The Return of the Glass-Steagall Act?

The Return of the Glass-Steagall Act?

A report flashed through the media recently about Iowa Democrat Senator Tom Harkin, who has introduced to the US Senate Bill No.985 on the reinstatement of the Glass-Steagall Act. This took place on 16 May on the 80th anniversary of the original Glass-Steagall Act. Its adoption, as well as its subsequent repeal, had an enormous influence on the development of both America’s and the world’s financial and banking systems... 

The history the Glass-Steagall Act

The history of the Glass-Steagall Act (hereinafter for brevity referred to as the GSA) dates back to the «roaring twenties» of the 20th century, when America was seized by a speculation fever that the banks played a key role in inflating. Money-lending bankers forgot about traditional credit operations and embarked on risky operations in the securities market. They acted as investor/speculators themselves and used their own credits to supply money to non-bank speculators, sharing with the latter the unprecedently high profits obtained from securities operations. It all ended in tears with the stock market crash of 1929, the development of the economic recession (which grew into a prolonged depression in the 1930s) and a banking crisis. At that time, one in five American banks sank to the depths together with investors’ deposits. This was the largest deposit confiscation in history, against which the current confiscation of bank deposits seems moderate. In the wake of these events, even the US Congress began to call increasingly for the nationalisation of banks. 

Before long, following President Franklin D Roosevelt’s rise to power, a law was passed in the US Congress in 1933, the draft of which had been initiated by two Democrats – Carter Glass and Henry Steagall. The GSA provided for the following important measures: 

1. the separation of commercial and investment banking (in view of the fact that the latter is much more risky); the separation of banks into commercial banks (with the right to take deposits and engage in lending activities) and investment banks (with the right to engage solely in securities activities on the stock market);

2. the establishment of a special organisation to insure peoples’ bank deposits – the Federal Deposit Insurance Corporation (FDIC).

3. the reinforcement of the US Federal Reserve System’s supervisory, regulatory and control functions with respect to commercial banks; investment banks to be removed from the US FRS’s sphere of control and their risks insured by neither the state nor the FRS;

4. the consolidation of the FRS’ right to regulate the maximum interest rates of banks’ saving deposits, as well as set reserve requirements for FRS member banks.

The adoption of the GSA played an important role in the stabilisation of America’s financial banking system. For several decades, America avoided banking crises. 

The battle to repeal the Glass-Steagall Act

The GSA controlled the greed of bankers wanting to combine their status as deposit institutions with speculative operations on the stock markets. These bankers tried everything they could to loosen the chains of the GSA. The first attempt to change the Glass-Steagall Act was undertaken back in 1956 on the back of a bill being passed on bank holding companies. At that time, it was suggested that the ban be lifted on the combination of credit and investment activities for subsidiaries of bank holding companies in all states. The attempt was not successful, however. Borrowing and lending organisations were still forbidden to conduct investment activities, as well as absorb companies from other financial services sectors (insurance, asset management) or set up partnerships with them.

The first easing of the Glass-Steagall Act appeared at the turn of the 1960s-1970s. It related to allowing banks to enter municipal bond markets as underwriters (investment brokers). At the same time, investment companies through their lobbyists gained the right to open up client money market accounts, which are an alternative to short-term loans. It is interesting that accounts like these ended up outside of the FDIC insurance system. At the end of 1986-beginning of 1987, another significant event took place: the FRS authorised certain particularly reliable commercial banks to earn up to 5 percent of its revenue from securities operations (although still with their own capital rather than customer deposits). A little later, the level for the most reliable banks was raised to 10 percent. This took place under FRS Chairman Paul Volcker. 

The final phase of the dismantling of the GSA is bound up with the name Alan Greenspan. Having replaced the director’s chair at JP Morgan with the chairman of the board of governors’ chair at FRS, Greenspan immediately declared: «the maximum deregulation of the banking system» was necessary «to increase the competitiveness of American banks in their struggle with major foreign banks». As Greenspan understood it, meanwhile, «deregulation» was first and foremost the repeal of the GSA. Naturally, the first bank that the FRS allowed to conduct investment activities totalling up to 10 percent of its revenue was JP Morgan in 1990. This gift from Greenspan allowed the bank to dramatically strengthen its position at the expense of other Wall Street banks. Through its investment operations, JP Morgan began to swallow up its competitors with great gusto: Chemical Bank (in 1991), Chase Manhattan (in 1995), First Chicago (in 1995), Great Western Bank (in 1997), Bank One (in 2004) and others. 

