steagall played no role in the late-2000sfinancial crisis, Melanie Fein notes courts had confirmed by 1990 the power of banks to securitize their assets underGlass–Steagall.[159]

The Second Circuit stated banks had been securitizing their assets for “ten years” before the OCC’s 1987 approval ofSecurity Pacific’s securitization.[160] As noted above, the OCC had approved such activity in 1978.[] Jan Kregelargues that the OCC’s interpretation of the “incidental powers” of national banks “ultimately evisceratedGlass–Steagall.”[125]

Continental Illinois Bank is often credited with issuing the first collateralized debt obligation (CDO) when, in 1987,it issued securities representing interests in a pool of “leveraged loans.”[161]

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By the late 1980s Citibank had become a major provider of “subprime” mortgages and credit cards.[162] ArthurWilmarth argued that the ability to securitize such credits encouraged banks to extend more “subprime” credit.[163]

Wilmarth reported that during the 1990s credit card loans increased at a faster pace for lower-income householdsthan higher-income households and that subprime mortgage loan volume quadrupled from 1993–99, before theGLBA became effective in 2000.[164] In 1995 Wilmarth noted that commercial bank mortgage lenders differed fromnonbank lenders in retaining “a significant portion of their mortgage loans” rather than securitizing the entireexposure.[165] Wilmarth also shared the bank regulator concern that commercial banks sold their “best assets” insecuritizations and retained their riskiest assets.[166]

ABCP conduits and SIVs

In the early 1980s commercial banks established asset backed commercial paper conduits (ABCP conduits) tofinance corporate customer receivables. The ABCP conduit purchased receivables from the bank customer andissued asset-backed commercial paper to finance that purchase. The bank “advising” the ABCP conduit providedloan commitments and “credit enhancements” that supported repayment of the commercial paper. Because the ABCPconduit was owned by a third party unrelated to the bank, it was not an affiliate of the bank.[167] Through ABCPconduits banks could earn “fee income” and meet “customers’ needs for credit” without “the need to maintain theamount of capital that would be required if loans were extended directly” to those customers.[168]

By the late 1980s Citibank had established ABCP conduits to buy securities. Such conduits became known asstructured investment vehicles (SIVs).[169] The SIV’s “arbitrage” opportunity was to earn the difference between theinterest earned on the securities it purchased and the interest it paid on the ABCP and other securities it issued tofund those purchases.[170]

OTC derivatives, including credit default swaps

In the early 1980s commercial banks began entering into interest rate and currency exchange “swaps” withcustomers. This “over-the-counter derivatives” market grew dramatically throughout the 1980s and 1990s.[171]

In 1996 the OCC issued “guidelines” for national bank use of “credit default swaps” and other “credit derivatives.”Banks entered into “credit default swaps” to protect against defaults on loans. Banks later entered into such swaps toprotect against defaults on securities. Banks acted both as “dealers” in providing such protection (or speculative“exposure”) to customers and as “hedgers” or “speculators” to cover (or create) their own exposures to such risks.[172]

Commercial banks became the largest dealers in swaps and other over-the-counter derivatives. Banking regulatorsruled that swaps (including credit default swaps) were part of the “business of banking,” not “securities” under theGlass–Steagall Act.[173]

Commercial banks entered into swaps that replicated part or all of the economics of actual securities. Regulatorseventually ruled banks could even buy and sell equity securities to “hedge” this activity.[173] Jan Kregel argues theOCC’s approval of bank derivatives activities under bank “incidental powers” constituted a “complete reversal of theoriginal intention of preventing banks from dealing in securities on their own account.”[125]

Glass–Steagall developments from 1995 to Gramm–Leach–Bliley Act

Leach and Rubin support for Glass–Steagall “repeal”; need to address “market realities”On January 4, 1995, the new Chairman of the House Banking Committee, Representative James A. Leach (R-IA),introduced a bill to repeal Glass–Steagall Sections 20 and 32.[174] After being confirmed as Treasury SecretaryRobert Rubin announced on February 28, 1995, that the Clinton Administration supported such Glass–Steagallrepeal.[175] Repeating themes from the 1980s, Leach stated Glass–Steagall was “out of synch with reality”[176] andRubin argued “it is now time for the laws to reflect changes in the world’s financial system.”[175]

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Leach and Rubin expressed a widely shared view that Glass–Steagall was “obsolete” or “outdated.”[177] As describedabove, Senator Proxmire[100] and Representative Markey[151] (despite their long-time support for Glass–Steagall)had earlier expressed the same conclusion. With his reputation for being “conservative” on expanded bankactivities,[137] former Federal Reserve Board Chairman Paul Volcker remained an influential commentator onlegislative proposals to permit such activities.[178] Volcker continued to testify to Congress in opposition topermitting banks to affiliate with commercial companies and in favor of repealing Glass–Steagall Sections 20 and 32as part of “rationalizing” bank involvement in securities markets.[179] Supporting the Leach and Rubin arguments,Volcker testified that Congressional inaction had forced banking regulators and the courts to play “catch-up” withmarket developments by “sometimes stretching established interpretations of law beyond recognition.”[180] In 1997Volcker testified this meant the “Glass–Steagall separation of commercial and investment banking is now almostgone” and that this “accommodation and adaptation has been necessary and desirable.”[181] He stated, however, thatthe “ad hoc approach” had created “uneven results” that created “almost endless squabbling in the courts” and an“increasingly advantageous position competitively” for “some sectors of the financial service industry and particularinstitutions.”[181] Similar to the GAO in 1988[115] and Representative Markey in 1990[151] Volcker asked thatCongress “provide clear and decisive leadership that reflects not parochial pleadings but the national interest.”[181]

Reflecting the regulatory developments Volcker noted, the commercial and investment banking industries largelyreversed their traditional Glass–Steagall positions. Throughout the 1990s (and particularly in 1996), commercialbanking firms became content with the regulatory situation Volcker described. They feared “financial modernization”legislation might bring an unwelcome change.[182] Securities firms came to view Glass–Steagall more as a barrier toexpanding their own commercial banking activities than as protection from commercial bank competition. Thesecurities industry became an advocate for “financial modernization” that would open a “two way street” forsecurities firms to enter commercial banking.[183]

Status of arguments from 1980sWhile the need to create a legal framework for existing bank securities activities became a dominant theme for the“financial modernization” legislation supported by Leach, Rubin, Volcker, and others, after the GLBA repealedGlass–Steagall Sections 20 and 32 in 1999, commentators identified four main arguments for repeal: (1) increasedeconomies of scale and scope, (2) reduced risk through diversification of activities, (3) greater convenience andlower cost for consumers, and (4) improved ability of U.S. financial firms to compete with foreign firms.[184]

By 1995, however, some of these concerns (which had been identified by the Congressional Research Service in1987[113]) seemed less important. As Japanese banks declined and U.S.-based banks were more profitable,“international competitiveness” did not seem to be a pressing issue.[185] International rankings of banks by size alsoseemed less important when, as Alan Greenspan later noted, “Federal Reserve research had been unable to findeconomies of scale in banking beyond a modest size.”[186] Still, advocates of “financial modernization” continued topoint to the combination of commercial and investment banking in nearly all other countries as an argument for“modernization”, including Glass–Steagall “repeal.”[187]

Similarly, the failure of the Sears Financial Network and other nonbank “financial supermarkets” that had seemed tothreaten commercial banks in the 1980s undermined the argument that financial conglomerates would be moreefficient than “specialized” financial firms.[188] Critics questioned the “diversification benefits” of combiningcommercial and investment banking activities. Some questioned whether the higher variability of returns ininvestment banking would stabilize commercial banking firms through “negative correlation” (i.e., cyclicaldownturns in commercial and investment banking occurring at different times) or instead increase the probability ofthe overall banking firm failing.[][189] Others questioned whether any theoretical benefits in holding a passive“investment portfolio” combining commercial and investment banking would be lost in managing the actualcombination of such activities.[190] Critics also argued that specialized, highly competitive commercial andinvestment banking firms were more efficient in competitive global markets.[191]

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Starting in the late 1980s, John H. Boyd, a staff member of the Federal Reserve Bank of Minneapolis, consistentlyquestioned the value of size and product diversification in banking.[][192] In 1999, as Congress was consideringlegislation that became the GLBA, he published an essay arguing that the “moral hazard” created by depositinsurance, too big to fail (TBTF) considerations, and other governmental support for banking should be resolvedbefore commercial banking firms could be given “universal banking” powers.[193] Although Boyd’s 1999 essay wasdirected at “universal banking” that permitted commercial banks to own equity interests in non-financial firms (i.e.,“commercial firms”), the essay was interpreted more broadly to mean that “expanding bank powers, by, for example,allowing nonbank firms to affiliate with banks, prior to undertaking reforms limiting TBTF-like coverage foruninsured bank creditors is putting the ‘cart before the horse.’”[194]

Despite these arguments, advocates of “financial modernization” predicted consumers and businesses would enjoycost savings and greater convenience in receiving financial services from integrated “financial services firms.”[195]

After the GLBA repealed Sections 20 and 32, commentators also noted the importance of scholarly attacks on thehistoric justifications for Glass–Steagall as supporting repeal efforts.[196] Throughout the 1990s, scholars continuedto produce empirical studies concluding that commercial bank affiliate underwriting before Glass–Steagall had notdemonstrated the “conflicts of interest” and other defects claimed by Glass–Steagall proponents.[197] By the late1990s a “remarkably broad academic consensus” existed that Glass–Steagall had been “thoroughly discredited.”[198]

Although he rejected this scholarship, Martin Mayer wrote in 1997 that since the late 1980s it had been “clear” thatcontinuing the Glass–Steagall prohibitions was only “permitting a handful of large investment houses and hedgefunds to charge monopoly rents for their services without protecting corporate America, investors, or thebanks.”[199]Hyman Minsky, who disputed the benefits of “universal banking,” wrote in 1995 testimony prepared forCongress that “repeal of the Glass–Steagall Act, in itself, would neither benefit nor harm the economy of the UnitedStates to any significant extent.”[200] In 1974 Mayer had quoted Minsky as stating a 1971 presidential commission(the “Hunt Commission”) was repeating the errors of history when it proposed relaxing Glass–Steagall and otherlegislation from the 1930s.[201]

With banking commentators such as Mayer and Minsky no longer opposing Glass–Steagall repeal, consumer andcommunity development advocates became the most prominent critics of repeal and of financial “modernization” ingeneral. Helen Garten argued that bank regulation became dominated by “consumer” issues, which produced “alargely unregulated, sophisticated wholesale market and a highly regulated, retail consumer market.”[202] In the1980s Representative Fernand St. Germain (D-RI), as chairman of the House Banking Committee, sought to tie anyGlass–Steagall reform to requirements for free or reduced cost banking services for the elderly and poor.[203]

Democratic Representatives and Senators made similar appeals in the 1990s.[204] During Congressional hearings toconsider the various Leach bills to repeal Sections 20 and 32, consumer and community development advocateswarned against the concentration of “economic power” that would result from permitting “financial conglomerates”and argued that any repeal of Sections 20 and 32 should mandate greater consumer protections, particularly free orlow cost consumer services, and greater community reinvestment requirements.[][205]

Failed 1995 Leach bill; expansion of Section 20 affiliate activities; merger of Travelers andCiticorpBy 1995 the ability of banks to sell insurance was more controversial than Glass–Steagall “repeal.” RepresentativeLeach tried to avoid conflict with the insurance industry by producing a limited “modernization” bill that repealedGlass–Steagall Sections 20 and 32, but did not change the regulation of bank insurance activities.[206] Leach’s effortsto separate insurance from securities powers failed when the insurance agent lobby insisted any banking law reforminclude limits on bank sales of insurance.[207]

