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What is the Glass Steagall Act and how did it come about? - GreenLine 401k
What is the Glass Steagall Act and how did it come about? - GreenLine 401k
Published: 2015/09/23
Channel: Strategic Choices
Glass-Steagall Act of 1933 explained by Max Keiser & William Black & Webster Tarpley
Glass-Steagall Act of 1933 explained by Max Keiser & William Black & Webster Tarpley
Published: 2009/10/31
Channel: Marc Chabot YT
Explaining Glass-Steagall
Explaining Glass-Steagall
Published: 2013/08/20
Channel: Shawn McIntyre
Bernie Sanders on the Big Banks and Repeal of Glass-Steagall Act (7/1/1999)
Bernie Sanders on the Big Banks and Repeal of Glass-Steagall Act (7/1/1999)
Published: 2015/08/16
Channel: Catholics 4Bernie
Who repealed the Glass-Steagall Act?
Who repealed the Glass-Steagall Act?
Published: 2009/11/01
Channel: order9066
The Truth About Glass-Steagall
The Truth About Glass-Steagall
Published: 2017/05/27
Channel: corbettreport
Glass-Steagall, The Complete Story...
Glass-Steagall, The Complete Story...
Published: 2011/10/18
Channel: LaRouchesupport
Glass–Steagall Legislation
Glass–Steagall Legislation
Published: 2015/11/15
Channel: Play With My Toys
Glass Steagall Act Explained
Glass Steagall Act Explained
Published: 2012/10/11
Channel: Christopher Hunt
Glass–Steagall Legislation
Glass–Steagall Legislation
Published: 2014/11/26
Channel: Audiopedia
Glass-Steagall crash course
Glass-Steagall crash course
Published: 2010/02/02
Channel: CNNMoney
Yaron Answers: Glass-Steagall And The Financial Crisis
Yaron Answers: Glass-Steagall And The Financial Crisis
Published: 2012/05/21
Channel: Ayn Rand Institute
6 4 Glass Steagall Banking Reform Act
6 4 Glass Steagall Banking Reform Act
Published: 2012/12/06
Channel: Louis Sobo
Trump Actively Considering Glass-Steagall: Act Now to Prevent New Crash
Trump Actively Considering Glass-Steagall: Act Now to Prevent New Crash
Published: 2017/05/01
Channel: LaRouchePAC Live
Glass-Steagall Reintroduced (HR 790), Pass it Now
Glass-Steagall Reintroduced (HR 790), Pass it Now
Published: 2017/02/02
Channel: LaRouchePAC Videos
Senator Elizabeth Warren - Reinstating Glass-Steagall - CNBC
Senator Elizabeth Warren - Reinstating Glass-Steagall - CNBC
Published: 2013/07/12
Channel: Marie Marr
What is Glass Steagall?  You should know this about our economy!
What is Glass Steagall? You should know this about our economy!
Published: 2013/08/01
Channel: Christian Video Channel
Glass Steagall Act
Glass Steagall Act
Published: 2015/06/07
Channel: the new middle ages
Elizabeth Warren reintroduces Glass-Steagall Act (7/7/2015)
Elizabeth Warren reintroduces Glass-Steagall Act (7/7/2015)
Published: 2015/07/10
Channel: Catholics 4Bernie
Glass-Steagall Now!
Glass-Steagall Now!
Published: 2011/05/09
Channel: Aljoša Durnik
Dodd-Frank, Glass Steagall & Wall Street
Dodd-Frank, Glass Steagall & Wall Street
Published: 2013/09/12
Channel: InsideOut Ptv
GOP Platform Calls For Reinstating Glass-Steagall
GOP Platform Calls For Reinstating Glass-Steagall
Published: 2016/07/19
Channel: Secular Talk
Glass Steagall Act
Glass Steagall Act
Published: 2016/03/18
Channel: ChrisLambropoulos15
US History Project-Glass-Steagall Act
US History Project-Glass-Steagall Act
Published: 2010/04/16
Channel: MoneyMoneyBall
Barney Frank: Glass-Steagall Act Is Not A Substitution For Other Regulation | Squawk Box | CNBC
Barney Frank: Glass-Steagall Act Is Not A Substitution For Other Regulation | Squawk Box | CNBC
Published: 2017/05/02
Channel: CNBC
Exploding the Glass-Steagall Myth
Exploding the Glass-Steagall Myth
Published: 2014/06/20
Channel: IvanTheHeathen
Mega Banks and the Glass-Steagall Act
