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20 mars 2013 3 20 /03 /mars /2013 06:35

Glass–Steagall Act

While the need to create a legal framework for existing bank securities activities became a dominant theme for the “financial modernization” legislation supported by Leach, Rubin, Volcker, and others, after the GLBA repealed Glass–Steagall Sections 20 and 32 in 1999, commentators identified four main arguments for repeal: (1) increased economies of scale and scope, (2) reduced risk through diversification of activities, (3) greater convenience and lower cost for consumers, and (4) improved ability of U.S. financial firms to compete with foreign firms.[188]ACER Aspire One D150-1920 Laptop Keyboard By 1995, however, some of these concerns (which had been identified by the Congressional Research Service in 1987[116]) seemed less important. As Japanese banks declined and U.S.-based banks were more profitable, “international competitiveness” did not seem to be a pressing issue.[189] International rankings of banks by size also seemed less important when, as Alan Greenspan later noted, “Federal Reserve research had been unable to find economies of scale in banking beyond a modest size.”[190] Still, advocates of “financial modernization” continued to point to the combination of commercial and investment banking in nearly all other countries as an argument for “modernization”, including Glass–Steagall “repeal.”[191]COMPAQ Presario C700 Laptop Keyboard Similarly, the failure of the Sears Financial Network and other nonbank “financial supermarkets” that had seemed to threaten commercial banks in the 1980s undermined the argument that financial conglomerates would be more efficient than “specialized” financial firms.[192] Critics questioned the “diversification benefits” of combining commercial and investment banking activities. Some questioned whether the higher variability of returns in investment banking would stabilize commercial banking firms through “negative correlation” HP G42-415DX Laptop Keyboard (i.e., cyclical downturns in commercial and investment banking occurring at different times) or instead increase the probability of the overall banking firm failing.[193][194] Others questioned whether any theoretical benefits in holding a passive “investment portfolio” combining commercial and investment banking would be lost in managing the actual combination of such activities.[195] Critics also argued that specialized, highly competitive commercial and investment banking firms were more efficient in competitive global markets.[196]DELL NSK-D8001 Laptop Keyboard Starting in the late 1980s, John H. Boyd, a staff member of the Federal Reserve Bank of Minneapolis, consistently questioned the value of size and product diversification in banking.[193][197] In 1999, as Congress was considering legislation that became the GLBA, he published an essay arguing that the “moral hazard” created by deposit insurance, too big to fail (TBTF) considerations, and other governmental support for banking should be resolved before commercial banking firms could be given “universal banking” powers.[198] ACER Aspire One D150-1920 Laptop Keyboard Although Boyd’s 1999 essay was directed at “universal banking” that permitted commercial banks to own equity interests in non-financial firms (i.e., “commercial firms”), the essay was interpreted more broadly to mean that “expanding bank powers, by, for example, allowing nonbank firms to affiliate with banks, prior to undertaking reforms limiting TBTF-like coverage for uninsured bank creditors is putting the ‘cart before the horse.’”[199]Compaq Presario CQ57 Series Laptop Keyboard Despite these arguments, advocates of “financial modernization” predicted consumers and businesses would enjoy cost savings and greater convenience in receiving financial services from integrated “financial services firms.”[200]SONY VAIO VGN-NW50JB laptop keyboard After the GLBA repealed Sections 20 and 32, commentators also noted the importance of scholarly attacks on the historic justifications for Glass–Steagall as supporting repeal efforts.[201] Throughout the 1990s, scholars continued to produce empirical studies concluding that commercial bank affiliate underwriting before Glass–Steagall had not demonstrated the “conflicts of interest” and other defects claimed by Glass–Steagall proponents.[202] By the late 1990s a “remarkably broad academic consensus” existed that Glass–Steagall had been “thoroughly discredited.”[203]FUJITSU CP270342-02 laptop keyboard Although he rejected this scholarship, Martin Mayer wrote in 1997 that since the late 1980s it had been “clear” that continuing the Glass–Steagall prohibitions was only “permitting a handful of large investment houses and hedge funds to charge monopoly rents for their services without protecting corporate America, investors, or the banks.”[204]Hyman Minsky, who disputed the benefits of “universal banking,” wrote in 1995 testimony prepared for Congress that “repeal of the Glass–Steagall Act, in itself, would neither benefit nor harm the economy of the United States to any significant extent.”[205] In 1974 Mayer had quoted Minsky as stating a 1971 presidential commission (the “Hunt Commission”) was repeating the errors of history when it proposed relaxing Glass–Steagall and other legislation from the 1930s.[206]Compaq Presario CQ56-130SY laptop keyboard With banking commentators such as Mayer and Minsky no longer opposing Glass–Steagall repeal, consumer and community development advocates became the most prominent critics of repeal and of financial “modernization” in general. Helen Garten argued that bank regulation became dominated by “consumer” issues, which produced “a largely unregulated, sophisticated wholesale market and a highly regulated, retail consumer market.”[207] In the 1980s Representative Fernand St. Germain (D-RI), Compaq Presario CQ42-173TU laptop keyboard as chairman of the House Banking Committee, sought to tie any Glass–Steagall reform to requirements for free or reduced cost banking services for the elderly and poor.[208] Democratic Representatives and Senators made similar appeals in the 1990s.[209] During Congressional hearings to consider the various Leach bills to repeal Sections 20 and 32, consumer and community development advocates warned against the concentration of “economic power” that would result from permitting “financial conglomerates” and argued that any repeal of Sections 20 and 32 should mandate greater consumer protections, particularly free or low cost consumer services, and greater community reinvestment requirements.[210][211]SONY VAIO VGN-FS940 laptop keyboard By 1995 the ability of banks to sell insurance was more controversial than Glass–Steagall “repeal.” Representative Leach tried to avoid conflict with the insurance industry by producing a limited “modernization” bill that repealed Glass–Steagall Sections 20 and 32, but did not change the regulation of bank insurance activities.[212] Leach’s efforts to separate insurance from securities powers failed when the insurance agent lobby insisted any banking law reform include limits on bank sales of insurance.[213]Compaq Presario CQ42-219AX laptop keyboard Similar to Senator Proxmire in 1988,[133] Representative Leach responded to the House’s inaction on his Glass–Steagall “repeal” bill by writing the Federal Reserve Board in June 1996 encouraging it to increase the limit on Section 20 affiliate bank-ineligible revenue.[132] When the Federal Reserve Board increased the limit to 25% in December 1996, the Board noted the Securities Industry Association (SIA) had complained this would mean even the largest Wall Street securities firms could affiliate with commercial banks.