Similar to Senator Proxmire in 1988,[130] Representative Leach responded to the House’s inaction on his Glass–Steagall “repeal” bill by writing the Federal Reserve Board in June 1996 encouraging it to increase the limit on Section 20 affiliate bank-ineligible revenue.[129] When the Federal Reserve Board increased the limit to 25% in

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December 1996, the Board noted the Securities Industry Association (SIA) had complained this would mean eventhe largest Wall Street securities firms could affiliate with commercial banks.[208]

The SIA’s prediction proved accurate two years later when the Federal Reserve Board applied the 25%bank-ineligible revenue test in approving Salomon Smith Barney (SSB) becoming an affiliate of Citibank throughthe merger of Travelers and Citicorp to form the Citigroup bank holding company. The Board noted that, althoughSSB was one of the largest US securities firms, less than 25% of its revenue was “bank-ineligible.”[209] Citigroupcould only continue to own the Travelers insurance underwriting business for two (or, with Board approval, five)years unless the Bank Holding Company Act was amended (as it was through the GLBA) to permit affiliationsbetween banks and underwriters of property, casualty, and life insurance. Citigroup’s ownership of SSB, however,was permitted without any law change under the Federal Reserve Board’s existing Section 20 affiliate rules.[3]

In 2003, Charles Geisst, a Glass–Steagall supporter, told Frontline the Federal Reserve Board’s Section 20 ordersmeant the Federal Reserve “got rid of the Glass–Steagall Act.”[210] Former Federal Reserve Board Vice-ChairmanAlan Blinder agreed the 1996 action increasing “bank-ineligible” revenue limits was “tacit repeal” of Glass–Steagall,but argued “that the market had practically repealed Glass–Steagall, anyway.”[211]

Shortly after approving the merger of Citicorp and Travelers, the Federal Reserve Board announced its intention toeliminate the 28 “firewalls” that required separation of Section 20 affiliates from their affiliated bank and to replacethem with “operating standards” based on 8 of the firewalls. The change permitted banks to lend to fund purchasesof, and otherwise provide credit support to, securities underwritten by their Section 20 affiliates.[212] This leftFederal Reserve Act Sections 23A (which originated in the 1933 Banking Act and regulated extensions of creditbetween a bank and any nonbank affiliate) and 23B (which required all transactions between a bank and its nonbankaffiliates to be on “arms-length” market terms) as the primary restrictions on banks providing credit to Section 20affiliates or to securities underwritten by those affiliates.[213] Sections 23A and B remained the primary restrictionson commercial banks extending credit to securities affiliates, or to securities underwritten by such affiliates, after theGLBA repealed Glass–Steagall Sections 20 and 32.[214]

1997-98 legislative developments: commercial affiliations and Community ReinvestmentActIn 1997 Representative Leach again sponsored a bill to repeal Glass–Steagall Sections 20 and 32. At first the maincontroversy was whether to permit limited affiliations between commercial firms and commercial banks.[215]

Securities firms (and other financial services firms) complained that unless they could retain their affiliations withcommercial firms (which the Bank Holding Company Act forbid for a commercial bank), they would not be able tocompete equally with commercial banks.[216] The Clinton Administration proposed that Congress either permit asmall “basket” of commercial revenue for bank holding companies or that it retain the “unitary thrift loophole” thatpermitted a commercial firm to own a single savings and loan.[217] Representative Leach, House Banking CommitteeRanking Member Henry Gonzalez (D-TX), and former Federal Reserve Board Chairman Paul Volcker opposed suchcommercial affiliations.[218]

Meanwhile, in 1997 Congressional Quarterly reported Senate Banking Committee Chairman Al D’Amato (R-NY)rejected Treasury Department pressure to produce a financial modernization bill because banking firms (such asCiticorp) were satisfied with the competitive advantages they had received from regulatory actions and were notreally interested in legislative reforms.[219] Reflecting the process Paul Volcker had described,[181] as financialreform legislation was considered throughout 1997 and early 1998, Congressional Quarterly reported how differentinterests groups blocked legislation and sought regulatory advantages.[220]

The “compromise bill” the House Republican leadership sought to bring to a vote in March 1998, was opposed by the commercial banking industry as favoring the securities and insurance industries.[221] The House Republican leadership withdrew the bill in response to the banking industry opposition, but vowed to bring it back when Congress returned from recess.[222] Commentators describe the April 6, 1998, merger announcement between

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Travelers and Citicorp as the catalyst for the House passing that bill by a single vote (214-213) on May 13, 1998.[223]

Citicorp, which had opposed the bill in March, changed its position to support the bill along with the few other largecommercial banking firms that had supported it in March for improving their ability to compete with “foreignbanks.”[224]

The Clinton Administration issued a veto threat for the House passed bill, in part because the bill would eliminate“the longstanding right of unitary thrift holding companies to engage in any lawful business,” but primarily becausethe bill required national banks to conduct expanded activities through holding company subsidiaries rather than thebank “operating subsidiaries” authorized by the OCC in 1996.[225]

On September 11, 1998, the Senate Banking Committee approved a bipartisan bill with unanimous Democraticmember support that, like the House-passed bill, would have repealed Glass–Steagall Sections 20 and 32.[226] Thebill was blocked from Senate consideration by the Committee’s two dissenting members (Phil Gramm (R-TX) andRichard Shelby (R-AL)), who argued it expanded the Community Reinvestment Act (CRA). Four Democraticsenators (Byron Dorgan (D-ND), Russell Feingold (D-WI), Barbara Mikulski (D-MD), and Paul Wellstone (D-MN))stated they opposed the bill for its repeal of Sections 20 and 32.[][227]

1999 Gramm–Leach–Bliley ActIn 1999 the main issues confronting the new Leach bill to repeal Sections 20 and 32 were (1) whether banksubsidiaries (“operating subsidiaries”) or only nonbank owned affiliates could exercise new securities and otherpowers and (2) how the CRA would apply to the new “financial holding companies” that would have such expandedpowers.[228] The Clinton Administration agreed with Representative Leach in supporting “the continued separationof banking and commerce.”[229]

The Senate Banking Committee approved in a straight party line 11-9 vote a bill (S. 900) sponsored by SenatorGramm that would have repealed Glass–Steagall Sections 20 and 32 and that did not contain the CRA provisions inthe Committee’s 1998 bill. The nine dissenting Democratic Senators, along with Senate Minority Leader ThomasDaschle(D-SD), proposed as an alternative (S. 753) the text of the 1998 Committee bill with its CRA provisions andthe repeal of Sections 20 and 32, modified to provide greater permission for “operating subsidiaries” as requested bythe Treasury Department.[230] Through a partisan 54-44 vote on May 6, 1999 (with Senator Fritz Hollings (D-SC)providing the only Democratic Senator vote in support), the Senate passed S. 900. The day before, SenateRepublicans defeated (in a 54-43 vote) a Democratic sponsored amendment to S. 900 that would have substituted thetext of S. 753 (also providing for the repeal of Glass–Steagall Sections 20 and 32).[231]

On July 1, 1999, the House of Representatives passed (in a bipartisan 343-86 vote) a bill (H.R. 10) that repealedSections 20 and 32. The Clinton Administration issued a statement supporting H.R. 10 because (unlike the Senatepassed S. 900) it accepted the bill’s CRA and operating subsidiary provisions.[232]

On October 13, 1999, the Federal Reserve and Treasury Department agreed that direct subsidiaries of national banks(“financial subsidiaries”) could conduct securities activities, but that bank holding companies would need to engagein merchant banking, insurance, and real estate development activities through holding company, not bank,subsidiaries.[233] On October 22, 1999, Senator Gramm and the Clinton Administration agreed a bank holdingcompany could only become a “financial holding company” (and thereby enjoy the new authority to affiliate withinsurance and securities firms) if all its bank subsidiaries had at least a “satisfactory” CRA rating.[234]

After these compromises, a joint Senate and House Conference Committee reported out a final version of S. 900 thatwas passed on November 4, 1999, by the House in a vote of 362-57 and by the Senate in a vote of 90-8. PresidentClinton signed the bill into law on November 12, 1999, as the Gramm–Leach–Bliley Financial Modernization Act of1999 (GLBA).[235]

The GLBA repealed Sections 20 and 32 of the Glass–Steagall Act, not Sections 16 and 21.[15] The GLBA also amended Section 16 to permit “well capitalized” commercial banks to underwrite municipal revenue bonds (i.e., non-general obligation bonds),[236] as first approved by the Senate in 1967.[82] Otherwise, Sections 16 and 21

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remained in effect regulating the direct securities activities of banks and prohibiting securities firms from takingdeposits.[15]

After March 11, 2000, bank holding companies could expand their securities and insurance activities by becoming“financial holding companies.”[237]

Commentator response to Section 20 and 32 repealPresident Bill Clinton’s signing statement for the GLBA summarized the established argument for repealingGlass–Steagall Section’s 20 and 32 in stating that this change, and the GLBA’s amendments to the Bank HoldingCompany Act, would “enhance the stability of our financial services system” by permitting financial firms to“diversify their product offerings and thus their sources of revenue” and make financial firms “better equipped tocompete in global financial markets.”[238]

With Salomon Smith Barney already operating as a Section 20 affiliate of Citibank under existing law,commentators did not find much significance in the GLBA’s repeal of Sections 20 and 32. Many commentatorsnoted those sections “were dead” before the GLBA.[2]

The GLBA’s amendment to the Bank Holding Company Act to permit banks to affiliate with insurance underwritingcompanies was a new power. Under a 1982 amendment to the Bank Holding Company Act bank affiliates had beenprohibited from underwriting most forms of insurance.[239] Because the GLBA permitted banks to affiliate withinsurance underwriters, Citigroup was able to retain ownership of the Travelers insurance underwriting business.[3]

Overall, however, commentators viewed the GLBA “as ratifying and extending changes that had already been made,rather than as revolutionary.”[240] At least one commentator found the entire GLBA “unnecessary” for banks andsuggested the OCC had the authority to grant national banks all the insurance underwriting powers permitted toaffiliates through the GLBA.[241]

As John Boyd had earlier,[192] Minneapolis Federal Reserve Bank president Gary Stern and Arthur Wilmarth warnedthat the GLBA’s permission for broader combinations of banking, securities, and insurance activities could increasethe “too big to fail” problem.[242]

Financial industry developments after repeal of Sections 20 and 32

Citigroup gives up insurance underwritingThe GLBA permitted Citigroup to retain the Travelers property, casualty, and life insurance underwriting businessesbeyond the five-year “divestiture” period the Federal Reserve Board could have permitted under the pre-GLBA formof the BHCA.[3] Before that five-year period elapsed, however, Citigroup spun off the Travelers property andcasualty insurance business to Citigroup’s shareholders.[243] In 2005 Citigroup sold to Metropolitan Life theTravelers life insurance business.[244] Commentators noted that Citigroup was left with selling insuranceunderwritten by third parties, a business it could have conducted without the GLBA.[245]

Banking, insurance, and securities industries remain structurally unchangedIn November 2003 the Federal Reserve Board and the Treasury Department issued to Congress a report (Joint Report) on the activities of the “financial holding companies” (FHCs) authorized by the GLBA and the effect of mergers or acquisitions by FHCs on market concentration in the financial services industry.[246] According to the Joint Report, 12% of all bank holding companies had qualified as financial holding companies to exercise the new powers provided by the GLBA, and those companies held 78% of all bank holding company assets.[247] 40 of the 45 bank holding companies with Section 20 affiliates before 2000 had qualified as financial holding companies, and their securities related assets had nearly doubled.[248] The great majority of this increase was at non-U.S. based banks. Such foreign banking companies had acquired several medium sized securities firms (such as UBS acquiring