Mega Banks and the Glass-Steagall Act
Published: 2017/05/10
Channel: Strange World of Econ
Is it time to reinstate the Glass-Steagall Act? | LIVE STREAM
Is it time to reinstate the Glass-Steagall Act? | LIVE STREAM
Published: 2017/06/01
Channel: American Enterprise Institute
Solving the World Financial Crash: Global Glass-Steagall Act
Solving the World Financial Crash: Global Glass-Steagall Act
Published: 2010/02/23
Channel: LaRouchePAC Videos
Trump Reiterates Support for a New Glass-Steagall Act, But It Will it Pass Congress?
Trump Reiterates Support for a New Glass-Steagall Act, But It Will it Pass Congress?
Published: 2017/05/15
Channel: TheRealNews
Elizabeth Warren GRILLS Steve Mnuchin On Glass-Steagall Reversal
Elizabeth Warren GRILLS Steve Mnuchin On Glass-Steagall Reversal
Published: 2017/05/18
Channel: Reflect
President Trump Willing To Work With Bernie Sanders To Restone Glass Steagall Bank Act
President Trump Willing To Work With Bernie Sanders To Restone Glass Steagall Bank Act
Published: 2017/03/09
Channel: Find Out News
Too Big To Fail Banks and the Glass-Steagall Act
Too Big To Fail Banks and the Glass-Steagall Act
Published: 2013/06/23
Channel: TheLipTV
Biden regrets 1999 vote to repeal Glass-Steagall
Biden regrets 1999 vote to repeal Glass-Steagall
Published: 2016/12/11
Channel: CNN
The Glass Steagall Act - The Useless Eaters USA
The Glass Steagall Act - The Useless Eaters USA
Published: 2016/08/28
Channel: The Useless Eaters USA
Glass- Steagall Act and Derivatives
Glass- Steagall Act and Derivatives
Published: 2011/04/13
Channel: vincegilmore2012
glass steagall act 1933
glass steagall act 1933
Published: 2014/09/12
Channel: Jazz Deus
Gary Cohn Said to Favor Bringing Back Glass-Steagall Act
Gary Cohn Said to Favor Bringing Back Glass-Steagall Act
Published: 2017/04/06
Channel: Bloomberg Politics
2015 Dem Debate - Hillary Clinton rejects Glass Steagall like an idiot.
2015 Dem Debate - Hillary Clinton rejects Glass Steagall like an idiot.
Published: 2015/10/17
Channel: May Benoet
Glass Steagall Act of 1933
Glass Steagall Act of 1933
Published: 2011/12/13
Channel: Superorchestra
Did TRUMP Just Paint a Target on his Back .. Reinact the Glass Steagall Act.
Did TRUMP Just Paint a Target on his Back .. Reinact the Glass Steagall Act.
Published: 2016/07/30
Channel: Wardo Rants
Reich on Bernie Sanders and Glass Steagall
Reich on Bernie Sanders and Glass Steagall
Published: 2015/09/30
Channel: Port Lander
The Glass-Steagall Banking Act and Its Effects on Markets: U.S. Finance
The Glass-Steagall Banking Act and Its Effects on Markets: U.S. Finance
Published: 2015/08/04
Channel: Remember This
Glass Steagall Act
Glass Steagall Act
Published: 2017/01/30
Channel: IshanBhargavaCalHigh
Harley Schlanger Interviewed on the Glass-Steagall Act
Harley Schlanger Interviewed on the Glass-Steagall Act
Published: 2010/05/13
Channel: LaRouchePAC Videos
Public Policy- Glass-Steagall Act
Public Policy- Glass-Steagall Act
Published: 2017/05/12
Channel: Casey Punches
Glass Steagall Act including the FDIC
Glass Steagall Act including the FDIC
Published: 2017/02/08
Channel: Natalie Norton
Dick Morris on Glass-Steagall and Bill Clinton
Dick Morris on Glass-Steagall and Bill Clinton
Published: 2016/09/03
Channel: David Roy Griffin
Rick Santorum: Repealing Glass Steagall a Mistake
Rick Santorum: Repealing Glass Steagall a Mistake
Published: 2016/01/26
Channel: The Undercurrent
Senator Elizabeth Warren on the 21st Century Glass-Steagall Act
Senator Elizabeth Warren on the 21st Century Glass-Steagall Act
Published: 2014/04/10
Channel: ourfinancialsecurity
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WIKIPEDIA ARTICLE