[214]SONY VAIO VGN-FS940 laptop keyboard The SIA’s prediction proved accurate two years later when the Federal Reserve Board applied the 25% bank-ineligible revenue test in approving Salomon Smith Barney (SSB) becoming an affiliate of Citibank through the merger of Travelers and Citicorp to form the Citigroup bank holding company. The Board noted that, although SSB was one of the largest US securities firms, less than 25% of its revenue was “bank-ineligible.”[215] HP Pavilion dv6-2120ec laptop keyboard Citigroup could only continue to own the Travelers insurance underwriting business for two (or, with Board approval, five) years unless the Bank Holding Company Act was amended (as it was through the GLBA) to permit affiliations between banks and underwriters of property, casualty, and life insurance. Citigroup’s ownership of SSB, however, was permitted without any law change under the Federal Reserve Board’s existing Section 20 affiliate rules.[5] TOSHIBA Satellite L775-S7245 Laptop Keyboard In 2003, Charles Geisst, a Glass–Steagall supporter, told Frontline the Federal Reserve Board’s Section 20 orders meant the Federal Reserve “got rid of the Glass–Steagall Act.”[216] Former Federal Reserve Board Vice-Chairman Alan Blinder agreed the 1996 action increasing “bank-ineligible” revenue limits was “tacit repeal” of Glass–Steagall, but argued “that the market had practically repealed Glass–Steagall, anyway.”[217]HP 517865-031 Laptop Keyboard Shortly after approving the merger of Citicorp and Travelers, the Federal Reserve Board announced its intention to eliminate the 28 “firewalls” that required separation of Section 20 affiliates from their affiliated bank and to replace them with “operating standards” based on 8 of the firewalls. The change permitted banks to lend to fund purchases of, and otherwise provide credit support to, securities underwritten by their Section 20 affiliates.[218]  ACER K032130A1 Laptop Keyboard This left Federal Reserve Act Sections 23A (which originated in the 1933 Banking Act and regulated extensions of credit between a bank and any nonbank affiliate) and 23B (which required all transactions between a bank and its nonbank affiliates to be on “arms-length” market terms) as the primary restrictions on banks providing credit to Section 20 affiliates or to securities underwritten by those affiliates.[219] Sections 23A and B remained the primary restrictions on commercial banks extending credit to securities affiliates, or to securities underwritten by such affiliates, after the GLBA repealed Glass–Steagall Sections 20 and 32.[220]HP Pavilion dv6-3047eo Laptop Keyboard 1997-98 legislative developments: commercial affiliations and Community Reinvestment Act In 1997 Representative Leach again sponsored a bill to repeal Glass–Steagall Sections 20 and 32. At first the main controversy was whether to permit limited affiliations between commercial firms and commercial banks.[221] Securities firms (and other financial services firms) complained that unless they could retain their affiliations with commercial firms (which the Bank Holding Company Act forbid for a commercial bank), they would not be able to compete equally with commercial banks.[222] TOSHIBA 9J.N7482.901 Laptop Keyboard The Clinton Administration proposed that Congress either permit a small “basket” of commercial revenue for bank holding companies or that it retain the “unitary thrift loophole” that permitted a commercial firm to own a single savings and loan.[223] Representative Leach, House Banking Committee Ranking Member Henry Gonzalez (D-TX), and former Federal Reserve Board Chairman Paul Volcker opposed such commercial affiliations.[224]HP Mini 110-1120SL Laptop CPU Cooling Fan Meanwhile, in 1997 Congressional Quarterly reported Senate Banking Committee Chairman Al D’Amato (R-NY) rejected Treasury Department pressure to produce a financial modernization bill because banking firms (such as Citicorp) were satisfied with the competitive advantages they had received from regulatory actions and were not really interested in legislative reforms.[225] Reflecting the process Paul Volcker had described,[185] as financial reform legislation was considered throughout 1997 and early 1998, Congressional Quarterly reported how different interests groups blocked legislation and sought regulatory advantages.[226]ACER Aspire 1660 Series laptop keyboard The “compromise bill” the House Republican leadership sought to bring to a vote in March 1998, was opposed by the commercial banking industry as favoring the securities and insurance industries.[227] The House Republican leadership withdrew the bill in response to the banking industry opposition, but vowed to bring it back when Congress returned from recess.[228] Commentators describe the April 6, 1998, merger announcement between Travelers and Citicorp as the catalyst for the House passing that bill by a single vote (214-213) on May 13, 1998.[229] Citicorp, which had opposed the bill in March, changed its position to support the bill along with the few other large commercial banking firms that had supported it in March for improving their ability to compete with “foreign banks.”[230]HP Mini 1001TU Laptop Keyboard The Clinton Administration issued a veto threat for the House passed bill, in part because the bill would eliminate “the longstanding right of unitary thrift holding companies to engage in any lawful business,” but primarily because the bill required national banks to conduct expanded activities through holding company subsidiaries rather than the bank “operating subsidiaries” authorized by the OCC in 1996.[231]SONY 148024022 Laptop Keyboard DELL 454RX Laptop Keyboard On September 11, 1998, the Senate Banking Committee approved a bipartisan bill with unanimous Democratic member support that, like the House-passed bill, would have repealed Glass–Steagall Sections 20 and 32.[232] The bill was blocked from Senate consideration by the Committee’s two dissenting members (Phil Gramm (R-TX) and Richard Shelby (R-AL)), who argued it expanded the Community Reinvestment Act (CRA). Four Democratic senators (Byron Dorgan (D-ND), Russell Feingold (D-WI), Barbara Mikulski (D-MD), and Paul Wellstone (D-MN)) stated they opposed the bill for its repeal of Sections 20 and 32.[210][233]SAMSUNG NP-N150-JP01 Laptop Keyboard In 1999 the main issues confronting the new Leach bill to repeal Sections 20 and 32 were (1) whether bank subsidiaries (“operating subsidiaries”) or only nonbank owned affiliates could exercise new securities and other powers and (2) how the CRA would apply to the new “financial holding companies” that would have such expanded powers.[234] The Clinton Administration agreed with Representative Leach in supporting “the continued separation of banking and commerce.”[235]HP Mini 210-1014TU Laptop Keyboard The Senate Banking Committee approved in a straight party line 11-9 vote a bill (S. 900) sponsored by Senator Gramm that would have repealed Glass–Steagall Sections 20 and 32 and that did not contain the CRA provisions in the Committee’s 1998 bill. The nine dissenting Democratic Senators, along with Senate Minority Leader Thomas Daschle(D-SD), proposed as an alternative (S. 753) the text of the 1998 Committee bill with its CRA provisions and the repeal of Sections 20 and 32, ACER Aspire 5742 Laptop Keyboard modified to provide greater permission for “operating subsidiaries” as requested by the Treasury Department.