Reply #7: The often overlooked S.900: Financial Services Modernization Act of 1999

[Adelante]

This bill repealed the New Deal Glass-Stegall Acts which had protected consumers from financial predators, which, when Edwards sat on the Banking Committee, he voted in favor of and supported. I won't go as far as to say this bill is responsible for the current economic crisis, but it went a good ways in making it easier for the credit crisis to happen. Because Clinton wasn't in the Senate, she had no vote, but this is a product of the Clinton administration she is claiming credit for, so I guess she gets the discredit.

Would Glass-Steagall save the day from credit woes?

SANTA MONICA, Calif. (MarketWatch) — Time was when banks and brokerages were separate entities, banned from uniting for fear of conflicts of interest, a financial meltdown, a monopoly on the markets, all of these things.

In 1999, the law banning brokerages and banks from marrying one another — the Glass-Steagall Act of 1933 — was lifted, and voila, the financial supermarket has grown to be the places we know as Citigroup, UBS, Deutsche Bank, et al.

But now that banks seemingly have stumbled over their bad mortgages, it’s worth asking whether the fallout would be wreaking so much havoc on the rest of the financial markets had Glass-Steagall been kept in place.

Diversity has always been the pathway to lowering risk. And Glass-Steagall kept diversity in place by separating the financial powers that be: banks and brokerages.

Glass-Steagall was passed by Congress to prohibit banks from owning full-service brokerage firms and vice versa so investment banking activities, such as underwriting corporate or municipal securities, couldn’t be called into question and also to insulate bank depositors from the risks of a stock market collapse such as the one that precipitated the Great Depression.

But as banks increasingly encroached upon the securities business by offering discount trades and mutual funds, the securities industry cried foul. So in that telling year of 1999, the prohibition ended and financial giants swooped in. Citigroup led the way and others followed. We saw Smith Barney, Salomon Brothers, PaineWebber and lots of other well-known brokerage brands gobbled up.

http://www.marketwatch.com/news/story/would-glass-steagall-save-day-credit/story.aspx?guid=%7B3AA33D85%2DAD38%2D41B4%2DB300%2D033235B5734A%7D

The bill was the culmination of years and years of lobbying by financial services firms such as Citigroup:

Citigroup: The standard in political corruption

Citigroup played the lead role in ushering the “Financial Services Modernization Act” through the US Congress, in the process joining with the rest of the financial services industry to set a new standard in legalized bribery. The Act will tear down the regulatory walls between banks, and insurance companies and securities firms, paving the way for a massive concentration of financial wealth and a future of industry bailouts, weakening the Community Reinvestment Act and permitting huge intrusions on consumer privacy.

http://www.motherjones.com/news/feature/2000/01/fotc16.html

Apparently, Edwards was helpful:

Several weeks after testifying to two subcommittees of the Senate Banking Committee, Fed Governor Laurence Meyer received a letter from eight senators admonishing the Fed for its stance on merchant banking and demanding a more lenient approach.

But only the Merchant Banking Eight have so wholeheartedly aligned themselves with the grievances of Chase, Wells Fargo and the largest financial conglomerates.

Dear Governor Meyer,

On behalf of the Securities and Financial Institutions Subcommittees of the Senate Committee on Banking Housing and Urban Affairs, thank you for appearing as a witness on June 13 to discuss the Board’s Interim and Proposed regulations concerning merchant banking activities.

Your testimony was helpful in clarifying your intent to consider carefully the views of members of Congress, the financial services industry and other interested parties concerning your proposed regulations. Your assurances that the Board’s goal is to encourage Financial Holding companies (FHCs), bank holding companies and banks to engage in innovative and progressive private equity investment activities while preserving the safety and soundness of the financial services system is welcome….”

MERCHANT BANKING EIGHT
Jack Reed (D-RI)
Charles Schumer (D-NY)
Mike Crapo (R-ID)
Robert Bennett (R-UT)
Rod Grams (R-MN)
Jim Bunning (R-KY)
Chuck Hagel (R-NE)
John Edwards (D-NC)

http://www.fmcenter.org/atf/cf/%7BDFBB2772-F5C5-4DFE-B310-D82A61944339%7D/sept00.pdf

Molly Ivins wasn't talking about Edwards, but this is what she had to say on the Financial Services Modernization Act itself and its sponsor, Phill Gramm:

As a member of the Senate Finance Committee and the recipient of enormous banking contributions, Gramm did an even bigger favor for the financial industry in 1999 when he sponsored the Financial Services Modernization Act allowing banks, securities firms, and insurance companies to combine. The bill weakened the Community Reinvestment Act, which requires banks to help meet the credit needs of low- and moderate-income neighborhoods. Gramm described community groups that use the CRA as “protection rackets” that extort funds from the poor, powerless banks. The bill is also a disaster for the privacy of bank customers and weakens regulatory supervision. As Gramm proudly declared, “You’re not going to find a single bank, insurance company, or securities company that will say they were hurt financially by this bill.”

http://www.motherjones.com/commentary/power_plays/2002/03/mean.html

PBS did a documentary called "The Wall Street Fix" which covers the demise of Glass-Steagall:

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html


I will say a lot of good Democrats did vote for this legislation, not just Edwards, and of course it was under the Clinton administration, but once again we have Edwards on the critical Senate committee and voting for a bill that has had serious repercussions.

NAYs —8
Boxer (D-CA)
Bryan (D-NV)
Dorgan (D-ND)
Feingold (D-WI)
Harkin (D-IA)
Mikulski (D-MD)
Shelby (R-AL)
Wellstone (D-MN)

http://www.thomas.gov/cgi-bin/query/D?c106:2:./temp/~c106cx5u0N::