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The Glass–Steagall legislation describes four provisions of the U.S. Banking Act of 1933 separating commercial and investment banking. [1] The article 1933 Banking Act describes the entire law, including the legislative history of the provisions covered here.

(The common name comes from the names of the Congressional sponsors, Senator Carter Glass and Representative Henry B. Steagall.[2] A separate 1932 law described in the article Glass–Steagall Act of 1932, had the same sponsors, and is also referred to as the Glass–Steagall Act.)

The separation of commercial and investment banking prevented securities firms and investment banks from taking deposits, and commercial Federal Reserve member banks from:

  • dealing in non-governmental securities for customers
  • investing in non-investment grade securities for themselves
  • underwriting or distributing non-governmental securities
  • affiliating (or sharing employees) with companies involved in such activities

Starting in the early 1960s, federal banking regulators interpretations of the Act permitted commercial banks, and especially commercial bank affiliates, to engage in an expanding list and volume of securities activities.[3] Congressional efforts to "repeal the Glass–Steagall Act", referring to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms),[4] culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.[5]

By that time, many commentators argued Glass–Steagall was already "dead".[6] Most notably, Citibank's 1998 affiliation with Salomon Smith Barney, one of the largest US securities firms, was permitted under the Federal Reserve Board's then existing interpretation of the Glass–Steagall Act.[7] In November 1999, President Bill Clinton publicly declared "the Glass–Steagall law is no longer appropriate".[8][9]

Some commentators have stated that the GLBA's repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the financial crisis of 2007–2008. Economics Nobel prize laureate Joseph Stiglitz, for instance, argued that "[w]hen repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top" [10][11] Economists at the Federal Reserve, such as Chairman of the Fed Ben Bernanke, have argued that the activities linked to the financial crisis were not prohibited (or, in most cases, even regulated) by the Glass–Steagall Act.[12][13][14]

Sponsors[edit]

Sen. Carter Glass (DVa.) and Rep. Henry B. Steagall (DAla.-3), the co-sponsors of the Glass–Steagall Act.

The sponsors of both the Banking Act of 1933 and the Glass–Steagall Act of 1932 were southern Democrats: Senator Carter Glass of Virginia (who in 1932 had been in the House, Secretary of the Treasury, or in the Senate, for the preceding 30 years), and Representative Henry B. Steagall of Alabama (who had been in the House for the preceding 17 years).