[236] Through a partisan 54-44 vote on May 6, 1999 (with Senator Fritz Hollings (D-SC) providing the only Democratic Senator vote in support), the Senate passed S. 900. The day before, Senate Republicans defeated (in a 54-43 vote) a Democratic sponsored amendment to S. 900 that would have substituted the text of S. 753 (also providing for the repeal of Glass–Steagall Sections 20 and 32).[237]HP Pavilion G6-1223TX Laptop Keyboard On July 1, 1999, the House of Representatives passed (in a bipartisan 343-86 vote) a bill (H.R. 10) that repealed Sections 20 and 32. The Clinton Administration issued a statement supporting H.R. 10 because (unlike the Senate passed S. 900) it accepted the bill’s CRA and operating subsidiary provisions.[238]HP Pavilion G6-1223TX Laptop Keyboard On October 13, 1999, the Federal Reserve and Treasury Department agreed that direct subsidiaries of national banks (“financial subsidiaries”) could conduct securities activities, but that bank holding companies would need to engage in merchant banking, insurance, and real estate development activities through holding company, not bank, subsidiaries.[239] On October 22, 1999, Senator Gramm and the Clinton Administration agreed a bank holding company could only become a “financial holding company” (and thereby enjoy the new authority to affiliate with insurance and securities firms) if all its bank subsidiaries had at least a “satisfactory” CRA rating.[240]HP Pavilion DV6-1104au Laptop Keyboard After these compromises, a joint Senate and House Conference Committee reported out a final version of S. 900 that was passed on November 4, 1999, by the House in a vote of 362-57 and by the Senate in a vote of 90-8. President Clinton signed the bill into law on November 12, 1999, as the Gramm–Leach–Bliley Financial Modernization Act of 1999 (GLBA).[241]HP Probook 4515S Laptop Keyboard The GLBA repealed Sections 20 and 32 of the Glass–Steagall Act, not Sections 16 and 21.[17] The GLBA also amended Section 16 to permit “well capitalized” commercial banks to underwrite municipal revenue bonds (i.e., non-general obligation bonds),[242] as first approved by the Senate in 1967.[84] Otherwise, Sections 16 and 21 remained in effect regulating the direct securities activities of banks and prohibiting securities firms from taking deposits.[17]HP Envy 15 Laptop Keyboard After March 11, 2000, bank holding companies could expand their securities and insurance activities by becoming “financial holding companies.”[243] President Bill Clinton’s signing statement for the GLBA summarized the established argument for repealing Glass–Steagall Section’s 20 and 32 in stating that this change, and the GLBA’s amendments to the Bank Holding Company Act, would “enhance the stability of our financial services system” by permitting financial firms to “diversify their product offerings and thus their sources of revenue” and make financial firms “better equipped to compete in global financial markets.”[244]HP 576835-001 Laptop Keyboard With Salomon Smith Barney already operating as a Section 20 affiliate of Citibank under existing law, commentators did not find much significance in the GLBA’s repeal of Sections 20 and 32. Many commentators noted those sections “were dead” before the GLBA.[4] The GLBA’s amendment to the Bank Holding Company Act to permit banks to affiliate with insurance underwriting companies was a new power. Under a 1982 amendment to the Bank Holding Company Act bank affiliates had been prohibited from underwriting most forms of insurance.[245] Because the GLBA permitted banks to affiliate with insurance underwriters, Citigroup was able to retain ownership of the Travelers insurance underwriting business.[5] Overall, however, commentators viewed the GLBA “as ratifying and extending changes that had already been made, rather than as revolutionary.”[246] At least one commentator found the entire GLBA “unnecessary” for banks and suggested the OCC had the authority to grant national banks all the insurance underwriting powers permitted to affiliates through the GLBA.[247] HP Pavilion dv3-2310ea Laptop Keyboard As John Boyd had earlier,[197] Minneapolis Federal Reserve Bank president Gary Stern and Arthur Wilmarth warned that the GLBA’s permission for broader combinations of banking, securities, and insurance activities could increase the “too big to fail” problem.[248]TOSHIBA Satellite l20-101 Laptop Keyboard The GLBA permitted Citigroup to retain the Travelers property, casualty, and life insurance underwriting businesses beyond the five-year “divestiture” period the Federal Reserve Board could have permitted under the pre-GLBA form of the BHCA.[5] Before that five-year period elapsed, however, Citigroup spun off the Travelers property and casualty insurance business to Citigroup’s shareholders.[249] In 2005 Citigroup sold to Metropolitan Life the Travelers life insurance business.[250] Commentators noted that Citigroup was left with selling insurance underwritten by third parties, a business it could have conducted without the GLBA.[251]HP Pavilion G7-1081NR Laptop Keyboard In November 2003 the Federal Reserve Board and the Treasury Department issued to Congress a report (Joint Report) on the activities of the “financial holding companies” (FHCs) authorized by the GLBA and the effect of mergers or acquisitions by FHCs on market concentration in the financial services industry.[252]According to the Joint Report, 12% of all bank holding companies had qualified as financial holding companies to exercise the new powers provided by the GLBA, HP Pavilion dv3-2310ea Laptop Keyboard and those companies held 78% of all bank holding company assets.[253] 40 of the 45 bank holding companies with Section 20 affiliates before 2000 had qualified as financial holding companies, and their securities related assets had nearly doubled.[254] The great majority of this increase was at non-U.S. based banks. Such foreign banking companies had acquired several medium sized securities firms (such as UBS acquiring Paine Webber and Credit Suisse acquiring Donaldson, Lufkin & Jenrette).[255]HP 516884-001 Laptop Keyboard Despite these increases in securities activities by bank holding companies that qualified as financial holding companies, the Joint Report found that concentration levels among securities underwriting and dealing firms had not changed significantly since 1999.[256] Ranked by capital levels, none of the four largest securities dealing and underwriting firms was affiliated with a financial holding company.[257] Although the market share of financial holding companies among the 25 largest securities firms had increased by 5.7 percentage points from that held in 1999 before the GLBA became effective, all of the increase came from foreign banks increasing their U.S. HP Probook 4510S Laptop Keyboard securities operations.[257] The combined market share of the five largest U.S. based financial holding companies declined by 1 percentage point from 1999–2003, with the largest, Citigroup, experiencing a 2.4 percentage point reduction from 1999–2003.[257] Of the 45 bank holding companies that had operated Section 20 affiliates before the GLBA, 40 had qualified as financial holding companies, 2 conducted securities underwriting and dealing through direct bank subsidiaries (i.e., “financial subsidiaries”), and 3 continued to operate Section 20 affiliates subject to pre-GLBA rules.[258]HP Probook 4520S Laptop Keyboard In a speech delivered shortly before the Joint Report was released, Federal Reserve Board Vice Chairman Roger Ferguson stated that the Federal Reserve had “not been able to uncover any evidence that the overall market structure of the [banking, insurance, and securities] segments of the financial services industry has substantially changed” since the GLBA.