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Paine Webber and Credit Suisse acquiring Donaldson, Lufkin & Jenrette).[249]

Despite these increases in securities activities by bank holding companies that qualified as financial holdingcompanies, the Joint Report found that concentration levels among securities underwriting and dealing firms had notchanged significantly since 1999.[250] Ranked by capital levels, none of the four largest securities dealing andunderwriting firms was affiliated with a financial holding company.[251] Although the market share of financialholding companies among the 25 largest securities firms had increased by 5.7 percentage points from that held in1999 before the GLBA became effective, all of the increase came from foreign banks increasing their U.S. securitiesoperations.[251] The combined market share of the five largest U.S. based financial holding companies declined by 1percentage point from 1999–2003, with the largest, Citigroup, experiencing a 2.4 percentage point reduction from1999–2003.[251] Of the 45 bank holding companies that had operated Section 20 affiliates before the GLBA, 40 hadqualified as financial holding companies, 2 conducted securities underwriting and dealing through direct banksubsidiaries (i.e., “financial subsidiaries”), and 3 continued to operate Section 20 affiliates subject to pre-GLBArules.[252]

In a speech delivered shortly before the Joint Report was released, Federal Reserve Board Vice Chairman RogerFerguson stated that the Federal Reserve had “not been able to uncover any evidence that the overall market structureof the [banking, insurance, and securities] segments of the financial services industry has substantially changed”since the GLBA.[253] Early in 2004, the Financial Times reported that “financial supermarkets” were failing aroundthe world, as both diversification and larger size failed to increase profitability.[254] The Congressional ResearchService noted that after the GLBA became law the financial services markets in the United States “had not reallyintegrated” as mergers and consolidations occurred “largely within sectors” without the expected “wholesaleintegration in financial services.”[255]

At a July 13, 2004, Senate Banking Committee hearing on the effects of the GLBA five years after passage, theLegislative Director of the Consumer Federation cited Roger Ferguson’s 2003 speech and stated the “extravagantpromises” of universal banking had “proven to be mostly hype.” He noted that advocates of repealing Sections 20 and32 had said “[b]anks, securities firms, and insurance companies would merge into financial services supermarkets”and, after five years, some mergers had occurred “but mostly within the banking industry, not across sectors.”[256]

Within the banking industry, Federal Reserve Board Chairman Alan Greenspan testified to Congress in 2004 thatcommercial bank consolidation had “slowed sharply in the past five years.”[257]

At the five-year anniversary of the GLBA in November 2004, the American Banker quoted then retiring Comptrollerof the Currency John D. Hawke, Jr. and former FDIC Chairman William Seidman as stating the GLBA had been lesssignificant than expected in not bringing about the combinations of banking, insurance, and investment banking.Hawke described the GLBA provisions permitting such combinations as “pretty much a dead letter.”[258] Althoughthe article noted other commentators expected this would change in 2005, a May 24, 2005, American Banker articleproclaimed 2005 the “year of divestiture” as “many observers” described Citigroup’s sale of the Travelers life andannuity insurance business as “a nail in the coffin of financial services convergence.”[244]

In 2005 the St. Louis Federal Reserve Bank’s staff issued a study finding that after five years the GLBA’s effects“have been modest” and the new law “simply made it easier for organizations to continue to engage in the activitiesthey had already undertaken.”[259]

Competition between commercial banking and investment banking firmsCommentators pointed to the Enron, WorldCom, and other corporate scandals of the early 2000s as exposing the dangers of uniting commercial and investment banking.[260] More broadly, Arthur Wilmarth questioned whether those scandals and the “stock market bubble” of the late-1990s were linked to the growing role of commercial banks in the securities markets during the 1990s.[261] As Wilmarth’s article indicated, the identified bank or bank affiliate activities linked to the Enron and World Com corporate scandals began in 1996 (or earlier) and most occurred before March 11, 2000, when bank holding companies could first use the new securities powers the GLBA provided to

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“financial holding companies.”[262]

In the 1990s investment banks complained that commercial banking firms with Section 20 affiliates had coercedcustomers into hiring the Section 20 affiliate to underwrite securities in order to receive loans from the affiliatedbank, which would have violated the “anti-tying” provisions of the Bank Holding Company Act. In 1997 the GAOissued a report reviewing those claims.[263] After the GLBA became law, investment banks continued to claim suchillegal “tying” was being practiced. In 2003 the GAO issued another report reviewing those claims.[264]

Partly because of the “tying” issue many commentators expected investment banking firms would need to convertinto bank holding companies (and qualify as financial holding companies) to compete with commercial bankaffiliated securities firms.[265] No major investment bank, however, became a bank holding company until 2008 inthe midst of the late-2000s financial crisis. Then all five major “free standing” investment banks (i.e., those not partof a bank holding company)[266] entered bankruptcy proceedings (Lehman Brothers), were acquired by bank holdingcompanies (Bear Stearns by JP Morgan Chase and Merrill Lynch by Bank of America), or became bank holdingcompanies by converting their industrial loan companies (“nonbank banks”) into a national (Morgan Stanley) or statechartered Federal Reserve member bank (Goldman Sachs).[267]

At the July 13, 2004, Senate Banking Committee hearing on the GLBA’s effects, the Securities Industry Associationrepresentative explained securities firms had not taken advantage of the GLBA’s “financial holding company”powers because that would have required them to end affiliations with commercial firms by 2009.[268] GLBA criticshad complained that the law had prevented insurance and securities firms from truly entering the banking businessby making a “faulty” distinction between commercial and financial activities.[269]

The Consumer Federation of America and other commentators suggested securities firms had avoided becoming“financial holding companies” because they wanted to avoid Federal Reserve supervision as bank holdingcompanies.[270] The SEC (through its Chairman Arthur Levitt) had supported efforts to permit securities firms toengage in non-FDIC insured banking activities without the Federal Reserve’s “intrusive banking-style oversight” ofthe “overall holding company.”[271] After the GLBA became law, securities firms continued (and expanded) theirdeposit and lending activities through the “unitary thrifts” and “nonbank banks” (particularly industrial loancompanies) they had used before the GLBA to avoid regulation as bank holding companies.[272] Alan Greenspanlater noted securities firms only took on the “embrace” of Federal Reserve Board supervision as bank holdingcompanies (and financial holding companies) after the financial crisis climaxed in September 2008.[273]

Melanie Fein has described how the consolidation of the banking and securities industries occurred in the 1990s,particularly after the Federal Reserve Board’s actions in 1996 and 1997 increasing Section 20 “bank-ineligible”revenue limits and removing “firewalls.”[274] Fein stated that “[a]lthough the Gramm-Leach-Blily Act was expectedto trigger a cascade of new consolidation proposals, no major mergers of banks and securities firms occurred in theyears immediately following” and that the “consolidation trend resumed abruptly in 2008 as a result of the financialcrisis” leading to all the large investment banks being acquired by, or converting into, bank holding companies.[275]

Fein noted the lack of consolidation activity after 1999 and before September 2008 was “perhaps because much ofthe consolidation had occurred prior to the Act.”[276]

Commentators cite only three major financial firms from outside the banking industry (the discount broker CharlesSchwab, the insurance company Met Life, and the mutual fund company Franklin Resources) for qualifying asfinancial holding companies after the GLBA became effective and before the late-2000s financial crisis.[277]

In 2011 the European Central Bank published a working paper that concluded commercial bank Section 20 affiliateunderwriting of corporate bonds in the 1990s had been of lower quality than the underwriting of non-commercialbank affiliated securities firms.[278] The authors suggest the most likely explanation was that commercial bankaffiliates “had to be initially more aggressive than investment bank houses in order to gain market share, and inpursuing this objective they might have loosened their credit standards excessively.”[279] The working paper onlyexamined corporate bonds underwritten from 1991 through 1999, a period before the GLBA permitted financialholding companies.[280]

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Glass–Steagall “repeal” and the financial crisisRobert Kuttner, Joseph Stiglitz, Elizabeth Warren, Robert Weissman, Richard D. Wolff and others have tiedGlass–Steagall repeal to the late-2000s financial crisis. Kuttner acknowledged “de facto enroads” beforeGlass–Steagall “repeal” but argued the GLBA’s “repeal” had permitted “super-banks” to “re-enact the same kinds ofstructural conflicts of interest that were endemic in the 1920s,” which he characterized as “lending to speculators,packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every stepalong the way.”[6] Stiglitz argued “the most important consequence of Glass–Steagall repeal” was in changing theculture of commercial banking so that the “bigger risk” culture of investment banking “came out on top.”[7] He alsoargued the GLBA “created ever larger banks that were too big to be allowed to fail,” which “provided incentives forexcessive risk taking.”[281] Warren explained Glass–Steagall had kept banks from doing “crazy things.” She creditedFDIC insurance, the Glass–Steagall separation of investment banking, and SEC regulations as providing “50 yearswithout a crisis” and argued that crises returned in the 1980s with the “pulling away of the threads” of regulation.[]

Weissman agrees with Stiglitz that the “most important effect” of Glass–Steagall “repeal” was to “change the cultureof commercial banking to emulate Wall Street's high-risk speculative betting approach.”[282]

Lawrence White and Jerry Markham rejected these claims and argued that products linked to the financial crisis werenot regulated by Glass–Steagall or were available from commercial banks or their affiliates before the GLBArepealed Glass–Steagall sections 20 and 32.[9]Alan Blinder wrote in 2009 that he had “yet to hear a good answer” tothe question “what bad practices would have been prevented if Glass–Steagall was still on the books?” Blinderargued that “disgraceful” mortgage underwriting standards “did not rely on any new GLB powers,” that“free-standing investment banks” not the “banking-securities conglomerates” permitted by the GLBA were the majorproducers of “dodgy MBS,” and that he could not “see how this crisis would have been any milder if GLB had neverpassed.”[283] Similarly, Melanie Fein has written that the financial crisis “was not a result of the GLBA” and that the“GLBA did not authorize any securities activities that were the cause of the financial crisis.”[284] Fein noted“[s]ecuritization was not an activity authorized by the GLBA but instead had been held by the courts in 1990 to bepart of the business of banking rather than an activity proscribed by the Glass–Steagall Act.”[159] As describedabove, in 1978 the OCC approved a national bank securitizing residential mortgages.[]

Carl Felsenfeld and David L. Glass wrote that “[t]he public—which for this purpose includes most of the members ofCongress” does not understand that the investment banks and other “shadow banking” firms that experienced “runs”precipitating the financial crisis (i.e., AIG, Bear Stearns, Lehman Brothers, and Merrill Lynch) never became“financial holding companies” under the GLBA and, therefore, never exercised any new powers available throughGlass–Steagall “repeal.”[285] They joined Jonathan R. Macey and Peter J. Wallison in noting many GLBA critics donot understand that Glass–Steagall’s restrictions on banks (i.e., Sections 16 and 21) remained in effect and that theGLBA only repealed the affiliation provisions in Sections 20 and 32.[286] The American Bankers Association, formerPresident Bill Clinton, and others have argued that the GLBA permission for affiliations between securities andcommercial banking firms “helped to mitigate” or “softened” the financial crisis by permitting bank holdingcompanies to acquire troubled securities firms or such troubled firms to convert into bank holding companies.[10]

