Gramm-Leach-Bliley Act

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The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999 was enacted on November 12, 1999 following extensive lobbying by investment banks and other financial services companies. The Act repealed the legal restrictions on combining banking and financial service firms of the Glass-Steagall Act of 1933. This allowing commercial banks, investment banks, securities companies and insurance companies to merge with each other. The Glass-Steagall Act had prohibited any company from acting as both an investment bank and a commercial bank. Both were prohibited from owning insurance companies by the Bank Holding Company Act of 1956.

The final act passed the Senate 90-8[1], and the House 362-57[2], more than sufficient to override any veto by President Bill Clinton.

Lobbying efforts

During the 1997-1998 Congress, big banks, securities firms and insurance companies gave more than $85 million in campaign contributions, including soft money donations to the Democratic and Republican parties, but the legislation still did not pass. In the next congressional session, these industries increased campaign contributions to more than $150 million.

Treasury Secretary, Robert Rubin, formerly head of Goldman Sachs, also promoted the legislation, having testified in 1995 that, “the banking industry is fundamentally different from what it was two decades ago, let alone in 1933."[3]

Citigroup, Travelers Group merger

In 1998 Citibank merged with Travelers Group in violation of the Bank Holding Company Act (BHCA), but Citibank was given a two-year forbearance that was based on an assumption that they would be able to force a change in the law. The Gramm-Leach-Bliley Act passed November 12, 1999, repealing the BHCA and portions of the Glass-Steagall Act, allowing banks, brokerages, and insurance companies to merge, thus making the Citigroup/Traveler Group merger legal.

Top Citigroup officials were allowed to review and approve drafts of the legislation before it was formally introduced. After resigning as Treasury Secretary and while secretly in negotiations to head Citigroup, Robert Rubin helped broker the final deal to pass the bill.[3]

Phil Gramm statement at signing

From the statement by Senator Phil Gramm at the signing of the Gramm-Leach-Bliley act repealing important regulatory elements of the Glass-Steagall Act[4]:

"In the 1930s, at the trough of the Depression, when Glass-Steagall became law, it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets.

We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.

I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future, and I am awfully proud to have been a part of making it a reality."

Contribution to the 2008 economic crisis

The repeal of important portions of the Glass-Steagall Act allowed banks to seek high returns by investing money from checking and savings accounts into "creative" and "innovative" financial instruments such as collateralized debt obligations (CDOs), mortgage-backed securities (MBSs) and credit default swaps (CDSs). These risky investments led to the collapse of the financial markets in 2008 and the resulting global financial crisis.

Articles and resources

See also

References

  1. Votes Database at Washington Post, retrieved November 5, 2009
  2. Votes Database at Washington Post, retrieved November 5, 2009
  3. 3.0 3.1 Sold Out - How Wall Street and Washington Betrayed America , Consumer Education Foundation, March, 2009. Retrieved October 10, 2009.
  4. Phil Gramm, GRAMM'S STATEMENT AT SIGNING CEREMONY FOR GRAMM-LEACH-BLILEY ACT, November 12, 1999

External resources

External articles