Legislative history[edit]

Between 1930 and 1932 Senator Carter Glass (D-VA) introduced several versions of a bill (known in each version as the Glass bill) to regulate or prohibit the combination of commercial and investment banking and to establish other reforms (except deposit insurance) similar to the final provisions of the 1933 Banking Act.[15] On June 16, 1933, President Roosevelt signed the bill into law. Glass originally introduced his banking reform bill in January 1932. It received extensive critiques and comments from bankers, economists, and the Federal Reserve Board. It passed the Senate in February 1932, but the House adjourned before coming to a decision. The Senate passed a version of the Glass bill that would have required commercial banks to eliminate their securities affiliates.[16]

The final Glass–Steagall provisions contained in the 1933 Banking Act reduced from five years to one year the period in which commercial banks were required to eliminate such affiliations.[17] Although the deposit insurance provisions of the 1933 Banking Act were very controversial, and drew veto threats from President Franklin Delano Roosevelt, President Roosevelt supported the Glass–Steagall provisions separating commercial and investment banking, and Representative Steagall included those provisions in his House bill that differed from Senator Glass's Senate bill primarily in its deposit insurance provisions.[18] Steagall insisted on protecting small banks while Glass felt that small banks were the weakness to U.S. banking.

Many accounts of the Act identify the Pecora Investigation as important in leading to the Act, particularly its Glass–Steagall provisions, becoming law.[19] While supporters of the Glass–Steagall separation of commercial and investment banking cite the Pecora Investigation as supporting that separation,[20] Glass–Steagall critics have argued that the evidence from the Pecora Investigation did not support the separation of commercial and investment banking.[21]

This source states that Senator Glass proposed many versions of his bill to Congress known as the Glass Bills in the two years prior to the Glass–Steagall Act being passed. It also includes how the deposit insurance provisions of the bill were very controversial at the time, which almost led to the rejection of the bill once again.

The previous Glass Bills before the final revision all had similar goals and brought up the same objectives which were to separate commercial from investment banking, bring more banking activities under Federal Reserve supervision and to allow branch banking. In May 1933 Steagall's addition of allowing state chartered banks to receive federal deposit insurance and shortening the time in which banks needed to eliminate securities affiliates to one year was known as the driving force of what helped the Glass–Steagall act to be signed into law.

Separating commercial and investment banking[edit]

The Glass–Steagall separation of commercial and investment banking was in four sections of the 1933 Banking Act (sections 16, 20, 21, and 32).[1] The Banking Act of 1935 clarified the 1933 legislation and resolved inconsistencies in it. Together, they prevented commercial Federal Reserve member banks from:

  • dealing in non-governmental securities for customers
  • investing in non-investment grade securities for themselves
  • underwriting or distributing non-governmental securities
  • affiliating (or sharing employees) with companies involved in such activities

Conversely, Glass–Steagall prevented securities firms and investment banks from taking deposits.

The law gave banks one year after the law was passed on June 16, 1933 to decide whether they would be a commercial bank or an investment bank. Only 10 percent of a commercial bank's income could stem from securities. One exception to this rule was that commercial banks could underwrite government-issued bonds.

There were several "loopholes" that regulators and financial firms were able to exploit during the lifetime of Glass–Steagall restrictions. Aside from the Section 21 prohibition on securities firms taking deposits, neither savings and loans nor state-chartered banks that did not belong to the Federal Reserve System were restricted by Glass–Steagall. Glass–Steagall also did not prevent securities firms from owning such institutions. S&Ls and securities firms took advantage of these loopholes starting in the 1960s to create products and affiliated companies that chipped away at commercial banks' deposit and lending businesses.

While permitting affiliations between securities firms and companies other than Federal Reserve member banks, Glass–Steagall distinguished between what a Federal Reserve member bank could do directly and what an affiliate could do. Whereas a Federal Reserve member bank could not buy, sell, underwrite, or deal in any security except as specifically permitted by Section 16, such a bank could affiliate with a company so long as that company was not "engaged principally" in such activities. Starting in 1987, the Federal Reserve Board interpreted this to mean a member bank could affiliate with a securities firm so long as that firm was not "engaged principally" in securities activities prohibited for a bank by Section 16. By the time the GLBA repealed the Glass–Steagall affiliation restrictions, the Federal Reserve Board had interpreted this "loophole" in those restrictions to mean a banking company (Citigroup, as owner of Citibank) could acquire one of the world's largest securities firms (Salomon Smith Barney).