[259] HP 516884-001 Laptop Keyboard Early in 2004, the Financial Times reported that “financial supermarkets” were failing around the world, as both diversification and larger size failed to increase profitability.[260] The Congressional Research Service noted that after the GLBA became law the financial services markets in the United States “had not really integrated” as mergers and consolidations occurred “largely within sectors” without the expected “wholesale integration in financial services.”[261]Compaq Presario CQ57 Series Laptop Keyboard At a July 13, 2004, Senate Banking Committee hearing on the effects of the GLBA five years after passage, the Legislative Director of the Consumer Federationcited Roger Ferguson’s 2003 speech and stated the “extravagant promises” of universal banking had “proven to be mostly hype.” He noted that advocates of repealing Sections 20 and 32 had said “[b]anks, securities firms, and insurance companies would merge into financial services supermarkets” and, after five years, some mergers had occurred “but mostly within the banking industry, not across sectors.”[262] Within the banking industry, Federal Reserve Board Chairman Alan Greenspan testified to Congress in 2004 that commercial bank consolidation had “slowed sharply in the past five years.”[263]SONY V072078AS1 Laptop Keyboard At the five-year anniversary of the GLBA in November 2004, the American Banker quoted then retiring Comptroller of the Currency John D. Hawke, Jr. and former FDIC Chairman William Seidman as stating the GLBA had been less significant than expected in not bringing about the combinations of banking, insurance, and investment banking. Hawke described the GLBA provisions permitting such combinations as “pretty much a dead letter.”[264] Although the article noted other commentators expected this would change in 2005, a May 24, 2005, American Banker article proclaimed 2005 the “year of divestiture” as “many observers” described Citigroup’s sale of the Travelers life and annuity insurance business as “a nail in the coffin of financial services convergence.”[250]ACER Aspire 5710Z laptop keyboard In 2005 the St. Louis Federal Reserve Bank’s staff issued a study finding that after five years the GLBA’s effects “have been modest” and the new law “simply made it easier for organizations to continue to engage in the activities they had already undertaken.”[265]Packard Bell NEW95 laptop keyboard Commentators pointed to the Enron, WorldCom, and other corporate scandals of the early 2000s as exposing the dangers of uniting commercial and investment banking.[266] More broadly, Arthur Wilmarth questioned whether those scandals and the “stock market bubble” of the late-1990s were linked to the growing role of commercial banks in the securities markets during the 1990s.[267] As Wilmarth’s article indicated, the identified bank or bank affiliate activities linked to the Enron and World Com corporate scandals began in 1996 (or earlier) and most occurred before March 11, 2000, when bank holding companies could first use the new securities powers the GLBA provided to “financial holding companies.”[268]SONY VAIO VGN-FS940 laptop keyboard In the 1990s investment banks complained that commercial banking firms with Section 20 affiliates had coerced customers into hiring the Section 20 affiliate to underwrite securities in order to receive loans from the affiliated bank, which would have violated the “anti-tying” provisions of the Bank Holding Company Act. In 1997 the GAO issued a report reviewing those claims.[269] After the GLBA became law, investment banks continued to claim such illegal “tying” was being practiced. In 2003 the GAO issued another report reviewing those claims.[270]TOSHIBA Satellite P505D-S8934 laptop keyboard Partly because of the “tying” issue many commentators expected investment banking firms would need to convert into bank holding companies (and qualify as financial holding companies) to compete with commercial bank affiliated securities firms.[271] No major investment bank, however, became a bank holding company until 2008 in the midst of the late-2000s financial crisis. Then all five major “free standing” investment banks (i.e., those not part of a bank holding company)[272] SONY VAIO PCG-FR395EP laptop keyboard entered bankruptcy proceedings (Lehman Brothers), were acquired by bank holding companies (Bear Stearns by JP Morgan Chase and Merrill Lynch by Bank of America), or became bank holding companies by converting their industrial loan companies (“nonbank banks”) into a national (Morgan Stanley) or state chartered Federal Reserve member bank (Goldman Sachs).[273]DELL E141395 laptop keyboard At the July 13, 2004, Senate Banking Committee hearing on the GLBA’s effects, the Securities Industry Association representative explained securities firms had not taken advantage of the GLBA’s “financial holding company” powers because that would have required them to end affiliations with commercial firms by 2009.[274] GLBA critics had complained that the law had prevented insurance and securities firms from truly entering the banking business by making a “faulty” distinction between commercial and financial activities.[275]HP Pavilion G7-1075DX laptop keyboard The Consumer Federation of America and other commentators suggested securities firms had avoided becoming “financial holding companies” because they wanted to avoid Federal Reserve supervision as bank holding companies.[276] The SEC (through its Chairman Arthur Levitt) had supported efforts to permit securities firms to engage in non-FDIC insured banking activities without the Federal Reserve’s “intrusive banking-style oversight” of the “overall holding company.”[277]HP 640208-001 Laptop Keyboard After the GLBA became law, securities firms continued (and expanded) their deposit and lending activities through the “unitary thrifts” and “nonbank banks” (particularly industrial loan companies) they had used before the GLBA to avoid regulation as bank holding companies.[278] Alan Greenspan later noted securities firms only took on the “embrace” of Federal Reserve Board supervision as bank holding companies (and financial holding companies) after the financial crisis climaxed in September 2008.[279]TOSHIBA Satellite L655D-S5095 Laptop Keyboard Melanie Fein has described how the consolidation of the banking and securities industries occurred in the 1990s, particularly after the Federal Reserve Board’s actions in 1996 and 1997 increasing Section 20 “bank-ineligible” revenue limits and removing “firewalls.”[280] Fein stated that “[a]lthough the Gramm-Leach-Blily Act was expected to trigger a cascade of new consolidation proposals, no major mergers of banks and securities firms occurred in the years immediately following” and that the “consolidation trend resumed abruptly in 2008 as a result of the financial crisis” leading to all the large investment banks being acquired by, or converting into, bank holding companies.[281] Fein noted the lack of consolidation activity after 1999 and before September 2008 was “perhaps because much of the consolidation had occurred prior to the Act.”[282]HP Mini 210-1135TU Laptop Keyboard Commentators cite only three major financial firms from outside the banking industry (the discount broker Charles Schwab, the insurance company Met Life, and the mutual fund company Franklin Resources) for qualifying as financial holding companies after the GLBA became effective and before the late-2000s financial crisis.[283]SAMSUNG NP-N150-JP01 Laptop Keyboard In 2011 the European Central Bank published a working paper that concluded commercial bank Section 20 affiliate underwriting of corporate bonds in the 1990s had been of lower quality than the underwriting of non-commercial bank affiliated securities firms.