Martin Mayer argued there were “three reasonable arguments” for tying Glass–Steagall repeal to the financial crisis: (1) it invited banks to enter risks they did not understand; (2) it created “network integration” that increased contagion; and (3) it joined the incompatible businesses of commercial and investment banking. Mayer, however, then described banking developments in the 1970s and 1980s that had already established these conditions before the GLBA repealed Sections 20 and 32.[287] Mayer’s 1974 book The Bankers detailed the “revolution in banking” that followed Citibank establishing a liquid secondary market in “negotiable certificates of deposit” in 1961. This new “liability management” permitted banks to fund their activities through the “capital markets,” like nonbank lenders in the “shadow banking market,” rather than through the traditional regulated bank deposit market envisioned by the 1933 Banking Act.[288] In 1973 Sherman J. Maisel wrote of his time on the Federal Reserve Board and described how “[t]he banking system today is far different from what it was even in 1960” as “formerly little used instruments”

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were used in the “money markets” and “turned out to be extremely volatile.”[289]

In describing the “transformation of the U.S. financial services industry” from 1975-2000 (i.e., from after the“revolution in banking” described by Mayer in 1974 to the effective date of the GLBA), Arthur Wilmarth describedhow during the 1990s, despite remaining bank holding companies, J.P. Morgan & Co. and Bankers Trust “builtfinancial profiles similar to securities firms with a heavy emphasis on trading and investments.”[290] In 1993, HelenGarten described the transformation of the same companies into “wholesale banks” similar to European “universalbanks.”[291]

Jan Kregel agrees that “multifunction” banks are a source for financial crises, but he argues the “basic principles” ofGlass–Steagall “were eviscerated even before” the GLBA.[292] Kregel describes Glass–Steagall as creating a“monopoly that was doomed to fail” because after World War II nonbanks were permitted to use “capital marketactivities” to duplicate more cheaply the deposit and commercial loan products for which Glass–Steagall had soughtto provide a bank monopoly.[293]

While accepting that under Glass–Steagall financial firms could still have “made, sold, and securitized riskymortgages, all the while fueling a massive housing bubble and building a highly leveraged, Ponzi-like pyramid ofderivatives on top,” the New Rules Project concludes that commentators who deny the GLBA played a role in thefinancial crisis “fail to recognize the significance of 1999 as the pivotal policy-making moment leading up to thecrash.” The Project argues 1999 was Congress’s opportunity to reject 25 years of “deregulation” and “confront thechanging financial system by reaffirming the importance of effective structural safeguards, such as theGlass–Steagall Act's firewall and market share caps to limit the size of banks; bringing shadow banks into theregulatory framework; and developing new rules to control the dangers inherent in derivatives and other engineeredfinancial products.”[294]

Raj Date and Michael Konczal similarly argued that the GLBA did not create the financial crisis but that the implicit“logical premises” of the GLBA, which included a belief that “non-depository ‘shadow banks’ should continue tocompete in the banking business,” “enabled the financial crisis” and “may well have hastened it.”[295]

Proposed reenactmentDuring the 2009 House of Representatives consideration of H.R. 4173, the bill that became the Dodd-Frank WallStreet Reform and Consumer Protection Act of 2010, Representative Maurice Hinchey (D-NY) proposed anamendment to the bill that would have reenacted Glass–Steagall Sections 20 and 32 and also prohibited bankinsurance activities. The amendment was not voted on by the House.[]

On December 16, 2009, Senators John McCain (R-AZ) and Maria Cantwell (D-WA) introduced in the Senate the“Banking Integrity Act of 2009” (S.2886), which would have reinstated Glass–Steagall Sections 20 and 32, but wasnot voted on by the Senate.[][296]

Before the Senate acted on its version of what became the Dodd-Frank Act, the Congressional Research Serviceissued a report describing securities activities banks and their affiliates had conducted before the GLBA. The Reportstated Glass–Steagall had “imperfectly separated, to a certain degree” commercial and investment banking anddescribed the extensive securities activities the Federal Reserve Board had authorized for “Section 20 affiliates” sincethe 1980s.[297]

The Obama Administration has been criticized for opposing Glass–Steagall reenactment.[][298] In 2009, TreasurySecretary Timothy Geithner testified to the Joint Economic Committee that he opposed reenacting Glass–Steagalland that he did not believe “the end of Glass–Steagall played a significant role” in causing the financial crisis.[299]

The Brown–Kaufman amendment (or the "SAFE Banking Act")[] was a failed 2010 amendment proposed in the United States Senate to be part of the Dodd–Frank bill by Democratic Senators Sherrod Brown (OH) and Ted Kaufman (DE). It sought to address the moral hazard of too big to fail by breaking up the largest banks with limits on the size of financial institutions.[][] The amendment would have capped deposits and other liabilities[] and

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restricted bank assets to 10% of US GDP.[300]

On April 12, 2011, Representative Marcy Kaptur (D-OH) introduced in the House the “Return to Prudent BankingAct of 2011” (H.R. 1489), which would (1) amend the Federal Deposit Insurance Act to add prohibitions on FDICinsured bank affiliations instead of reenacting the affiliation restrictions in Glass–Steagall Sections 20 and 32, (2)direct federal banking regulators and courts to interpret these affiliation provisions and Glass–Steagall Sections 16and 21 in accordance with the Supreme Court decision in Camp,[62] and (3) repeal various GLBA changes to theBank Holding Company Act.[301]

On July 7, 2011, Representative Maurice D. Hinchey (D-NY) introduced in the House the “Glass–SteagallRestoration Act of 2011” (H.R. 2451), which would reinstate Glass–Steagall Sections 20 and 32.[302]

Volcker rule ban on proprietary trading as Glass–Steagall liteThe Dodd-Frank Act included the Volcker Rule, which among other things limited proprietary trading by banks andtheir affiliates.[303] This proprietary trading ban will generally prevent commercial banks and their affiliates fromacquiring non-governmental securities with the intention of selling those securities for a profit in the “near term.”[304]

Some have described the Volcker Rule, particularly its proprietary trading ban,[305] as “Glass–Steagall lite.”[306]

As described above, Glass–Steagall restricted commercial bank “dealing” in, not “trading” of, non-governmentsecurities the bank was permitted to purchase as “investment securities.”[39] After the GLBA became law,Glass–Steagall Section 16 continued to restrict bank securities purchases. The GLBA, however, expanded the list of“bank-eligible” securities to permit banks to buy, underwrite, and deal in municipal revenue bonds, not only “fullfaith and credit” government bonds.[236]

The Volcker Rule permits “market making” and other “dealer” activities in non-government securities as services forcustomers.[307] Glass–Steagall Section 16 prohibits banks from being a “market maker” or otherwise “dealing” innon-government (i.e., “bank-ineligible”) securities.[36] Glass–Steagall Section 16 permits a bank to purchase and sell(i.e., permits “trading”) for a bank’s own account non-government securities that the OCC approves as “investmentsecurities.”[39] The Volcker Rule will prohibit such “proprietary trading” of non-government securities.[308]

Before and after the late-2000s financial crisis, banking regulators worried that banks were incorrectly reportingnon-traded assets as held in their “trading account” because of lower regulatory capital requirements for assets heldin a “trading account.”[309] Under the Volcker Rule, U.S. banking regulators have proposed that banks and theiraffiliates be prohibited from holding any asset (other than government securities and other listed exceptions) as a“trading position.”[310]

Senators Jeff Merkley (D-OR) and Carl Levin (D-MI) have written that “proprietary trading losses” played “a centralrole in bringing the financial system to its knees.” They wrote that the Volcker Rule’s proprietary trading bancontained in statutory language they proposed is a “modern Glass–Steagall” because Glass–Steagall was both“over-inclusive” (in prohibiting some “truly client-oriented activities that could be managed by developments insecurities and banking law”) and “under-inclusive” in failing to cover derivatives trading.[311]

In 2002, Arthur Wilmarth wrote that from 1990-1997 the nine U.S. banks with the greatest securities activities heldmore than 20% of their assets as trading assets.[290] By 1997, 40% of J.P. Morgan’s revenue was from trading.[312] A1995 study by the federal banking regulators of commercial bank trading activity from June 30, 1984, to June 30,1994, concluded that “trading activities are an increasingly important source of revenue for banks” and that“[n]otwithstanding the numerous press reports that focus on negative events, the major commercial banks haveexperienced long-term success in serving customers and generating revenues with these activities.” In reporting thestudy results, the American Banker described “proprietary trading” as “basically securities trading not connected tocustomer-related bank activities“ and summarized the study as finding that “proprietary trading has been getting abad rap.”[313]

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Paul Volcker supported the Volcker Rule prohibition on proprietary trading as part of bringing commercial banksback to “concentrating on continuing customer interest.”[314] As described above, Volcker had long testified toCongress in support of repealing Glass–Steagall Sections 20 and 32.[123][][179][315] In 2010 he explained that heunderstood Glass–Steagall as preventing banks from being principally engaged in underwriting and dealing incorporate securities. Volcker stated that with securitization and other developments he believes it is a proper bankfunction to underwrite corporate securities “as serving a legitimate customer need.” He, therefore, did not believe“repeal of Glass–Steagall was terrible” but that Congress “should have thought about what they replace it with.”Volcker’s criticism was that Congress “didn’t replace it with other restrictions.”[316]

Separate from its proprietary trading ban, the Volcker Rule restricts bank and affiliate sponsorship and ownership ofhedge funds and private equity funds.[306] The GLBA amended the Bank Holding Company Act to permit “merchantbanking” investments by bank affiliates subject to various restrictions.[317] It also authorized the TreasuryDepartment and Federal Reserve Board to permit such merchant banking activities by direct bank subsidiaries(“financial subsidiaries”) after five years, but they have not provided such permission.[318] This was not aGlass–Steagall change but a change to the Bank Holding Company Act, which previously limited the size ofinvestments bank affiliates could make in a company engaged in activities not “closely related to banking.”[319] Suchmerchant banking investments may be made through private equity funds.[320] The Volcker Rule will affect theability of bank affiliates to make such investments.[321]

”Ring fencing” proposal in United Kingdom as Glass–Steagall substituteThe Independent Commission on Banking’s (ICB) proposal to “ring fence” retail and small business commercialbanking from investment banking in the United Kingdom[322] has been described as comparable to theGlass–Steagall separation of commercial and investment banking.[323] The proposal seeks to isolate the “retailbanking” functions of a banking firm within a separate corporation that would not be affected by the failure of theoverall firm so long as the “ring fenced” retail bank itself remained solvent.[324]

Bank of England Governor Mervyn King expressed concern the European Commission could block implementationof the ICB proposal as a violation of Commission standards.[325] Although Michel Barnier, European Union internalmarket Commissioner, proposed limits on capital requirements for banks that could have hindered the UKringfencing proposal and indicated support for the French and German position against breaking up banking groups,in November 2011 he announced an “expert commission” would “study the mandatory separation of risky investmentbanking activities from traditional retail lenders.”[326] On October 2, 2012, the committee appointed to study theissue recommended a form of “ring fencing” similar to the proposal in the United Kingdom.[327]

Glass–Steagall and “firewalls”Congressional and bank regulator efforts to “repeal”, “reform” or apply Glass–Steagall were based on isolating acommercial banking firm’s expanded securities activities in a separately capitalized bank affiliate.[152][212] Much ofthe debate concerned whether such affiliates could be owned by a bank (as with “operating subsidiaries” in the1990s) or would be bank holding company subsidiaries outside the chain of bank ownership.[233][328] In either case,“firewalls” were intended to isolate the bank from the affiliate.[329]

Banking regulators and commentators debated whether “firewalls” could truly separate a bank from its affiliate in a crisis and often cited the early 1980s’ statement by then Citicorp CEO Walter Wriston that “it is inconceivable that any major bank would walk away from any subsidiary of its holding company.”[330] Alan Greenspan and Paul Volcker testified to Congress that firewalls so strong that they truly separated different businesses would eliminate the benefits of combining the two activities.[331] Both testified that in a crisis the owners of the overall firm would inevitably find ways to use the assets of any solvent part of the firm to assist the troubled part.[331] Thus, “firewalls” sufficient to prevent a bank from assisting its affiliate would eliminate the purpose of the combination, but “workable” firewalls would be insufficient to prevent such assistance. Both Volcker and Greenspan proposed that the