By December 1996, the level of banks’ own permissible investment activities was, at Greenspan’s initiative, raised to 25 percent. As early as August 1997, the first banking institution Bankers Trust absorbed the brokerage company Alex, Brown & Co. Later on, Bankers Trust itself was taken over by Deutsche Bank. The demolition of the walls between various types of financial services on Wall Street had been carried out at full pelt. For a time, only the ban on banks engaging in insurance activities was retained. However, following the takeover of investment bank Salomon Brothers by the insurance company Travelers in 1997 and the subsequent absorption of 70 billion dollars from that same Travelers by the company Citicorp (a subsidiary of Citibank), the Glass-Steagall Act, which had at least in some way restrained the appetites of financial conglomerates, de facto ceased to exist. Now all that was left was to remove the act de jure. On 4 November 1999, on the threshold of the next bubble’s explosion onto the stock market and after 25 years fighting to get the Glass-Steagall Act repealed, lobbyists and their sponsors celebrated victory. Democrat President Clinton signed the Financial Modernization Act. This is still referred to using the surnames of the act’s creators – the Gramm-Leach-Bliley Act (shortened to the GLB Act). The Glass-Steagall Act, having lingered on in the world for 66 years, was no more. Or to be more precise, it had been destroyed by greedy bankers. In the many speeches that accompanied the GLB Act, bankers painted an optimistic outlook for Americans who would now apparently be able to save time and money, getting all their financial services «from one window». Nothing was said about the catastrophic risks of such a combination.

The consequences of the repeal of the Glass-Steagall Act

On 4 November 1999, a landmine was placed under America’s financial system and this landmine exploded after less than a decade. I am referring to the financial crisis that began in 2008. The American Financial Crisis Inquiry Commission, under the chairmanship of Phil Angelides, has published the results of its study on the reasons behind the financial crash of 2008. In the report, Angelides concludes that the main reason for the crisis is rooted in the desire over the last three decades to get rid of the measures aimed at protecting citizens set up by Franklin D Roosevelt in the middle of the 20th century, including the Glass-Steagall Act. The person named as the main initiator behind the destruction of the regulatory mechanism is former FRS Chairman Alan Greenspan. The Commission singles out two Wall Street initiatives that contributed to the financial crash. The first is the adoption of the Commodity Futures Modernization Act (CFMA) in 2000, which legalised over-the-counter derivatives trading (the notional value of which immediately rose to one trillion dollars). The second is the liquidation of what remained of the GSA in November 1999. The repeal of the GSA led to rampant speculation by Wall Street banks and the inflation of «bubbles» on the financial and property markets. The first signs that these «bubbles» were collapsing were evident back in 2007. In 2008, meanwhile, the crisis had entered an acute phase followed by the bankruptcies of a number of banking and financial giants. The largest of these was Lehman Brothers. Angelides’ report criticises leading Wall Street players, including FRS chairman Ben Bernanke, former chairman of the Federal Reserve Bank of New York and more recently Secretary of the Treasury under President Obama Timothy Geithner, and Secretary of the Treasury under President Bush Hank Paulson for measures aimed at «rescuing» investment banks which also lead to the crisis as a result of speculative games. The first financial assistance was given to the bank Bear Stearns on 16 March 2008. Well-known American non-conformist Lyndon LaRouche categorised it as a violation of the Emergency Banking Act of 1933, which limited the help the state could give to commercial banks and excluded investment institutions. On 24 July 2008, Paulson provided help to the mortgage agencies Fannie Mae and Freddie Mac. Published under the aegis of Lyndon LaRouche, the EIR magazine wrote that with the help of this trick, the banks stockpiling securities and collateral mortgages were being given even more funds.

On 25 September 2008, Paulson forced the Troubled Asset Relief Program (TARP) through Congress. At the time, LaRouche warned: «Never before in history has any government proposed to use taxpayers’ money to bail out the worthless paper of foreign investors. Paulson is moving to have US taxpayers bail out British and other European friends. This is illegal and unconstitutional». The House of Representatives voted against this help on 29 September 2008, but it was backed by Obama, at that time a presidential candidate. On 3 October 2008, the House of Representatives, yielding to pressure, approved the programme. Congressmen were told that if the programme was not approved, there would be a catastrophe and martial law would have to be introduced. Speaking on LPAC-TV on 26 January 2011, LaRouche declared: «The 2008 Commission report is perceived by many politicians and experts as the alternative to Obama. The Commission has concluded that the bailout was not necessary. It was not necessary under George W Bush, it is not necessary under Obama. We have now destroyed the ability to sustain the present world population. The planet is on the verge of a genocide, but it can still be saved. But it is impossible to do it without the United States. If the Glass-Steagall Act is reinstated, we can clean up about $17 trillion worth of wastepaper. And we can force the same thing to occur in Europe and elsewhere».