[284] The authors suggest the most likely explanation was that commercial bank affiliates “had to be initially more aggressive than investment bank houses in order to gain market share, and in pursuing this objective they might have loosened their credit standards excessively.”[285] The working paper only examined corporate bonds underwritten from 1991 through 1999, a period before the GLBA permitted financial holding companies.[286]SAMSUNG N150 Laptop Keyboard Robert Kuttner, Joseph Stiglitz, Elizabeth Warren, Robert Weissman, Richard D. Wolff and others have tied Glass–Steagall repeal to the late-2000s financial crisis. Kuttner acknowledged “de facto enroads” before Glass–Steagall “repeal” but argued the GLBA’s “repeal” had permitted “super-banks” to “re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s,” which he characterized as “lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way.”[8] Stiglitz argued “the most important consequence of Glass–Steagall repeal” HP COMPAQ NX6325 Laptop Keyboard was in changing the culture of commercial banking so that the “bigger risk” culture of investment banking “came out on top.”[9] He also argued the GLBA “created ever larger banks that were too big to be allowed to fail,” which “provided incentives for excessive risk taking.”[287] Warren explained Glass–Steagall had kept banks from doing “crazy things.” She credited FDIC insurance, the Glass–Steagall separation of investment banking, and SEC regulations as providing “50 years without a crisis” and argued that crises returned in the 1980s with the “pulling away of the threads” of regulation.[288] Weissman agrees with Stiglitz that the “most important effect” of Glass–Steagall “repeal” was to “change the culture of commercial banking to emulate Wall Street's high-risk speculative betting approach.”[289]HP Mini 210-1072TU Laptop Keyboard Lawrence White and Jerry Markham rejected these claims and argued that products linked to the financial crisis were not regulated by Glass–Steagall or were available from commercial banks or their affiliates before the GLBA repealed Glass–Steagall sections 20 and 32.[11]Alan Blinder wrote in 2009 that he had “yet to hear a good answer” to the question “what bad practices would have been prevented if Glass–Steagall was still on the books?” Blinder argued that “disgraceful” mortgage underwriting standards “did not rely on any new GLB powers,” that “free-standing investment banks” not the “banking-securities conglomerates” permitted by the GLBA were the major producers of “dodgy MBS,”  HP 636376-001 Laptop Keyboard and that he could not “see how this crisis would have been any milder if GLB had never passed.”[290] Similarly, Melanie Fein has written that the financial crisis “was not a result of the GLBA” and that the “GLBA did not authorize any securities activities that were the cause of the financial crisis.”[291] Fein noted “[s]ecuritization was not an activity authorized by the GLBA but instead had been held by the courts in 1990 to be part of the business of banking rather than an activity proscribed by the Glass–Steagall Act.”[163] As described above, in 1978 the OCC approved a national bank securitizing residential mortgages.[87]HP Mini 210-1099TU Laptop Keyboard Carl Felsenfeld and David L. Glass wrote that “[t]he public—which for this purpose includes most of the members of Congress” does not understand that the investment banks and other “shadow banking” firms that experienced “runs” precipitating the financial crisis (i.e., AIG, Bear Stearns, Lehman Brothers, andMerrill Lynch) never became “financial holding companies” under the GLBA and, therefore, never exercised any new powers available through Glass–Steagall “repeal.”[292] ACER TravelMate 3002WTCi Laptop Keyboard hey joined Jonathan R. Macey and Peter J. Wallison in noting many GLBA critics do not understand that Glass–Steagall’s restrictions on banks (i.e., Sections 16 and 21) remained in effect and that the GLBA only repealed the affiliation provisions in Sections 20 and 32.[293] The American Bankers Association, former President William J. Clinton, and others have argued that the GLBA permission for affiliations between securities and commercial banking firms “helped to mitigate” or “softened” the financial crisis by permitting bank holding companies to acquire troubled securities firms or such troubled firms to convert into bank holding companies.[12]ASUS F3F Laptop Keyboard Martin Mayer argued there were “three reasonable arguments” for tying Glass–Steagall repeal to the financial crisis: (1) it invited banks to enter risks they did not understand; (2) it created “network integration” that increased contagion; and (3) it joined the incompatible businesses of commercial and investment banking. Mayer, however, then described banking developments in the 1970s and 1980s that had already established these conditions before the GLBA repealed Sections 20 and 32.[294] Mayer’s 1974 book The Bankers detailed the “revolution in banking” that followed Citibank establishing a liquid secondary market in “negotiable certificates of deposit” in 1961. TOSHIBA Satellite U305-S5097 Laptop Keyboard This new “liability management” permitted banks to fund their activities through the “capital markets,” like nonbank lenders in the “shadow banking market,” rather than through the traditional regulated bank deposit market envisioned by the 1933 Banking Act.[295] In 1973 Sherman J. Maisel wrote of his time on the Federal Reserve Board and described how “[t]he banking system today is far different from what it was even in 1960” as “formerly little used instruments” were used in the “money markets” and “turned out to be extremely volatile.”[296]HP Mini 210-2010ee Laptop Keyboard In describing the “transformation of the U.S. financial services industry” from 1975-2000 (i.e., from after the “revolution in banking” described by Mayer in 1974 to the effective date of the GLBA), Arthur Wilmarth described how during the 1990s, despite remaining bank holding companies, J.P. Morgan & Co. and Bankers Trust “built financial profiles similar to securities firms with a heavy emphasis on trading and investments.”[297] In 1993, Helen Garten described the transformation of the same companies into “wholesale banks” similar to European “universal banks.”[298] ACER TravelMate 2350 Laptop Keyboard Jan Kregel agrees that “multifunction” banks are a source for financial crises, but he argues the “basic principles” of Glass–Steagall “were eviscerated even before” the GLBA.[299] Kregel describes Glass–Steagall as creating a “monopoly that was doomed to fail” because after World War II nonbanks were permitted to use “capital market activities” to duplicate more cheaply the deposit and commercial loan products for which Glass–Steagall had sought to provide a bank monopoly.[300]HP Mini 110-1120SL Laptop CPU Cooling Fan While accepting that under Glass–Steagall financial firms could still have “made, sold, and securitized risky mortgages, all the while fueling a massive housing bubble and building a highly leveraged, Ponzi-like pyramid of derivatives on top,” the New Rules Project concludes that commentators who deny the GLBA played a role in the financial crisis Packard Bell PEW91 laptop keyboard “fail to recognize the significance of 1999 as the pivotal policy-making moment leading up to the crash.” The Project argues 1999 was Congress’s opportunity to reject 25 years of “deregulation” and “confront the changing financial system by reaffirming the importance of effective structural safeguards, such as the Glass–Steagall Act's firewall and market share caps to limit the size of banks; bringing shadow banks into the regulatory framework; and developing new rules to control the dangers inherent in derivatives and other engineered financial products.”