By defining commercial banks as banks that take in deposits and make loans and investment banks as banks that underwrite and deal with securities the Glass–Steagall act explained the separation of banks by stating that commercial banks could not deal with securities and investment banks could not own commercial banks or have close connections with them. With the exception of commercial banks being allowed to underwrite government-issued bonds, commercial banks could only have ten percent of their income come from securities.

The Glass–Steagall Legislation page specifies that only Federal Reserve member banks were affected by the provisions which according to secondary sources the act "applied direct prohibitions to the activities of certain commercial banks".

Decline and repeal[edit]

It was not until 1933 that the separation of commercial banking and investment banking was considered controversial. There was a belief that the separation would lead to a healthier financial system.[22] As time passed, however, the separation became so controversial that in 1935, Senator Glass himself attempted to "repeal" the prohibition on direct bank underwriting by permitting a limited amount of bank underwriting of corporate debt.

In the 1960s the Office of the Comptroller of the Currency issued aggressive interpretations of Glass–Steagall to permit national banks to engage in certain securities activities. Although most of these interpretations were overturned by court decisions, by the late 1970s bank regulators began issuing Glass–Steagall interpretations that were upheld by courts and that permitted banks and their affiliates to engage in an increasing variety of securities activities. Starting in the 1960s banks and non-banks developed financial products that blurred the distinction between banking and securities products, as they increasingly competed with each other.

Separately, starting in the 1980s, Congress debated bills to repeal Glass–Steagall's affiliation provisions (Sections 20 and 32). In 1999 Congress passed the Gramm–Leach–Bliley Act, also known as the Financial Services Modernization Act of 1999,[23] to repeal them. Eight days later, President Bill Clinton signed it into law.

Aftermath of repeal[edit]

After the financial crisis of 2007–2008, some commentators argued that the repeal of Sections 20 and 32 had played an important role in leading to the housing bubble and financial crisis. Economics Nobel prize laureate Joseph Stiglitz, for instance, argued that "[w]hen repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top", and banks which had previously been managed conservatively turned to riskier investments to increase their returns.[11] Another laureate, Paul Krugman, contended that the repealing of the act "was indeed a mistake"; however, it was not the cause of the financial crisis.[24]

Other commentators believed that these banking changes had no effect, and the financial crisis would have happened the same way if the regulations had still been in force.[25] Lawrence J. White, for instance, noted that "it was not [commercial banks'] investment banking activities, such as underwriting and dealing in securities, that did them in".[26]

At the time of the repeal, most commentators believed it would be harmless. Because the Federal Reserve's interpretations of the act had already weakened restrictions previously in place, commentators did not find much significance in the repeal, especially of sections 20 and 32.[14] Instead, the five year anniversary of its repeal was marked by numerous sources explaining that the GLBA had not significantly changed the market structure of the banking and securities industries. More significant changes had occurred during the 1990s when commercial banking firms had gained a significant role in securities markets through "Section 20 affiliates".

Post-financial crisis reform debate[edit]

Following the financial crisis of 2007-2008, legislators unsuccessfully tried to reinstate Glass–Steagall Sections 20 and 32 as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Both in the United States and elsewhere, banking reforms have been proposed that refer to Glass–Steagall principles. These proposals include issues of “ring fencing” commercial banking operations and narrow banking proposals that would sharply reduce the permitted activities of commercial banks.

