«VOLUM E 1 1, N UM B E R 1 I S SN 2 1 6 8 - 0 6 1 2 F L ASH DR I V E I S SN 1 9 4 1 - 9 5 8 9 ON L I N E T h e In s t it ut e f o r Bu s i n e s s an ...»
Congressional Research Service. Retrieved November 14, 2015 from https://www.fas.org/sgp/crs/row/RL33407.pdf GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 249 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Piattoni, Simona (2012) “Multilevel Governance and Public Administration,” in The Sage Handbook of Public Administration, eds B. Guy Peters and Jon Pierre. Sage, Washington, DC, p. 764-77 “Putin guest of honour at Serbia military parade” (2014) BBC 16 October “Putin's annual news conference for international journalists - full text” (2006) BBC Monitoring Service, February 1, Source: RTR Russia TV, Moscow, in Russian 0900 gmt 31 Jan 06. Retrieved from February 20, 2006 from http://search.ft.com/search/articles.html “Rebel Chechen minister argues against democracy” (2006) BBC Monitoring, 31 January. Kavkaz-Tsentr news agency website, in Russian 8 Jan 06. Retrieved February 1, 2006 from ProQuest “Results of Vladimir Putin's visit to Serbia” (2014) TASS-Russian News Agency, 16 October. Retrieved December 7, 2014 from http://itar-tass.com/en/economy/754813 Roth, A (2014) "Putin, in Defeat, Diverts Pipeline." New York Times, December 2 “Russia Asks Bulgaria to Issue South Stream Construction Permits” (2014) Sofia News Agency, December 19.
Retrieved December 27, 2014 from http://www.consilium.europa.eu/uedocs/cmsUpload/78367.pdf Spasovska, V (2014) “Opinion: Russian advances in the Balkans a cause for concern.” DW, 11 November. Retrieved November 11, 2014 from http://dw.de/p/1DpB1 Stern, J, S Pirani, & K Yafimava (2015) “Does the cancellation of South Stream signal a fundamental reorientation of Russian gas export policy?” January, Oxford Energy Comment, Oxford Institute for Energy Studies, Oxford University Wagstyl, Stefan (2014) “Germany acts to counter Russia’s Balkan designs.” Financial Times, 27 November Weible, CM, PA Sabatier, HC. Jenkins-Smith, D Nohrstedt, AD Henry and P deLeon, (2011) “A Quarter Century of the Advocacy Coalition Framework: An Introduction to the Special Issue” PSJ: Policy Studies Journal, vol. 39(3) August, p. 349–360
ACKNOWLEDGEMENTThis paper was produced with the support of the Research Fund of the Catholic University of Korea.
BIOGRAPHYBenedict E. DeDominicis, Ph.D. (University of Pittsburgh, BA Ohio State) is an assistant professor of political science in the International Studies Department at the Catholic University of Korea. He was on the faculty at the American University in Bulgaria, 1994-2009.
GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 250 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1
This paper will examine the critical aspects of the Glass-Steagall Act of 1933 including a detailed analysis of the objective of the act on the banks and the economy. A further review will explore the atmosphere and psychology of the various banking practices that were implemented during the 1980’s and 1990’s. A chronology of pivotal events will prove that the current environment of deregulation and erosion of the distinct line between commercial and investment banks is actually attributed to monetary policies dating back to Alan Greenspan and the Federal Reserve Board actions of the 1990’s. The start of the 21st century saw the rapid growth of derivative instruments that were not regulated, prompting the moral hazard which caused the mortgage banking industry collapse. A further analysis of the reckless practices will show how these lending practices caused financial chaos. The companies that failed did so because of overleveraging and failure to control risk effectively while rewarding themselves without establishing adequate reserves.
The paper will conclude with an analysis of the present arguments to strengthen the core requirements for both the investment and commercial banking.