[301]SONY VAIO VGN-FS730 laptop keyboard Raj Date and Michael Konczal similarly argued that the GLBA did not create the financial crisis but that the implicit “logical premises” of the GLBA, which included a belief that “non-depository ‘shadow banks’ should continue to compete in the banking business,” “enabled the financial crisis” and “may well have hastened it.”[302]SONY VAIO VGN-N110E laptop keyboard During the 2009 House of Representatives consideration of H.R. 4173, the bill that became the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Representative Maurice Hinchey (D-NY) proposed an amendment to the bill that would have reenacted Glass–Steagall Sections 20 and 32 and also prohibited bank insurance activities. The amendment was not voted on by the House.[303]HP Pavilion dv6-3047eo Laptop Keyboard On December 16, 2009, Senators John McCain (R-AZ) and Maria Cantwell (D-WA) introduced in the Senate the “Banking Integrity Act of 2009” (S.2886), which would have reinstated Glass–Steagall Sections 20 and 32, but was not voted on by the Senate.[303][304]TOSHIBA Satellite A305 Laptop Keyboard Before the Senate acted on its version of what became the Dodd-Frank Act, the Congressional Research Service issued a report describing securities activities banks and their affiliates had conducted before the GLBA. The Report stated Glass–Steagall had “imperfectly separated, to a certain degree” commercial and investment banking and described the extensive securities activities the Federal Reserve Board had authorized for “Section 20 affiliates” since the 1980s.[305]HP 519265-001 Laptop Keyboard The Obama Administration has been criticized for opposing Glass–Steagall reenactment.[303][306] In 2009, Treasury Secretary Timothy Geithner testified to theJoint Economic Committee that he opposed reenacting Glass–Steagall and that he did not believe “the end of Glass–Steagall played a significant role” in causing the financial crisis.[307]TOSHIBA Satellite M645-S4070 Laptop Keyboard The Brown–Kaufman amendment (or the "SAFE Banking Act")[308] was a failed 2010 amendment proposed in the United States Senate to be part of the Dodd–Frank billby Democratic Senators Sherrod Brown (OH) and Ted Kaufman (DE). It sought to address the moral hazard of too big to fail by breaking up the largest banks with limits on the size of financial institutions.[309][310] The amendment would have capped deposits and other liabilities[310] and restricted bank assets to 10% of US GDP.[311]HP 519265-001 Laptop Keyboard On April 12, 2011, Representative Marcy Kaptur (D-OH) introduced in the House the “Return to Prudent Banking Act of 2011” (H.R. 1489), which would (1) amend the Federal Deposit Insurance Act to add prohibitions on FDIC insured bank affiliations instead of reenacting the affiliation restrictions in Glass–Steagall Sections 20 and 32, (2) direct federal banking regulators and courts to interpret these affiliation provisions and Glass–Steagall Sections 16 and 21 in accordance with the Supreme Court decision in Camp,[64] and (3) repeal various GLBA changes to the Bank Holding Company Act.[312]HP 636376-001 Laptop Keyboard On July 7, 2011, Representative Maurice D. Hinchey (D-NY) introduced in the House the “Glass–Steagall Restoration Act of 2011” (H.R. 2451), which would reinstate Glass–Steagall Sections 20 and 32.[313]HP Envy 15 Laptop Keyboard The Dodd-Frank Act included the Volcker Rule, which among other things limited proprietary trading by banks and their affiliates.[314] This proprietary trading ban will generally prevent commercial banks and their affiliates from acquiring non-governmental securities with the intention of selling those securities for a profit in the “near term.”[315] Some have described the Volcker Rule, particularly its proprietary trading ban,[316] as “Glass–Steagall lite.”[317]DELL NSK-DCK01 Laptop Keyboard As described above, Glass–Steagall restricted commercial bank “dealing” in, not “trading” of, non-government securities the bank was permitted to purchase as “investment securities.”[41] After the GLBA became law, Glass–Steagall Section 16 continued to restrict bank securities purchases. The GLBA, however, expanded the list of “bank-eligible” securities to permit banks to buy, underwrite, and deal in municipal revenue bonds, not only “full faith and credit” government bonds.[242]DELL Precision M4500 Laptop Keyboard The Volcker Rule permits “market making” and other “dealer” activities in non-government securities as services for customers.[318] Glass–Steagall Section 16 prohibits banks from being a “market maker” or otherwise “dealing” in non-government (i.e., “bank-ineligible”) securities.[38] Glass–Steagall Section 16 permits a bank to purchase and sell (i.e., permits “trading”) for a bank’s own account non-government securities that the OCC approves as “investment securities.”[41] The Volcker Rule will prohibit such “proprietary trading” of non-government securities.[319]SONY VAIO VGN-FS715F Laptop Keyboard Before and after the late-2000s financial crisis, banking regulators worried that banks were incorrectly reporting non-traded assets as held in their “trading account” because of lower regulatory capital requirements for assets held in a “trading account.”[320] Under the Volcker Rule, U.S. banking regulators have proposed that banks and their affiliates be prohibited from holding any asset (other than government securities and other listed exceptions) as a “trading position.”[321]HP Pavilion G60-230 Laptop Keyboard Senators Jeff Merkley (D-OR) and Carl Levin (D-MI) have written that “proprietary trading losses” played “a central role in bringing the financial system to its knees.” They wrote that the Volcker Rule’s proprietary trading ban contained in statutory language they proposed is a “modern Glass–Steagall” because Glass–Steagall was both “over-inclusive” (in prohibiting some “truly client-oriented activities that could be managed by developments in securities and banking law”) and “under-inclusive” in failing to cover derivatives trading.[322]HP Pavilion DV7-3065dx Laptop Keyboard In 2002, Arthur Wilmarth wrote that from 1990-1997 the nine U.S. banks with the greatest securities activities held more than 20% of their assets as trading assets.[297] By 1997, 40% of J.P. Morgan’s revenue was from trading.[323] A 1995 study by the federal banking regulators of commercial bank trading activity from June 30, ACER Aspire 5610Z Laptop Keyboard 1984, to June 30, 1994, concluded that “trading activities are an increasingly important source of revenue for banks” and that “[n]otwithstanding the numerous press reports that focus on negative events, the major commercial banks have experienced long-term success in serving customers and generating revenues with these activities.” In reporting the study results, the American Banker described “proprietary trading” as “basically securities trading not connected to customer-related bank activities“ and summarized the study as finding that “proprietary trading has been getting a bad rap.”[324]HP Envy 15 Laptop Keyboard Paul Volcker supported the Volcker Rule prohibition on proprietary trading as part of bringing commercial banks back to “concentrating on continuing customer interest.”[325] As described above, Volcker had long testified to Congress in support of repealing Glass–Steagall Sections 20 and 32.