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solution was adequate supervision, including sufficient capital and other requirements.[331]

In 1998 and 1999 Greenspan testified to Congress in opposition to the Clinton Administration proposal to permitnational bank subsidiaries to engage in expanded securities and other activities. He argued such direct banksubsidiary activities would be “financed by the sovereign credit of the United States” through the “federal safety net”for banks, despite the Treasury Department’s assurance that “firewalls” between the bank and its operating subsidiarywould prevent the expansion of the “federal safety net.”[332]

As described above, Gary Stern, Arthur Wilmarth, and others questioned whether either operating subsidiaries orseparate holding company affiliates could be isolated from an affiliated bank in a financial crisis and feared that the“too big to fail” doctrine gave competitive benefits to banking firms entering the securities or insurance businessthrough either structure.[242] Greenspan did not deny that the government might act to “manage an orderlyliquidation” of a large financial “intermediary” in a crisis, but he suggested that only insured creditors would be fullyrepaid, that shareholders would be unprotected, and that uninsured creditors would receive less than full paymentthrough a discount or “haircut.”[333] Commentators pointed to the 1990 failure of Drexel Burnham Lambert assuggesting “too-big-to-fail” considerations need not force a government rescue of creditors to a failing investmentbank or other nonbank,[334] although Greenspan had pointed to that experience as questioning the ability of firewallsto isolate one part of a financial firm from the rest.[331]

After the late-2000s financial crisis commentators noted that the Federal Reserve Board used its power to grantexemptions from Federal Reserve Act Section 23A (part of the 1933 Banking Act and the “principle statutory”firewall between banks and their affiliates) to permit banks to “rescue” various affiliates or bank sponsoredparticipants in the “shadow banking system” as part of a general effort to restore liquidity in financial markets.[335]

Section 23A generally prevented banks from funding securities purchases by their affiliates before the financial crisis(i.e., prevented the affiliates from “using insured deposits to purchase risky investments”) by “limiting the ability ofdepository institutions to transfer to affiliates the subsidy arising from the institutions’ access to the federal safetynet,” but the Federal Reserve Board’s exemptions allowed banks to shift the risk of such investments from theshadow banking market to FDIC insured banks during the crisis.[336] The Federal Reserve Board’s General Counselhas defended these actions by arguing that all the Section 23A exemptions required that bank funding be “fullycollateralized” on a daily basis, so that the bank was “very much protected,” and that in the end the exemptions didnot prove very “useful.”[337]

The ICB proposes to erect a barrier between the “ring-fenced bank” and its “wider corporate group” that will permitbanking regulators to isolate the ring-fenced bank “from the rest of the group in a matter of days and continue theprovision of its services without providing solvency support.”[338]

Limited purpose banking and narrow bankingLaurence Kotlikoff was disappointed the ICB did not adopt the “limited purpose banking” he proposed to theICB.[339][] This would require a bank to operate like a mutual fund in repaying “deposits” based on the currentmarket value of the bank’s assets. Kotlikoff argues there will always be financial crises if banks lend deposits but arerequired to repay the full amount of those deposits “on demand.”[340] Kotlikoff would only permit a bank (i.e.,mutual fund) to promise payment of deposits at “par” (i.e., $1 for every $1 deposited) if the bank (i.e., mutual fund)held 100% of all deposits in cash as a trustee.[][341]

As Kotlikoff notes, in 1987 Robert Litan proposed “narrow banking.”[342] Litan suggested commercial banking firms be freed from Glass–Steagall limits (and other activity restrictions) so long as they isolated FDIC insured deposits in a “narrow bank” that was only permitted to invest those deposits in “safe securities” approved by the FDIC.[343] In 1995 Arthur Wilmarth proposed applying Litan’s “narrow bank” proposal to U.S. banks (“global banks”) that had become heavily involved in “capital markets” activities through “Section 20 affiliates,” derivatives, and other activities.[344] Under Wilmarth’s proposal (which he repeated in 2001 after the GLBA became law[345]) only banks that limited their activities to taking deposits and making commercial loans would be permitted to make commercial

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loans with FDIC insured deposits.[346] Wilmarth expected only “community banks” specialized in making consumerand small business loans would continue to operate as such traditional banks.[347] The large “global banks” wouldfund their lending through the capital markets just like investment banks and other “shadow banking” lenders.[348]

Wholesale financial institutionsIn 1997 the Clinton Administration proposed that “wholesale financial institutions” (known as “woofies”) beauthorized to be members of the Federal Reserve System but not “banks” under the Bank Holding Company Actbecause they would own non-FDIC insured banks that would only take deposits of $100,000 or more.[349] Whereas“narrow banks” would be FDIC insured, but only invest in FDIC approved “safe securities,” “woofies” would be freeto lend, purchase securities, and make other investments, because they would not hold any FDIC insured deposits.The proposal was intended to permit securities firms to continue to maintain ownership of commercial firms whilegaining access to the Federal Reserve’s “payment system” and “discount window”, so long as the firm did not takeFDIC insured deposits.[350]

“Woofies” were not authorized by the GLBA because of a dispute between Senator Phil Gramm and the ClintonAdministration over the application of the Community Reinvestment Act (CRA) to “woofies.” In their October 1999compromise on CRA provisions in the GLBA,[234] the Clinton Administration agreed with Gramm that CRA wouldnot apply to woofies so long as only a company that did not then own any FDIC insured depository institution wouldbe permitted to qualify as a “wholesale financial institution.”[] The Clinton Administration wanted this restriction toprevent existing bank holding companies from disposing of their FDIC insured banks to qualify as “woofies,” whichcould reduce the deposit base subject to CRA requirements.[] When Chase and J.P. Morgan lobbied to change thefinal legislation to permit them to become woofies, they complained only Goldman Sachs and “a few others” couldqualify as a woofie.[][] When negotiators decided they could not resolve the dispute, permission for woofies waseliminated from the final GLBA.[][]

“Woofies” were similar to the “global bank” structure suggested by Arthur Wilmarth because they would not useFDIC insured deposits to make commercial loans. They would, however, be subject to Federal Reserve supervisionunlike lenders in the unsupervised “shadow banking” system. Because woofies would have had access to the FederalReserve discount window and payments service, critics (including the Independent Bankers Association of Americaand Paul Volcker) opposed woofies (and a similar 1996 proposal by Representative James A. Leach) for providingunfair competition to banks.[351] Although October 1999 press reports suggested bank holding companies wereinterested in becoming woofies,[][] the New York Times reported in July 1999 that banking and securities firms hadlost interest in becoming woofies.[352]

Shadow bankingThe ICB Report rejected “narrow banking” in part because it would lead to more credit (and all credit during times ofstress) being provided by a “less regulated sector.”[353] In 1993 Jane D'Arista and Tom Schlesinger noted that the“parallel banking system” had grown because it did not incur the regulatory costs of commercial banks.[354] Theyproposed to equalize the cost by establishing “uniform regulation” of banks and the lenders and investors in theparallel banking system.[355] As with Kotlikoff’s “limited purpose banking” proposal, only investment pools funded100% from equity interests would remain unregulated as banks.[356] Although D’Arista and Schlesingeracknowledged the regulation of banks and of the parallel banking system would end up only being “comparable,”their goal was to eliminate so far as possible the competitive advantages of the “parallel” or “shadow” bankingmarket.[357]

Many commentators have argued that the failure to regulate the shadow banking market was a primary cause of the financial crisis.[295][358] There is general agreement that the crisis emerged in the shadow banking markets not in the traditional banking market.[359] As described above, Helen Garten had identified the “consumerization” of banking regulation as producing “a largely unregulated, sophisticated wholesale market,”[202] which created the risk of the

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“underproduction of regulation” of that market.[360]

Laurence Kotlikoff’s “limited purpose banking” proposal rejects bank regulation (based on rules and supervision toensure “safety and soundness”) and replaces it with a prohibition on any company operating like a traditional “bank.”All limited liability financial companies (not only today’s “banks”) that receive money from the public for investmentor “lending” and that issue promises to pay amounts in the future (whether as insurance companies, hedge funds,securities firms, or otherwise) could only issue obligations to repay amounts equal to the value of their assets.[][361]

All “depositors” in or “lenders” to such companies would become “investors” (as in a mutual fund) with the right toreceive the full return on the investments made by the companies (minus fees) and obligated to bear the full loss onthose investments.[][362]

Thomas Hoenig rejects both “limited purpose banking” and the proposal to regulate shadow banking as part of thebanking system. Hoenig argues it is not necessary to regulate “shadow banking system” lenders as banks if thoselenders are prohibited from issuing liabilities that function like bank demand deposits. He suggests that requiringmoney market funds to redeem shares at the funds’ fluctuating daily net asset values would prevent those funds fromfunctioning like bank checking accounts and that eliminating special Bankruptcy Code treatment for repurchaseagreements would delay repayment of those transactions in a bankruptcy and thereby end their treatment as “cashequivalents” when the “repo” was funding illiquid, long term securities. By limiting the ability of “shadow banks” tocompete with traditional banks in creating “money-like” instruments, Hoenig hopes to better assure that the safety netis not ultimately called upon to “bail them [i.e., shadow banks such as Bear Stearns and AIG during the financialcrisis] out in a crisis.” He proposes to deal with actual commercial banks by imposing “Glass–Steagall-typeboundaries” so that banks “that have access to the safety net should be restricted to certain core activities that thesafety net was intended to protect—making loans and taking deposits—and related activities consistent with thepresence of the safety net.”[363]

Glass–Steagall role in reform proposals in Europe and North AmericaAlthough the UK's ICB and the commentators presenting the proposals described above to modify banks or bankingregulation address issues beyond the scope of the Glass–Steagall separation of commercial and investment banking,each specifically examines Glass–Steagall. The ICB stated Glass–Steagall had been “undermined in part by thedevelopment of derivatives.”[364] The ICB also argued that the development before 1999 of “the world’s leadinginvestment banks out of the US despite Glass–Steagall in place at the time” should caution against assuming the“activity restrictions” it recommended in its “ringfencing” proposal would hinder UK investment banks fromcompeting internationally.[365]

Boston University economist Laurence J. Kotlikoff suggests commercial banks only became involved with CDOs,SIVs, and other “risky products” after Glass–Steagall was “repealed,” but he rejects Glass–Steagall reinstatement(after suggesting Paul Volcker favors it) as a “non-starter” because it would give the “nonbank/shadowbank/investment bank industry” a “competitive advantage” without requiring it to pay for the “implicit”“lender-of-last-resort” protection it receives from the government.[366] Robert Litan and Arthur Wilmarth presentedtheir “narrow bank” proposals as a basis for eliminating Glass–Steagall (and other) restrictions on bank affiliates.[367]

Writing in 1993, Jane D’Artista and Tom Schlesinger noted that “the ongoing integration of financial industryactivities makes it increasingly difficult to separate banking and securities operations meaningfully” but rejectedGlass–Steagall repeal because “the separation of banking and securities functions is a proven, least-cost method ofpreventing the problems of one financial sector from spilling over into the other” (which they stated was “mostrecently demonstrated in the October 1987 market crash.”)[368]

During the Senate debate of the bill that became the Dodd-Frank Act, Thomas Hoenig wrote Senators Maria Cantwell and John McCain (the co-sponsors of legislation to reinstate Glass–Steagall Sections 20 and 32) supporting a “substantive debate” on “the unintended consequences of leaving investment banking commingled with commercial banking” and reiterating that he had “long supported” reinstating “Glass–Steagall-type laws” to separate “higher risk,