See also[edit]

Notes[edit]

  1. ^ a b CRS 2010a, pp. 1 and 5. Wilmarth 1990, p. 1161.
  2. ^ Wilmarth 2008, p. 560.
  3. ^ CRS 2010a, p. 10
  4. ^ Reinicke 1995, pp. 104-105. Greenspan 1987, pp. 3 and 15-22. FRB 1998.
  5. ^ Macey 2000, p. 716. Wilmarth 2002, p. 219, fn. 5.
  6. ^ Wilmarth 2002, pp. 220 and 222. Macey 2000, pp. 691-692 and 716-718. Lockner and Hansche 2000, p. 37.
  7. ^ Simpson Thacher 1998, pp. 1-6. Lockner and Hansche 2000, p. 37. Macey 2000, p. 718.
  8. ^ "Money, power, and Wall Street: Transcript, Part 4, (quoted as "The Glass–Steagall law is no longer appropriate—")". April 24 and May 1, 2012; encore performance July 3, 2012. PBS. Retrieved October 8, 2012.  Transcript of Clinton remarks at Financial Modernization bill signing, Washington, D.C.: U.S. Newswire, November 12, 1999, 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 the world is very different. 
  9. ^ "Statement on Signing the Gramm-Leach-Bliley Act". The University of California, Santa Barbara – The American Presidency Project. November 12, 1999. 
  10. ^ Kuttner, Robert (October 2, 2007), "The Alarming Parallels Between 1929 and 2007", The American Prospect: 2, retrieved February 20, 2012 .
  11. ^ a b Stiglitz, Joseph E. "Joseph E. Stiglitz on capitalist fools". Retrieved 2016-09-11. 
  12. ^ White, Lawrence J. (2010), "The Gramm-Leach-Bliley Act of 1999: A Bridge Too Far? Or Not Far Enough?" (PDF), Suffolk University Law Review, 43 (4): 938 and 943–946, retrieved February 20, 2012 [permanent dead link]. Markham, Jerry W. (2010), "The Subprime Crisis—A Test Match For The Bankers: Glass–Steagall vs. Gramm-Leach-Bliley" (PDF), University of Pennsylvania Journal of Business Law, 12 (4): 1092–1134, retrieved February 20, 2012 .
  13. ^ "FRB: Speech--Bernanke, Monetary Policy and the Housing Bubble--January 3, 2010". www.federalreserve.gov. Retrieved 2016-09-11. 
  14. ^ a b Mester, Loretta J. "Optimal industrial structure in banking." (2005).
  15. ^ Kennedy 1973, pp. 50-53 and 203-204. Perkins 1971, pp. 497-505.
  16. ^ Kennedy 1973, pp. 72-73.
  17. ^ Patrick 1993, pp. 172-174. Kelly III 1985, p. 54, fn. 171. Perkins 1971, p. 524.
  18. ^ Patrick 1993, pp. 168-172. Burns 1974, pp. 41-42 and 79. Kennedy 1973, pp. 212-219.
  19. ^ Kennedy 1973, pp. 103-128 and 204-205. Burns 1974, p 78.
  20. ^ Perino 2010
  21. ^ Bentson 1990, pp. 47-89. Cleveland and Huertas 1985, pp. 172-187.
  22. ^ "Banking Act of 1933, commonly called Glass-Steagall". 
  23. ^ "Financial Services Modernization Act of 1999, commonly called Gramm-Leach-Bliley". 
  24. ^ Krugman, Paul (2015-10-16). "Democrats, Republicans and Wall Street Tycoons". The New York Times. ISSN 0362-4331. Retrieved 2016-09-11. 
  25. ^ Gramm-Leach-Bliley Did Not Cause the Financial Crisis (PDF), American Bankers Association, January 2010, retrieved July 13, 2012 . Who Caused the Economic Crisis?, FactCheck.org, October 1, 2008, retrieved February 20, 2012  Bartiromo, Maria (September 23, 2008), "Bill Clinton on the banking crisis, McCain, and Hillary", Bloomberg Businessweek Magazine, retrieved October 11, 2012 
  26. ^ White, Lawrence J. (2010), "The Gramm-Leach-Bliley Act of 1999: A Bridge Too Far? Or Not Far Enough?" (PDF), Suffolk University Law Review, 43 (4): 938 and 943–946, retrieved February 20, 2012 .

References[edit]

Further reading[edit]

External links[edit]

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