Glass –Steagall Act, also known as the Banking Act of 1933(48 Sat.162) was passed in 1933 and forbade commercial banks from engaging in the investment banking business. The enactment was an emergency response to the failure of nearly 5,000 banks during the Great Depression. It was originally a section of President Franklin D. Roosevelt’s New Deal program and became a permanent measure in 1945. Some of the more important features included tighter regulations for national banks in the Federal Reserve System, prohibited banks from the sale of securities and created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money appropriated from banks. Beginning in the 1900’s commercial banks established security affiliates that floated bond issues and underwrote corporate stock issues. The expansion of commercial banks into securities underwriting was substantial until the 1929 stock market crash and the subsequent Depression. In 1930, the Bank of the United States failed, reportedly because of activities of its security affiliates that created artificial conditions in the market. In 1933 all banks were required to close for a four day “Bank Holiday” and 4,000 closed permanently.
Bank closings coupled with an already devastated economy pushed public confidence in the U.S. financial structure to new lows. In an attempt to reverse this spiral and restore the public’s confidence that bank’s would follow reasonable banking practices Congress created the Glass-Steagall Act. The Act forced a separation of commercial and investment banks by preventing commercial banks from underwriting securities, with the exception of U.S Treasuries and federal agency securities and municipal and state general obligation securities. Conversely investment banks were not allowed to receive banking deposits.
Investment banking consists mostly of underwriting securities and related activities, making secondary markets in those securities and setting up merger and acquisition activities, restructuring and overall GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 251 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 business advisement. The Glass- Steagall Act helped restore confidence in the banking industry during and after the Depression. Many historians however gesticulate that the practices of the commercial banks of the time had little actual effect on the already devastated economy and were not a major contributor to the crisis environment. Over the years legislators, economists and businessmen have argued that GlassSteagall was outdated, created an atmosphere of uneven playing field between domestic institutions and those globally who were not constrained by such restrictions. There was also a strong feeling of government overreaction to a crisis in attempt to insure against repeat economic distress. The world economy became more dynamic with the emergence of the strong Japanese economy and the geopolitical impact of the Middle Eastern states buttressed with growing oil revenues.
In 1994 the Government proposed letting the banks enter new fields of business, including allowing big banks selling real estate, computer services and possibly even securities. The new rules would allow banks to set up subsidiaries that could undertake any activity “incidental to or within the business of banking” Until now, subsidiaries of federally chartered banks have been limited almost exclusively to banking.
Critics of big banks were quick to warn that new regulations could undermine Glass-Steagall which is murkily written and open to interpretation “said Diane Casey, executive director of the Independent Bankers of America, a Washington based trade group that represents small banks. While the Treasury was not actively involved in drafting regulations the proposals were consistent with the Clinton administration’s general position that banks should be allowed to diversify into other industries.
The first breach in the Glass-Steagall Act occurred in 1989 when some big banks were granted permission from the Federal Reserve to set up separate subsidiaries for trading securities and J.P. Morgan was the first obtaining the right to trade corporate debt and stocks in 1990. These holding companies were legally separate from the banks and were limited to trading securities and could not engage in activities like real estate brokerage and data processing. The Financial Services Modernization Act of 1999 was passed by Congress after 12 attempts in 25 years. Congress finally repealed Glass-Steagall, rewarding financial companies after 20 years and $300,000,000 of lobbying efforts. The key element of the repeal of GlassSteagall was the proposed merger of Citicorp and Travelers Insurance. The merger was granted temporary approval by Alan Greenspan’s Federal Reserve. The official stance of the White House was that the Financial Modernization Act was tearing down the antiquated laws and granting banks significant new authority. The signing of the Gramm-Leach-Bliley Act in late 1999 repealed Glass-Steagall once and for all paving the way for both consolidation and expansion in the banking/investment banking industry.
