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BusinessWeek: November 15, 1999 |
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Economic Viewpoint
A Requiem for Glass-Steagall Of course, Congress wasn't alone in wanting to dump Glass-Steagall. Financial companies spent $300 million over nearly 20 years to lobby Congress to get it to change the legislation. The financial community also managed to persuade most of the media that this was the right thing to do. The editorial consensus across the country was that Glass-Steagall was a Depression-era relic whose repeal was overdue. Herewith a dissenting view. The Banking Act of 1933 was enacted after investigations showed that large financial houses had abused their fiduciary duties, peddling all manner of dubious securities, often with conflicts of interest and insider profiteering at the expense of customers. Congress attributed the great crash partly to these speculative excesses. The particular target of Glass-Steagall was the House of Morgan, the prime culprit. With Glass-Steagall, commercial banking and investment banking became two very separate businesses. SOUND LOGIC. In recent years, this wall has been breached. Glass-Steagall is partly moot, thanks to loopholes in the Bank Holding Company Act and regulatory acquiescence to mergers such as the huge Citicorp-Travelers deal. But the essential logic that separates banking from ordinary commerce and depository banking from investment banking remains sound. There are two core reasons: the depository banks' fiduciary obligations to customers, and the hazards of widespread systemic risk. In effect, Glass-Steagall put salutary limits on the economy's ability to speculate with other people's money. And what exactly is broken that the repeal of Glass-Steagall will fix? Venture-capital markets are stunningly robust. Entrepreneurs have no trouble connecting with investors. Nobody I know has any difficulty buying stocks or insurance. Indeed, as more retail financial transactions of all kinds are conducted on the Internet, consumers will (wisely) bypass large financial conglomerates entirely (BW--Nov. 8). Glass-Steagall was not repealed to improve the efficiency of markets. Nor did Congress have consumers especially in mind when it took the decision to rescind the act. It was repealed mainly to pave the way for more megamergers. With these consolidations, senior executives will make even more money and ordinary consumers will have even fewer choices. UNSAVORY ODOR. It's a shame that the Clinton Administration caved in. Former Treasury Secretary Robert Rubin's move to Citigroup days after the Administration acceded to key Republican demands to weaken the new legislation's privacy protections and community reinvestment requirements (with Citigroup playing a key lobbying role in both) has a slightly unsavory odor. Rubin favored dismantling Glass-Steagall when he was in the Administration. Now, he appears to be benefiting personally from its repeal. Speaking of conflicts of interest, a personal disclosure: It was the 1977 Community Reinvestment Act that delayed and nearly sank the repeal of Glass-Steagall. CRA requires banks to put something back into their communities. Senator Phil Gramm (R-Tex.) and some big banks considered it a federally aided shakedown; depressed communities consider it a financial lifeline. Thanks to CRA, a generation of bankers came of age enthusiastic about community economic-development lending rather than speculative loans to Bolivia. During the near-meltdown of the 1980s, when speculative savings and loan ventures and commercial-bank fliers in sovereign debt cost taxpayers hundreds of billions of dollars, not a single bank went down because of community-reinvestment lending. Well, I am the SOB who wrote the Community Reinvestment Act, in a prior life as an aide to Senator William Proxmire (D-Wis.). It is one of the few public-minded pieces of banking legislation to pass into law in recent decades, and it is a travesty that the Clinton White House has let it be weakened. Repeal of the Glass-Steagall Act is a tribute less to economic efficiency than to the power of lobbying dollars and insider clout. There will come a time when Senator Carter Glass and Representative Henry Steagall will look a lot more stewardly than Phil Gramm and Bob Rubin. | |
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