[126][151][183][326] In 2010 he explained that he understood Glass–Steagall as preventing banks from being principally engaged in underwriting and dealing in corporate securities. Volcker stated that with securitization and other developments he believes it is  Lenovo 3000 Y500 Laptop Keyboard a proper bank function to underwrite corporate securities “as serving a legitimate customer need.” He, therefore, did not believe “repeal of Glass–Steagall was terrible” but that Congress “should have thought about what they replace it with.” Volcker’s criticism was that Congress “didn’t replace it with other restrictions.”[327]Compaq Presario CQ42-228LA Laptop Keyboard Separate from its proprietary trading ban, the Volcker Rule restricts bank and affiliate sponsorship and ownership of hedge funds and private equity funds.[317]The GLBA amended the Bank Holding Company Act to permit “merchant banking” investments by bank affiliates subject to various restrictions.[328] It also authorized the Treasury Department and Federal Reserve Board to permit such merchant banking activities by direct bank subsidiaries (“financial subsidiaries”) after five years, ACER K032130A1 Laptop Keyboard but they have not provided such permission.[329] This was not a Glass–Steagall change but a change to the Bank Holding Company Act, which previously limited the size of investments bank affiliates could make in a company engaged in activities not “closely related to banking.”[330] Such merchant banking investments may be made through private equity funds.[331] The Volcker Rule will affect the ability of bank affiliates to make such investments.[332] TOSHIBA Satellite A305 Laptop Keyboard The Independent Commission on Banking’s (ICB) proposal to “ring fence” retail and small business commercial banking from investment banking in the United Kingdom[333] has been described as comparable to the Glass–Steagall separation of commercial and investment banking.[334] The proposal seeks to isolate the “retail banking” functions of a banking firm within a separate corporation that would not be affected by the failure of the overall firm so long as the “ring fenced” retail bank itself remained solvent.[335]TOSHIBA Satellite L755-S5246 Laptop Keyboard Bank of England Governor Mervyn King expressed concern the European Commission could block implementation of the ICB proposal as a violation of Commission standards.[336] Although Michel Barnier, European Union internal market Commissioner, proposed limits on capital requirements for banks that could have hindered the UK ringfencing proposal and indicated support for the French and German position against breaking up banking groups, in November 2011 he announced an “expert commission” would “study the mandatory separation of risky investment banking activities from traditional retail lenders.”[337] On October 2, 2012, the committee appointed to study the issue recommended a form of “ring fencing” similar to the proposal in the United Kingdom.[338]eyboard.com/toshiba-satellite-l755-sp5102cl-laptop-keyboard-ic.html">TOSHIBA Satellite L755-SP5102CL Laptop Keyboard Congressional and bank regulator efforts to “repeal”, “reform” or apply Glass–Steagall were based on isolating a commercial banking firm’s expanded securities activities in a separately capitalized bank affiliate.[156][218] Much of the debate concerned whether such affiliates could be owned by a bank (as with “operating subsidiaries” in the 1990s) or would be bank holding company subsidiaries outside the chain of bank ownership.[239][339] In either case, “firewalls” were intended to isolate the bank from the affiliate.[340]HP 508112-001 Laptop Keyboard Banking regulators and commentators debated whether “firewalls” could truly separate a bank from its affiliate in a crisis and often cited the early 1980s’ statement by then Citicorp CEO Walter Wriston that “it is inconceivable that any major bank would walk away from any subsidiary of its holding company.”[341]Alan Greenspan and Paul Volcker testified to Congress that firewalls so strong that they truly separated different businesses would eliminate the benefits of combining the two activities.[342] HP Pavilion dv6-2132ec Laptop Keyboard Both testified that in a crisis the owners of the overall firm would inevitably find ways to use the assets of any solvent part of the firm to assist the troubled part.[342] Thus, “firewalls” sufficient to prevent a bank from assisting its affiliate would eliminate the purpose of the combination, but “workable” firewalls would be insufficient to prevent such assistance. Both Volcker and Greenspan proposed that the solution was adequate supervision, including sufficient capital and other requirements.[342]SONY VAIO VGN-NW130D Laptop Keyboard In 1998 and 1999 Greenspan testified to Congress in opposition to the Clinton Administration proposal to permit national bank subsidiaries to engage in expanded securities and other activities. He argued such direct bank subsidiary activities would be “financed by the sovereign credit of the United States” through the “federal safety net” for banks, despite the Treasury Department’s assurance that “firewalls” between the bank and its operating subsidiary would prevent the expansion of the “federal safety net.”[343] HP Pavilion G6-1223TX Laptop Keyboard As described above, Gary Stern, Arthur Wilmarth, and others questioned whether either operating subsidiaries or separate holding company affiliates could be isolated from an affiliated bank in a financial crisis and feared that the “too big to fail” doctrine gave competitive benefits to banking firms entering the securities or insurance business through either structure.[248] Greenspan did not deny that the government might act to “manage an orderly liquidation” of a large financial “intermediary” in a crisis, DELL Inspiron 510m Laptop Keyboard but he suggested that only insured creditors would be fully repaid, that shareholders would be unprotected, and that uninsured creditors would receive less than full payment through a discount or “haircut.”[344] Commentators pointed to the 1990 failure of Drexel Burnham Lambert as suggesting “too-big-to-fail” considerations need not force a government rescue of creditors to a failing investment bank or other nonbank,[345]although Greenspan had pointed to that experience as questioning the ability of firewalls to isolate one part of a financial firm from the rest.[342] HP Envy 15 Laptop Keyboard After the late-2000s financial crisis commentators noted that the Federal Reserve Board used its power to grant exemptions from Federal Reserve Act Section 23A (part of the 1933 Banking Act and the “principle statutory” firewall between banks and their affiliates) to permit banks to “rescue” various affiliates or bank sponsored participants in the “shadow banking system” as part of a general effort to restore liquidity in financial markets.[346] Section 23A generally prevented banks from funding securities purchases by their affiliates before the financial crisis (i.e., prevented the affiliates from “using insured deposits to purchase risky investments”) HP Pavilion dv6-3178ee Laptop Keyboard by “limiting the ability of depository institutions to transfer to affiliates the subsidy arising from the institutions’ access to the federal safety net,” but the Federal Reserve Board’s exemptions allowed banks to shift the risk of such investments from the shadow banking market to FDIC insured banks during the crisis.[347] The Federal Reserve Board’s General Counsel has defended these actions by arguing that all the Section 23A exemptions required that bank funding be “fully collateralized” on a daily basis, so that the bank was “very much protected,” and that in the end the exemptions did not prove very “useful.”