It must be remembered that deregulation and consolidation in the banking and investment banking area had been in place and growing over the past three decades. In fact there were more bank mergers and acquisitions from 1988-1998 sixty-nine in total than from 1998 to 2012, fifty-nine. It also could be argued that an overly accommodating monetary policy by the Federal Reserve since before the dot.com bust and post 9/11 was the fuel that propelled asset backed price appreciation. Alan Greenspan, in an effort to move the stalled economy post 9/11 kept interest rate at historically low levels as the stock market and economy struggled. Investment money flowed unabatedly into real estate as a safe haven. This accommodative policy along with a relaxation of regulations led to an environment of ever increasing laxity when it came to policing risk and its potential consequences.
The Glass –Steagall repeal did not lead to a tremendous consolidation of banks and mergers or takeover of brokerage firms on a large scale. It is not often mentioned that there existed and still does exist tremendous differences in culture of the two types of institutions. The genetic makeup of those who work in investment banks is drawn from the universe of alpha males and females as opposed to the more staid personalities in the commercial bank sector. In fact of all the firms those failed or were in danger of failing only one was the real benefactor of the repeal. The institution was the very one that hastened and lobbied for the repeal of Glass-Steagall, Citigroup. Citigroup was the combination of Citicorp and Travelers Insurance and its subsidiary of Salomon Brothers-Smith Barney that was allowed by the adoption of Financial Modernization GCBF ♦ Vol. 11 ♦ No. 1 ♦ 2016 ♦ ISSN 1941-9589 ONLINE & ISSN 2168-0612 USB Flash Drive 252 Global Conference on Business and Finance Proceedings ♦ Volume 11 ♦ Number 1 Act mentioned earlier. In studying the other firms that fell victim to the Great Recession in the banking and investment industry all others were either banks or brokerage firms.
Brokerage Firms Lehman brothers – unable to find a buyer and fell into bankruptcy Merrill Lynch----bought by BankAmerica during the crisis Bear Stearns—bought by J.P. Morgan also during the crisis and both acquisitions orchestrated to some extend by the Federal Reserve and Treasury Banks.
Wachovia Washington Mutual A number of Savings and Loan Companies along with Mortgage granting institutions also failed, the most prominent being Countrywide Credit which was acquired by BankAmerica. Glass Steagall in and of itself did not directly cause bank and or investment bank failures, it was a component of a string of ongoing deregulation and lax regulation that added fodder to the fire. One must look at some of the other factors that allowed, indeed provided impetus for the failures. Deregulation in its broad stroke should spur competition as long as the remaining regulations are upheld and enforced. The first line of defense in any organization is regulating itself as a means of survival and the ability to prosper and thrive. Given an atmosphere of relaxed regulatory involvement the risk appetite will rise to meet the appetite and intestinal fortitude levels of your rivals. This is exactly what transpired during the melt down and the Great Recession.
It would be wise to look at some of the more pertinent and elusive descriptions of Glass Steagall and what are indeed factual.
Glass Steagall in fact was never repealed. It is still applicable to insured banks and forbids them from underwriting or dealing in securities. What was repealed in 1999 were the sections that prohibited insured banks from being affiliated with firms commonly called investment banks, those that are engaged in underwriting and dealing in securities. Repeal allowed banks to use taxpayer insured funds for risky trading, this is also not factual. Portions of Glass Steagall that remained after 1999 prohibited insured banks from underwriting or dealing in securities. Before and after repeal the banks were allowed to trade [buy or sell] bonds and other fixed income securities for their own account. Banks have always been allowed to trade securities they can invest in. Banks did not get into trouble ‘trading’ risky mortgage back securities they ran afoul by holding these instruments in their portfolios. This is basically the same thing as granting loans that defaulted during the meltdown. The repeal of Glass Steagall did not allow the Investment bank subsidiary to have access to insured deposits so unless they fraudulently comingled or poached funds this would not be possible. The banks failed by making bad loans. The investment banks that failed Bear Stearns. Merrill Lynch and Lehman were not affiliated with insured banks. These institutions by and large became insolvent because of over leveraging, something this paper will address in ensuing pages.