… the biggest mistake of the Clinton years regarding Wall Street and the one that rings loudest today was the repeal of Glass-Steagall, a 1933 law that effectively split investment banking and brokerages from commercial banks.
In the years leading up to the repeal, Wall Street had been grumbling that the law had become an anachronism. Financial technology was sophisticated. We were so much smarter than they were back in 1929 that there was no way a financial services conglomerate could pose a threat to the system, Wall Street experts said. Besides, they argued, it was a good idea for a bank to handle customers’ investments and savings as a hedge in the bad times.
The Clinton administration effectively had its hand forced in 1998 by the merger of Citicorp and Travelers Group in 1998. The creation of Citigroup Inc. required a lot of chutzpah by its CEO, Sandy Weill, because it was effectively prohibited under Glass-Steagall.
Enter the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, which not only allowed Citi to exist but also eliminated key barriers between bankers who are supposed to limit risks and investment bankers who were supposed to take them.
The biggest argument critics have against bringing back Glass-Steagall is that it would be too chaotic. Whole companies would have to be cleaved. Relationships would have to be unwound.
Well, back in 1933 the law effectively split J.P. Morgan, the bank, from what would become Morgan Stanley, the brokerage. Both seem to have come through the disruption fairly well.
I am not entirely sure I agree with Mr. Weidner’s thesis that the repeal of Glass-Steagall was a mistake, and I definitely don’t think that using a 75 year old example of two companies that were able to survive being split is a good comparison … but I do think that there should have been better controls on how a financial services company expanded and grew so that problems in one unit wouldn’t threaten to take down the entire company with it.
The modern JPMorgan Chase has seemed to weather the crisis fairly well, and it is by far the largest of the financial conglomerates … Bank of America‘s biggest problems were caused by their forced acquisition of Merrill Lynch; far more so than by their own mistakes, such as their acquisition of Countrywide, which while still a mistake is far less devastating to their bottom line.
It’s about balance, and hopefully what comes out of this debacle is increased oversight and regulation of derivative products and hedge-funds, but without an excessive amount of government interference into expansion of more traditional business lines.