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often more leveraged, activities of investment banks” from commercial banking. Hoenig agreed with Paul Volcker,however, that “financial market developments” had caused underwriting corporate bonds (the prohibition of whichVolcker described as the purpose of Glass–Steagall[316]), and also underwriting of corporate equity, revenue bonds,and “high quality asset-backed securities,” to be “natural extensions of commercial banking.” Instead of reinstatingGlass–Steagall prohibitions on such underwriting, Hoenig proposed restoring “the principles underlying theseparation of commercial and investment banking firms.”[369]

In Mainland Europe, some scholars have suggested Glass–Steagall should be a model for any in-depth reform ofbank regulation:[370] notably in France where SFAF and World Pensions Council (WPC) banking experts haveargued that "a new Glass–Steagall Act" should be viewed within the broader context of separation of powers inEuropean Union law.[]

This perspective has gained ground after the unraveling of the Libor scandal in July 2012, with mainstream opinionleaders such as the Financial Times editorialists calling for the adoption of an EU-wide "Glass Steagall II".[371]

On July 25, 2012, former Citigroup Chairman and CEO Sandy Weill, considered one of the driving forces behind theconsiderable financial deregulation and “mega-mergers” of the 1990s, surprised financial analysts in Europe andNorth American by “calling for splitting up the commercial banks from the investment banks. In effect, he says:bring back the Glass–Steagall Act of 1933 which led to half a century, free of financial crises.”[372]

Notes[1][1] . Wilmarth 1990, p. 1161.[2][2] Wilmarth 2002, pp. 220 and 222. Macey 2000, pp. 691-692 and 716-718. Lockner and Hansche 2000, p. 37.[3][3] Simpson Thacher 1998, pp. 1-6. Lockner and Hansche 2000, p. 37. Macey 2000, p. 718.[4] (“It is true that the Glass-Steagall law is no longer appropriate to the economy in which we lived. It worked pretty well for the industrial

economy, which was highly organized, much more centralized and much more nationalized than the one in which we operate today. But theworld is very different.”)

[6][6] .[7][7] .[9][9] . .[10][10] .[11] Friedman and Schwartz 1963 , p. 321 (http:/ / books. google. com/ books?id=Q7J_EUM3RfoC& pg=PA321& lpg=PA321& dq=friedman+

february+ 27,+ 1932,+ glass+ steagall+ Act+ 1932#v=onepage& q& f=false) and pp. 399-406 (http:/ / books. google. com/books?id=Q7J_EUM3RfoC& pg=PA403& lpg=PA403& dq=friedman+ glass+ steagall+ 1932#v=onepage& q& f=false). Patrick 1993, pp.71-77.

[12] . Each form of special lending to Federal Reserve member banks required approval from at least five members of the Federal Reserve Board.Group lending could be made to fewer than five (but not fewer than two) member banks if the borrowing banks had deposit liabilities equal toat least 10% of the deposits liabilities of member banks in their Federal Reserve district. The special lending to individual member bankscould be made only in “exceptional and exigent circumstances.” Both forms of lending were based on the borrowing member banks not havingsufficient "eligible assets" to borrow on normal terms.

[13][13] Wilmarth 2008, p. 560.[14][14] Reinicke 1995, pp. 104-105. Greenspan 1987, pp. 3 and 15-22. .[15][15] Macey 2000, p. 716. Wilmarth 2002, p. 219, fn. 5.[16][16] Kennedy 1973, pp. 50-53 and 203-204. Perkins 1971, pp. 497-505.[17][17] Kennedy 1973, pp. 72-73.[18][18] Patrick 1993, pp. 172-174. Kelly III 1985, p. 54, fn. 171. Perkins 1971, p. 524.[19][19] Patrick 1993, pp. 168-172. Burns 1974, pp. 41-42 and 79. Kennedy 1973, pp. 212-219.[20][20] Kennedy 1973, pp. 103-128 and 204-205. Burns 1974, p 78.[21][21] Perino 2010[22][22] Bentson 1990, pp. 47-89. Cleveland and Huertas 1985, pp. 172-187.[23][23] . Fein 2011, §4.03[A].[24][24] Wilmarth 2008, p. 564, fn. 24.[25][25] . Fein 2011, §4.03[C].[26][26] . Fein 2011, §4.03[B].[27][27] . Fein 2011, §4.03[D].[28][28] Malloy 2011, § 9.02[B], pp. 9-37. . Patrick 1993, p. 251.

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[29][29] . .[30][30] Wilmarth 2008, p. 565. Pecora 1939, pp. 82-104.[31][31] Benston 1990, pp. 44-45.[32][32] Wilmarth 2008, p. 560, fn. 8.[33][33] Wilmarth 2008, p. 565.[34][34] pp. 1 (Section 3(a)), 4 (Section 7), 8 (Section 11(a)). Rodkey 1934, p. 893. Willis 1935, pp. 705-711.[35][35] . Fein 2011, § 4.03[A], pp. 4-8 to 4-9[36][36] Fein 2011, § 7.06[A], p. 7-90. .[37][37] Peach 1941, pp. 38-43. Malloy 2011, § 9.02[A], p. 9-21. .[38] Fein 2011, § 4.04[C], pp. 4-29 to 4-30 and § 7.06[A], pp. 7-90 to 7-91. Capatides 1992, VI. F. “Securities Trading Activities Pursuant to

Investment Powers,” pp. 200-204.[39][39] Fein 2011, § 4.04[C], p. 4-30 and § 7.06[A], pp. 7-90 to 7-91. Capatides 1992, p. 201.[40][40] Fein 2011, § 7.01 INTRODUCTION, p. 7-5.[41][41] , chapter 3, pp. 44 and 47-53.[42][42] Wilmarth 1990, p. 1137.[43][43] Reinicke 1995, pp. 65-66. . Shull and White 1998, p. 7.[44][44] Reinicke 1995, pp. 66-68 and 75.[45][45] Eaton 1995, pp. 1202-1207. Benston 1990, p. 9.[46][46] . . .[47][47] .[48][48] Perkins 1971, pp. 503-504 and 517-522. Peach 1941, pp. 66-70.[49] , p. 475 (“Congress drew a clear distinction between member banks and their affiliates in the Glass–Steagall Act.”) Benston 1990, pp. 7-9.[51][51] Garten 1989, pp. 515-516. Hendrickson 2001, p. 860. Peach 1941, p. 160.[54][54] . Wilmarth 2008, p. 590.[55][55] Burns 1974, pp. 170-171. Patrick 1993, pp. 265-266. Wilmarth 2008, pp. 590-591.[56][56] Burns 1974, pp. 170-171. Perkins 1971, p. 269.[57] White 1992, p. 7. (http:/ / books. google. com/ books?id=sII_dLAeZBgC& pg=PA7& lpg=PA7& dq=white+ comptroller+ saxon+ new+

forceful#v=onepage& q& f=false)[58] Pitt and Williams 1983, p. 142. Investment Company Institute v. Camp, 401 U.S. 617 (http:/ / supreme. justia. com/ us/ 401/ 617/ case. html),

pp. 621-622 (for OCC actions) (1971). Retrieved February 18, 2012.[59][59] Langevoort 1987, pp. 688-690. .[60] . White 1992, p. 13. (http:/ / books. google. com/ books?id=sII_dLAeZBgC& pg=PA13& lpg=PA13& dq=white+ comptroller+ saxon+

revenue+ bond#v=onepage& q& f=false)[61][61] White 1992, pp. 13 and 15. Reinicke 1995, p. 31.[62][62] .[63][63] Macey 2000, p. 717. Reinicke 1995, p. 31[64][64] .[65][65] Minsky 1982, pp. xii-xiv.[66][66] .[67][67] Garten 1989, pp. 522-524. Wilmarth 1990, pp. 1147-1148.[68][68] Wilmarth 1990, pp. 1142-1143.[69][69] .[70][70] . .[71][71] Wilmarth 1990, pp. 1142-1144.[72][72] Mayer 1984, pp. 34-45.[73][73] .[74][74] . Litan 1987, p. 34. .[75][75] Garten 1989, pp. 508-509 and 521-525. Garten 1991, pp. 8-14.[76][76] Vietor 1987, pp. 33-39.[77][77] Mayer 1974, pp. 523 and 531-535.[78][78] Minsky 1982, p. 201[79][79] , p. 66 (Section 3.10 "The regulatory dynamic of innovation and protection").[80][80] .[81][81] Reinicke 1995, pp. 91-92, 95, and 115-116.[82][82] . Reinicke 1995, p. 59.[83][83] . .[84][84] Pitt and Williams 1983, pp. 154-155.[85][85] Reinicke 1995, pp. 57-58.[86][86] Shull and White 1998, p. 5.

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[87][87] Reinicke 1995, pp. 30-31. Shull and White 1998, pp. 5-6.[88][88] Reinicke 1995, p. 61.[89][89] Reinicke 1995, pp. 65-70.[90][90] . Shull and White 1998, p. 7.[91][91] Reinicke 1995, pp. 91 and 95. Pitt and Williams 1983, p. 167.[92][92] Capatides 1992, p. 7, fn. 12.[93][93] Langevoort 1987, pp. 709-712.[94][94] Reinicke 1995, pp. 76-77. .[95][95] Reinicke 1995, p. 96. , pp. CRS-4 to CRS-5. Kurucza et al. 1988, pp. 1112 and 1119.[96][96] Kurucza et al. 1988, p. 1107. Reinicke 1995, pp. 96-99.[97][97] Reinicke 1995, pp. 84-85 and 91-101[98][98] Reinicke 1995, pp. 98-100.[99][99] Reinicke 1995, pp. 99-100 and 105-109. .[100] White 1992, p. 53 (http:/ / books. google. com/ books?id=sII_dLAeZBgC& pg=PA53& lpg=PA53& dq=white+ comptroller+

transformation+ proxmire+ protectionist+ dinosaur#v=onepage& q& f=false).[101] . Reinicke 1995, pp. 92 (for the U.K.’s Big Bang) and 95 (for broader global “deregulation”).[102][102] .[103][103] Reinicke 1995, pp. 92, 95, and 101. .[104][104] Benston 1990, pp. 32-34. . .[105][105] Vietor 1987, pp. 38-39.[106][106] Garten 1989, p. 512-513. .[107][107] Eaton 1995, pp. 1202-1210.[108][108] Mayer 1974, p. 535.[109][109] Mayer 1984, p. 49.[110][110] Mayer 1984, pp. 49-52. Shull and White 1998, p. 6.[111][111] Vietor 1987, p. 49.[112][112] Reinicke 1995, p. 93. .[113][113] .[114][114] Reinicke 1995, p. 98 (quoting CRS Report No. 87-725E).[115][115] .[116][116] .[117][117] Jeannot 1999, pp. 1733, fn. 98 (on effective date), and 1736-1738 (on securities powers). .[118][118] Jeannot 1999, pp. 1737-1738.[119][119] Reinicke 1995, pp.105-111.[120][120] Reinicke 1995, pp. 103-104. FRB Manual, Section 3600.21.2.[121][121] Reinicke 1995, pp. 103-104. FRB Manual, Section 3600.21.3.[122][122] Fein 2011, § 1.04[A], p. 1-14. .[123][123] Reinicke 1995, pp. 71 (for opposition to underwriting corporate bonds), 74 and 76. .[124][124] , pp. 505-506. Reinicke 1995, p. 103.[125][125] .[126][126] Reinicke 1995, pp. 103-4. , pp. 505-506.[127][127] Reinicke 1995, p. 103.[128][128] Reinicke 1995, pp. 110-111.[129][129] Fein 2011, § 1.06[F], p. 1-39. .[130][130] Reinicke 1995, p. 110.[131][131] Reinicke 1995, pp. 114 and 124-125.[132][132] Eaton 1995, pp. 1189 and 1201-1202.[133][133] Eaton 1995, pp. 1202-1203.[134][134] Reinicke 1995, p. 93.[135][135] Eaton 1995, p. 1219.[136][136] Reinicke 1995, p. 104. Greenspan 1987, p. 3.[137][137] Reinicke 1995, p. 104.[138][138] Greenspan 1987, p. 3.[139][139] .[140][140] Fein 2011, § 1.04, pp. 1-9 to 1-12. .[141][141] Fein 2011, § 4.05[C] [4]. .[142][142] Fein 2011, § 4.05[C] [5]. .[143][143] Fein 2011, § 4.05[C] [8]. .[144][144] Reinicke 1995, p. 69. .