The battle to reinstate the Glass-Steagall Act

The financial crisis in America and throughout the world has lead to a sharp increase in criticism being levelled at bankers. President Barack Obama can today be found among these ranks of critics. The media believe that the Dodd Frank Act on financial reform, which was adopted following the financial crisis in 2008-2009, was not adopted without Obama’s support. Some of those who once tried to dismantle the GSA have today found themselves in the supporters’ camp for its reinstatement. Among them, for example, is H. Summers, former Secretary of the Treasury in the cabinet of George W Bush. At the head of those in support of rebuilding the «walls» between commercial and investment banks is former FRS Chairman Paul Volcker. Of the more youthful former FRS heads should be mentioned Thomas Hoenig; he once served as the chief executive of the Federal Reserve Bank of Kansas City and is currently a director of the Federal Deposit Insurance Corporation. In an interview with the English Central Banking Journal on 10 may 2013, he reconfirmed his position regarding the reinstatement of the Glass-Steagall Act and declared that a complete separation of banking and investment activities «must be executed legally». 

There is a lot of rhetoric and even cunning in the criticism being levelled at bankers by Obama and a number of other prominent government figures, of course. So the Dodd Frank Act mentioned earlier (its full name is «The Dodd–Frank Wall Street Reform and Consumer Protection Act») has not solved the crucial problem – separating the borrowing and lending activities of American banks from their investment and insurance activities. Lyndon LaRouche called the Dodd Frank Act «a pointless, half-hearted measure». In all fairness to such evaluations, it should be recognised that a favourable atmosphere has emerged in the US for those who really do want the Glass-Steagall Act reinstated. There have already been several attempts to pass laws in the US Congress to impose order on the country’s banking system in the spirit of the GSA. Here are some of the most significant.

At the beginning of 2010, Senators Maria Cantwell (a Democrat from Washington State) and John McCain (a Republican from Arizona) proposed an amendment to the Dodd-Frank Act re-establishing the general provisions of the GSA. The amendment did not receive the necessary support. 

In April 2011, a member of the US House of Representatives Marcy Kaptur (a Democrat from Ohio State) repeatedly introduced legislation for consideration on the reinstatement of the Glass-Steagall Act under the name H.R.1489 – the suggestion is «to repeal certain provisions of the Gramm-Leach-Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called Glass-Steagall Act, and for other purposes». The legislation’s co-authors are Walter Jones, Jr (a Republican from North Carolina) and James Moran (a Democrat from Virginia). By the time the 112th Congress expired, the legislation’s authors had managed to gain the support of 84 members of the Lower House. With the start of the 113th Congress, Kaptur and Jones reintroduced legislation (H.R. 129) on the reinstatement of the GSA. As of last month (May 2013), 62 congressmen are lending their support to the legislation. 

Realisation that banking operations must be separated in keeping with the GSA is also growing in the Senate. But the influence of bankers in the Upper House is much stronger. As has already been mentioned, Senator Tom Harkin (Democrat, Iowa) introduced Bill No.985 (SB 985) on the reinstatement of the Glass-Steagall Act to the US Senate on 16 May 2013. Harkin’s Bill was registered at the same time as the introduction of proposed resolutions into the Legislative Assemblies of two states (Delaware and Illinois) calling for representatives of these two states to support the reinstatement of the GSA in Congress. Prior to this, similar resolutions had already been introduced into the Legislative Assemblies of 18 states. Lyndon LaRouche congratulated Harkin on introducing Bill SB 985 despite massive pressure from the White House and the Senate leadership. LaRouche declared: «This is a very important new development. It will have a very significant impact for very obvious reasons. All of the efforts to suppress this action have been defeated. This is a new game. The agenda has changed. Despite all of the efforts to prevent this action, Sen. Harkin has taken the initiative. This is not yet a complete victory, but it shows that the situation is not hopeless...»

The merging (combination) of borrowing and lending and investment activities is not just characteristic of banks in the US. Today, it is also common in the European banking system. In Europe, however, the issue is not yet being discussed so passionately. Few European politicians understand the forcefulness of the landmine capable of blowing up the European Union. For the time being, the most recent initiative in Europe in favour of separating banking activities belongs to the Regional Council of Tuscany, which has passed a resolution called «Banking and Legal Reform according to the Glass-Steagall Act». 

At the level of the G7, G8 and G20 Summits and other global forums where the issues of increasing financial stability and reform of the global financial system are constantly under discussion, the question of separating the borrowing and lending and investment activities of banks is being handled extremely carefully. And all in vain. Experts know that without a solution to this cardinal problem, all the talk about financial stability is just empty words.

Tags: European Union    G20   JP Morgan  US