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[145][145] . Reinicke 1995, p. 97.[146][146] Reinicke 1995, pp. 93 and 97-98.[147][147] . Reinicke 1995, pp. 117 and 119.[148][148] .[149][149] Reinicke 1995, pp. 120-124[150][150] Markey 1990.[151][151] Markey 1990, pp. 457-458 and 474-475.[152][152] . .[153][153] Reinicke 1995, pp. 122-124. Hendrickson 2001, pp. 862-864 (finding the same reason in 1988 and 1991).[154][154] . Kotlikoff 2010, p. 151 (suggesting commercial bank CDO and SIV activities began after the 1999 GLBA).[155][155] Capatides 1992, pp. 98-105. Fein 2011, § 4.05[C] [15], pp. 4-61 to 4-63.[156][156] .[157][157] Fein 2011, § 4.05[C] [15], p. 4-62. Capatides 1992, pp. 99-101.[158][158] Fein 2011, § 4.05[C] [15], p. 4-62.[159][159] Fein 2011, § 1.02, p. 1-7.[160] Securities Industry Association v. Robert L. Clarke, 885 F.2d 1034 (http:/ / law. justia. com/ cases/ federal/ appellate-courts/ F2/ 885/ 1034/

144081/ ), 1041 (for “ten years”) (2d. Cir. 1989).[161][161] Capatides 1992, p. 102. .[162][162] Wilmarth 1995, pp. 57-59. Wilmarth 2002, pp. 401-402.[163][163] Wilmarth 1995, pp. 55-59. Wilmarth 2002, pp. 403-407.[164][164] Wilmarth 2002, pp. 392-393.[165][165] Wilmarth 1995, p. 56.[166][166] Wilmarth 2002, pp. 406-407.[167] Kavanaugh, Boemio & Edwards, Jr. 1992, pp. 109-112.[168] Kavanaugh, Boemio & Edwards, Jr. 1992, p. 107.[169][169] .[170][170] .[171][171] .[172][172] . .[173][173] . .[174][174] .[175][175] .[176][176] .[177] Hendrickson 2001, p. 879. Wilmarth 2008, pp. 561-562. (“Throughout the debate, Glass–Steagall was derided as an old-fashioned law out

of step with modern finance”).[178] . (“Mr. Volcker, who still carries considerable weight on Capitol Hill”). . .[179] . (“I have argued this morning the logic and practical desirability of finally eliminating Glass–Steagall restrictions”).[180][180] .[181][181] .[182][182] Fein 2011, § 1.02, p. 1-6. Hendrickson 2001, pp. 867-869. .[183] Fein 2011, § 1.02, p. 1-6. Fisher 2001, p. 1302, fn. 6. Levitt 1998 (“A Competitive Two-Way Street”).[184][184] Wilmarth 2002, p. 223. . Focarelli, Marques-Ibanez, Pozzolo 2011, pp. 6-7.[185][185] Mayer 1997, pp. 387-389 and 446-447.[186][186] Greenspan 2010, p. 33. Wilmarth 1995, pp. 14-26.[187][187] . Litan and Rauch 1998, pp. 88-92.[188][188] Wilmarth 2002, pp. 223-224, 284, and 425-428. Mayer 1997, pp. 23-24.[189][189] Garten 1993, pp. 164-166.[190][190] Garten 1993, pp. 163-164. Wilmarth 2002, pp. 439-440.[191][191] Garten 1993, p. 195. Wilmarth 2002, pp. 440-444.[192][192] Stern and Feldman 2004, p. 77. Reinicke 1995, p. 112, fn. 105.[193][193] .[194][194] Stern and Feldman 2004, p. 77.[195][195] Litan and Rauch 1998, pp. 88-92.[196][196] Wilmarth 2008, p. 562. Focarelli, Marques-Ibanez, Pozzolo 2011, pp. 6-7.[197][197] . Barth et al. 2000, p.1.[198][198] . Wilmarth 2008, p. 562. .[199][199] Mayer 1997, p. 429.[200][200] . .[201][201] Mayer 1974, pp. 521-524.

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[202][202] Garten 1999, p. 293.[203][203] Reinicke 1995, pp. 80 and 109.[204][204] . .[205][205] Mattingly and Fallon 1998, pp. 66-69. .[206][206] .[207][207] Hendrickson 2001, pp. 865-866. .[208][208] . .[209][209] . Simpson Thacher 1998, p. 4.[212][212] . Rodelli 1998, pp. 321-326.[213][213] Shull and White 1998, p. 8. Rodelli 1998, p. 335.[214][214] Omarova 2011. .[215][215] Fein 2011, § 1.06[F], pp. 1-40 to 1-41. .[216][216] Mattingly and Fallon 1998, p. 34. .[217][217] . .[218] . (“permitting banks or bank holding companies to extend their activities into commerce and industry -- contrary to Anglo-Saxon traditions

of finance -- would be directly contrary” to “the need for strong structural protection against conflicts of interest in the provision of credit andundue concentration of resources.”)

[219][219] .[220][220] . .[221][221] Hendrickson 2001, pp. 868-869. .[222][222] .[223][223] Hendrickson 2001, p. 869. Fein 2011, § 1.06[G], p. 1-42. .[224][224] . .[225][225] Hendrickson 2001, p. 869. . .[226][226] . , pp. 3, 6, 19, and (for Democratic member statement) 53-58.[227][227] .[228][228] , p. 1.[229][229] .[230] . . S. 753, 106th Congress, First Session (http:/ / www. gpo. gov/ fdsys/ pkg/ BILLS-106s753is/ pdf/ BILLS-106s753is. pdf), p. 7, Section

101.[231] . Amendment No. 302 (http:/ / www. gpo. gov:80/ fdsys/ pkg/ CREC-1999-05-04/ pdf/ CREC-1999-05-04-pt1-PgS4682. pdf),

Congressional Record, S4682 (May 4, 1999), Section 101, p. S4683. Senate debate and vote on Amendment No. 302 (http:/ / www. gpo.gov:80/ fdsys/ pkg/ CREC-1999-05-05/ pdf/ CREC-1999-05-05-pt1-PgS4736-2. pdf), Congressional Record, S. 4736-4743 (May 5, 1999).

[232][232] . . .[233][233] , pp. 1-2.[234][234] , pp. 1-2. .[235][235] . .[236][236] . .[237][237] . .[238][238] . Wilmarth 2002, p. 223.[239][239] . .[240][240] Barth et al. 2000, p. 196.[241][241] Fisher 2001, pp. 1337-1367.[242][242] Stern 2000. Stern and Feldman 2004, p. 77. Wilmarth 2001, p. 22. Wilmarth 2002, pp. 224-225.[243][243] .[244][244] .[245][245] Heyward 2005, p. 1.[246][246] .[247][247] .[248][248] .[249][249] .[250][250] . .[251][251] .[252][252] .[253][253] .[254][254] .[255][255] .[256][256] .[257][257] .

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[258][258] .[259][259] .[260][260] .[261][261] Wilmarth 2008, pp. 559 and 562-563.[262][262] . Wilmarth 2008, pp. 563-564 and 614.[263][263] .[264][264] . .[265][265] . Eaton 1995, pp. 1188-1189 and 1214-1219. Macey 2000, p. 694.[266][266] .[267][267] . Fein 2011, §1.09, p. 1-78.[268][268] .[269][269] . .[270][270] . Heyward 2005, pp. 4-6.[271] Levitt 1998 (“Market Discipline--not Safety and Soundness Regulation--for Securities Firms).[272][272] . .[273][273] Greenspan 2010, p. 29, fn. 47.[274][274] Fein 2011, §1.09, pp. 1-77 to 1-78.[275][275] Fein 2011, §1.09, p. 1-78.[276][276] Fein §1.09, p. 1-78.[277][277] Fein 2011, §1.09[A], p. 1-80. Heyward 2005, p. 5. . Wilmarth 2002, p. 223.[278][278] Focarelli, Marques-Ibanez, and Pozzolo 2011, pp. 7-8, 13-15, and 22-23.[279][279] Focarelli, Marques-Ibanez, and Pozzolo 2011, p. 23.[280][280] Focarelli, Marques-Ibanez, and Pozzolo 2011, pp. 13-14.[281][281] .[282][282] .[283][283] .[284][284] Fein 2011, §1.02, p. 1-6.[285][285] Felsenfeld and Glass 2011, p. 362.[286][286] Felsenfeld and Glass 2011, p. 312. .[287][287] .[288][288] Mayer 1974, pp. 192-197.[290][290] Wilmarth 2002, p. 374.[291][291] Garten 1993, pp. 169-170 and 182-185.[292][292] .[293][293] .[294] , p. 3 (“The Financial Crisis”).[295][295] Date and Konczal 2011, p. 61.[296][296] .[297][297] .[298][298] .[299][299] . .[300] "H.R. 5714 (112th): Safe, Accountable, Fair, and Efficient Banking Act of 2012" (http:/ / www. govtrack. us/ congress/ bills/ 112/ hr5714/

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[317][317] . Fein 2011, §§ 8.01 and 8.02[D], p. 8-3 to 8-5.[318][318] . Fein 2011, § 8.03[D], p. 8-12.[319][319] Lockner and Hansche 2000, p. 37.[320][320] .[321][321] Fein 2011, § 7.08[G], pp. 7-119 to 7-126 and § 8.04, p. 8-15.[322][322] ICB 2011[323][323] .[326][326] .[327][327] .[328][328] Wagner 2000, pp. 335-337 and 382-424. Fein 2011, §1.04[B] pp. 1-21 to 1-22.[329][329] Shull and White 1998, pp. 1, 8-10, and 14-17.[330][330] Shull and White 1998, p. 8. . Wilmarth 2001, p. 22, fn. 37.[331] Shull and White 1998, pp. 8-9 (for Greenspan in 1990). . Rodelli 1998, p. 316, fn. 35 (for Volcker in 1995). , pp. 3-4 (“Firewalls”). Fein

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• Wilmarth, Jr., Arthur E. (2008), "Did Universal Banks Play a Significant Roe in the U.S. Economy’s Boom-and-Bust Cycle of 1921-33? A Preliminary Assessment", Current Development in Monetary and Financial Law 4, Washington, D.C.: International Monetary Fund, pp. 559–645, ISBN 978-1-58906-507-9, SSRN  838267

GlassSteagall Act 41

(http:/ / ssrn. com/ abstract=838267).

Further reading• Anderson, Benjamin (1949), Economics and the Public Welfare, New York: D. Van Nostrand Company.• Barth, James R.; Brumbaugh, R. Dan, Jr. & Wilcox, James A. (2000), "Policy Watch: The Repeal of

Glass–Steagall and the Advent of Broad Banking", Journal of Economic Perspectives 14 (2): 191–204, JSTOR 2647102 (http:/ / www. jstor. org/ stable/ 2647102).

• Blass, Asher A.; Grossman, Richard S. (1998), "Who Needs Glass–Steagall? Evidence From Israel’s Bank ShareCrisis and the Great Depression" (http:/ / onlinelibrary. wiley. com/ doi/ 10. 1111/ j. 1465-7287. 1998. tb00511. x/abstract), Contemporary Economic Policy 16 (2): 185–196, doi: 10.1111/j.1465-7287.1998.tb00511.x (http:/ / dx.doi. org/ 10. 1111/ j. 1465-7287. 1998. tb00511. x), retrieved February 27, 2012.

• Burns, Arthur F. (1988), The Ongoing Revolution in American Banking, Washington, D.C.: American EnterpriseInstitute, ISBN 0-8447-3654-6.

• Calomiris, Charles W.; White, Eugene N. (1994), "The Origins of Federal Deposit Insurance, chapter 5 in TheRegulated Economy: A Historical Approach to Political Economy, edited by Claudia Golden and Gary D.Libecap, Chicago: University of Chicago Press, ISBN 0-226-30110-9" (http:/ / www. nber. org/ chapters/ c6575.pdf), Journal of Comparative Business and Capital Market Law 5 (2): 137–193, retrieved February 27, 2012.

• Calomiris, Charles W. (2000), U.S. Bank Deregulation in Historical Perspective, New York: CambridgeUniversity Press, ISBN 0-521-58362-4

• Canals, Jordi (1997), Universal Banking: International Comparisons and Theoretical Perspectives, Oxford; NewYork: Clarendon Press, ISBN 0-19-877506-7.

• Coggins, Bruce (1998), Does Financial Deregulation Work? A Critique of Free Market Approaches, NewDirections in Modern Economics, Northampton, MA: Edward Elgar Publishing Limited, ISBN 1-85898-638-9.

• Firzli, M. Nicolas (January 2010), "Bank Regulation and Financial Orthodoxy: the Lessons from theGlass–Steagall Act", Revue Analyse Financière: 49–52 (French).

• Hambley, Winthrop P. (September 19999), "The Great Debate-What will become of financial modernization"(http:/ / www. frbsf. org/ publications/ community/ investments/ cra99-2/ debate. html), Community Investments(Federal Reserve Bank of San Francisco) 11 (2): 1–3, retrieved February 16, 2012.

• Huertas, Thomas (1983), "Chapter 1: The Regulation of Financial Institutions: A Historical Perspective onCurrent Issues", in Benston, George J., Financial Services: The Changing Institutions and Government Policy,Englewood Cliffs, N.J.: Prentice-Hall, ISBN 0-13-316513-2.

• Kroszner, Randall S. & Rajan, Raghuram G. (1994), "Is the Glass–Steagall Act Justified? A Study of the U.S.Experience with Universal Banking Before 1933", American Economic Review 84 (4): 810–832, JSTOR 2118032 (http:/ / www. jstor. org/ stable/ 2118032).

• Lewis, Toby (January 22, 2010), "New Glass–Steagall Will Shake Private Equity", Financial News.• Mester, Loretta J. (1996), "Repealing Glass–Steagall: The Past Points the Way to the Future" (http:/ / www.

philadelphiafed. org/ research-and-data/ publications/ business-review/ 1996/ july-august/ Glass–Steagall. cfm),Federal Reserve Bank of Philadelphia Business Review (July/August), retrieved February 25, 2012.

• Minsky, Hyman (1982), Can It Happen Again?, Armonk, N.Y.: M.E. Sharpe, ISBN 0-873-32213=4.• Mishkin, Frederic S. (2006), "How Big a Problem is Too Big to Fail? A Review of Gary Stern and Ron Feldman’s

Too Big to Fail: The Hazards of Bank Bailouts" (http:/ / www. business. unr. edu/ faculty/ rtl/ 791/ toobigtofail.pdf), Journal of Economic Literature 44 (December): 988–1004, retrieved February 25, 2012.

• Pecora, Ferdinand (1939), Wall Street Under Oath: The Story of Our Modern Money Changers, Reprints ofEconomics Classics, New York: A.M. Kelley (published 1966 (reprint of 1939 edition pubslished by Simon&Schuster, New York )), LCCN  68-20529 (http:/ / lccn. loc. gov/ 68-20529).

• Saunders, Anthony; Walter, Ingo (1994), Universal Banking in the United States: What could we gain? Whatcould we lose?, New York: Oxford University Press, ISBN 0-19-508069-6.

GlassSteagall Act 42

• Saunders, Anthony; Walter, Ingo, eds. (1997), Universal Banking: Financial System Design Reconsidered,Chicago: Irwin Professional Publishing, ISBN 0-7863-0466-9.

• Uchitelle, Louis (February 16, 2010), "Elders of Wall St. Favor More Regulation" (http:/ / www. nytimes. com/2010/ 02/ 17/ business/ 17volcker. html), New York Times.

• White, Eugene Nelson (1986), "Before the Glass–Steagall Act: An analysis of the investment banking activitiesof national banks", Explorations in Economic History 23 (1): 33–55, doi: 10.1016/0014-4983(86)90018-5 (http:/ /dx. doi. org/ 10. 1016/ 0014-4983(86)90018-5).

• Willis, Henry Parker; Chapman, John (1934), The Banking Situation: American Post-War Problems andDevelopments, New York: Columbia University Press, OCLC  742920 (http:/ / www. worldcat. org/ oclc/742920).

• Wilmarth, Jr., Arthur E. (2007), "Walmart and the Separation of Banking and Commerce", Connecticut LawReview 39 (4): 1539–1622, SSRN  984103 (http:/ / ssrn. com/ abstract=984103).

External links• Glass–Steagall Act – further readings (http:/ / law. jrank. org/ pages/ 7165/ Glass–Steagall-Act. html)• On the systematic dismemberment of the Act from PBS's Frontline (http:/ / www. pbs. org/ wgbh/ pages/

frontline/ shows/ wallstreet/ weill/ demise. html)• Full text of the Glass–Steagall Act followed by New York Federal Reserve Bank Explanation (http:/ / fraser.

stlouisfed. org/ publication-issue/ ?id=10671)• Glass Subcommittee hearings (http:/ / fraser. stlouisfed. org/ publication/ ?pid=675)• Pecora Investigation hearings (http:/ / fraser. stlouisfed. org/ publication/ ?pid=87)• FDIC History: 1933-1983 (http:/ / www. fdic. gov/ bank/ analytical/ firstfifty/ )• 1987 Federal Reserve Bank of Kansas City Jackson Hole Symposium on Restructuring the Financial System

(http:/ / www. kc. frb. org/ publicat/ sympos/ 1987/ S87. pdf)

Article Sources and Contributors 43

Article Sources and ContributorsGlass–Steagall Act  Source: http://en.wikipedia.org/w/index.php?oldid=558181304  Contributors: 7&6=thirteen, AaronF2, Abe.Froman, Adam Carr, Adam sk, Adjwilley, Adlerschloß,AgnosticPreachersKid, Allens, Amelapay, Analoguni, AndrewLeeson, AnimeJanai, AntelopeInSearchOfTruth, Antifamilymang, Arbeit Sockenpuppe, Arbero, Arthur Rubin, AscendingIntellect,B.Andersohn, BD2412, Bbigjohnson, Beland, Bender235, Benjamin9832, Best O Fortuna, Big Bird, BigK HeX, BigPimpinBrah, Bkuschel, Blahblah5555, Blinkozo, Blueandgreen24, Bobo192,BoomerAB, Brentdax, Bruvajc, Bsadowski1, Bulba2036, Byelf2007, CapitalSasha, Capricorn42, CarolynETaylor, Catgut, Cbowen4, Cfweckenmann, Chris the speller, Chuunen Baka, Clydefrogg, ConMan, Connormah, Cooldude7911, Courcelles, Cumulus Clouds, Curb Chain, D1stewart1, DLZ, DMCer, Dan.sampey, Daveman 84, DeanKeaton, Denimadept, DesertRat16, Digestible,DocendoDiscimus, Dodiad, DouglasCalvert, Dr.enh, Dratman, Dreginald, Duoduoduo, Dvoiceoreason, EAFAAT, ELApro, Ed Wood's Wig, Edward, Elemented9, Encyclopedant, Esprqii,Eyreland, Famspear, Fang Aili, Fcy, Fdssdf, Feureau, Ffirehorse, Foofbun, Foogod, Fraxinus23, Gabbe, GentlemanGhost, George Orwell III, Ggarndt, Gobonobo, GoingBatty, GoldRingChip,Gonzobent, Good Olfactory, Goodconstitution, GorillaWarfare, Grimsooth, Ground Zero, Guerillero, Gz1derbread, Headbomb, Hmains, Hoagie08540, Hobit, Htonl, Htournyol, Int21h, Iota, It IsMe Here, J Clear, J.R. Hercules, J.delanoy, Jags427, JamesMLane, Jatkins, JayJasper, JeffGarofano, Jenix89, Jennavecia, Jerryseinfeld, Jesan Fafon, Jlivewell, Jmsand, John K, John Z, John ofReading, John254, JohnDoe0007, JohnSawyer, Johncsrnyc, Jrlevine, Jujutacular, Justanotherperson, Kaltenmeyer, Kgrad, Khazar2, Kitsunegami, Ktr101, Kumioko (renamed), Kurykh,Lackingdirection, Last1in, Lights, Linguo42, Lokpest, LordHarris, LuK3, LuigiManiac, Luke 19 Verse 27, MER-C, MKFI, Madrone, Malachias111, Mav, Mazin07, Mbelisle, McSly, Mdkb123,MeStevo, Meco, Mic, Mindmatrix, Moorehaus, Nareek, Nathanpbell, NawlinWiki, Neo Poz, Nerdyjoe314, Niceguyedc, Nil Einne, NoSpinJustFacts, Nosneh, NuclearWarfare, Nunh-huh,Nutcracker, Nwlaw63, Olivier, Oneeyedguide, Orion prince, Ospalh, PGWG, Paramecium13, PaulHanson, Pawyilee, Peter Karlsen, Philvarner, PiMaster3, Piano non troppo, Pianoman13, Pnm,Polmandc, Postdlf, Prevenient, R'n'B, RC12, RKill, Ray Radlein, Rewalt, Rich Farmbrough, Rickterp, Riziles, Rjbesquire, Rjwilmsi, Rl, Rnolds, Roadrunner, Rodrigo Cornejo, Rossy65,Rrawpower, Rudehost, SDC, Sastian, Scbomber, Seaphoto, Septegram, Sesel, Shakescene, SimonP, Skakkle, Smokizzy, Snowolf, Solarra, Solferino, Some jerk on the Internet, Steven J.Anderson, Stevenmitchell, Summit88, Svick, THC Loadee, Tabletop, Tabrez, Ted87, Tellsbadjokes, Temporaluser, The PIPE, Theopolisme, TonyTheTiger, Topbanana, Treybien, TrulyBlue,Trusilver, Twalls, Twas Now, Tyler McHenry, Ucscottb4u, Ulric1313, UnQuébécois, Uncle Dick, UncleBubba, UpstateNYer, Uriel8, Vegetarian75, Verne Equinox, Vinnie the lips, Vints1,Welhaven, Whatup816, Whkoh, Wikibluesfreak, Wikidea, Wikimalte, Will Beback, Winampman, Wink37, Yunesj, Zad68, Zelphia, 496 anonymous edits

Image Sources, Licenses and ContributorsFile:GlassSteagall.jpg  Source: http://en.wikipedia.org/w/index.php?title=File:GlassSteagall.jpg  License: Public Domain  Contributors: CGlass.jpg: Original uploader was The Mystery Man aten.wikipedia Henry_Steagall.jpg: US House of Representatives derivative work: Adam sk (talk)

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