[348]HP Pavilion dv6-2174ca laptop keyboard The ICB proposes to erect a barrier between the “ring-fenced bank” and its “wider corporate group” that will permit banking regulators to isolate the ring-fenced bank “from the rest of the group in a matter of days and continue the provision of its services without providing solvency support.”[349]SONY VAIO VGN-FS195VP laptop keyboard Laurence Kotlikoff was disappointed the ICB did not adopt the “limited purpose banking” he proposed to the ICB.[350][351] This would require a bank to operate like a mutual fund in repaying “deposits” based on the current market value of the bank’s assets. Kotlikoff argues there will always be financial crises if banks lend deposits but are required to repay the full amount of those deposits “on demand.”[352] Kotlikoff would only permit a bank (i.e., mutual fund) to promise payment of deposits at “par” (i.e., $1 for every $1 deposited) if the bank (i.e., mutual fund) held 100% of all deposits in cash as a trustee.[351][353]TOSHIBA Satellite L505-S6959 laptop keyboard As Kotlikoff notes, in 1987 Robert Litan proposed “narrow banking.”[354] Litan suggested commercial banking firms be freed from Glass–Steagall limits (and other activity restrictions) so long as they isolated FDIC insured deposits in a “narrow bank” that was only permitted to invest those deposits in “safe securities” approved by the FDIC.[355] In 1995 Arthur Wilmarth proposed applying Litan’s “narrow bank” proposal to U.S. banks (“global banks”) that had become heavily involved in “capital markets” HP AETT9U00010 Laptop Keyboard activities through “Section 20 affiliates,” derivatives, and other activities.[356] Under Wilmarth’s proposal (which he repeated in 2001 after the GLBA became law[357]) only banks that limited their activities to taking deposits and making commercial loans would be permitted to make commercial loans with FDIC insured deposits.[358] Wilmarth expected only “community banks” specialized in making consumer and small business loans would continue to operate as such traditional banks.[359] The large “global banks” would fund their lending through the capital markets just like investment banks and other “shadow banking” lenders.[360]HP Pavilion dm3-1020CA Laptop Keyboard In 1997 the Clinton Administration proposed that “wholesale financial institutions” (known as “woofies”) be authorized to be members of the Federal Reserve System but not “banks” under the Bank Holding Company Act because they would own non-FDIC insured banks that would only take deposits of $100,000 or more.[361]Whereas “narrow banks” would be FDIC insured, but only invest in FDIC approved “safe securities,” “woofies” would be free to lend, purchase securities, and make other investments, because they would not hold any FDIC insured deposits. The proposal was intended to permit securities firms to continue to maintain ownership of commercial firms while gaining access to the Federal Reserve’s “payment system” and “discount window”, so long as the firm did not take FDIC insured deposits.[362]SONY VAIO VGN-FS415M Laptop Keyboard “Woofies” were not authorized by the GLBA because of a dispute between Senator Phil Gramm and the Clinton Administration over the application of the Community Reinvestment Act (CRA) to “woofies.” In their October 1999 compromise on CRA provisions in the GLBA,[240] the Clinton Administration agreed with Gramm that CRA would not apply to woofies so long as only a company that did not then own any FDIC insured depository institution would be permitted to qualify as a “wholesale financial institution.”[363] SONY VAIO VGN-AR570 Laptop Keyboard The Clinton Administration wanted this restriction to prevent existing bank holding companies from disposing of their FDIC insured banks to qualify as “woofies,” which could reduce the deposit base subject to CRA requirements.[364] When Chase and J.P. Morgan lobbied to change the final legislation to permit them to become woofies, they complained only Goldman Sachs and “a few others” could qualify as a woofie.[363][364] When negotiators decided they could not resolve the dispute, permission for woofies was eliminated from the final GLBA.[363][364]SAMSUNG R522 Laptop Keyboard “Woofies” were similar to the “global bank” structure suggested by Arthur Wilmarth because they would not use FDIC insured deposits to make commercial loans. They would, however, be subject to Federal Reserve supervision unlike lenders in the unsupervised “shadow banking” system. Because woofies would have had access to the Federal Reserve discount window and payments service, critics (including the Independent Bankers Association of America and Paul Volcker) opposed woofies (and a similar 1996 proposal by Representative James A. Leach) for providing unfair competition to banks.[365] Although October 1999 press reports suggested bank holding companies were interested in becoming woofies,[363][364] the New York Times reported in July 1999 that banking and securities firms had lost interest in becoming woofies.[366]ACER Aspire 5742 Laptop Keyboard The ICB Report rejected “narrow banking” in part because it would lead to more credit (and all credit during times of stress) being provided by a “less regulated sector.”[367] In 1993 Jane D'Arista and Tom Schlesinger noted that the “parallel banking system” had grown because it did not incur the regulatory costs of commercial banks.[368] They proposed to equalize the cost by establishing “uniform regulation” of banks and the lenders and investors in the parallel banking system.[369] Lenovo ThinkPad Edge E520 Laptop Keyboard As with Kotlikoff’s “limited purpose banking” proposal, only investment pools funded 100% from equity interests would remain unregulated as banks.[370] Although D’Arista and Schlesinger acknowledged the regulation of banks and of the parallel banking system would end up only being “comparable,” their goal was to eliminate so far as possible the competitive advantages of the “parallel” or “shadow” banking market.[371]HP Mini 110-3135dx Laptop Keyboard Many commentators have argued that the failure to regulate the shadow banking market was a primary cause of the financial crisis.[302][372] There is general agreement that the crisis emerged in the shadow banking markets not in the traditional banking market.[373] As described above, Helen Garten had identified the “consumerization” of banking regulation as producing “a largely unregulated, sophisticated wholesale market,”[207] which created the risk of the “underproduction of regulation” of that market.[374]HP G42-415DX Laptop Keyboard Laurence Kotlikoff’s “limited purpose banking” proposal rejects bank regulation (based on rules and supervision to ensure “safety and soundness”) and replaces it with a prohibition on any company operating like a traditional “bank.” All limited liability financial companies (not only today’s “banks”) that receive money from the public for investment or “lending” and that issue promises to pay amounts in the future (whether as insurance companies, hedge funds, securities firms, or otherwise) could only issue obligations to repay amounts equal to the value of their assets.[351][375] All “depositors” in or “lenders” to such companies would become “investors” (as in a mutual fund) with the right to receive the full return on the investments made by the companies (minus fees) and obligated to bear the full loss on those investments.[351][376]HP G42-380TX Laptop Keyboard Thomas Hoenig rejects both “limited purpose banking” and the proposal to regulate shadow banking as part of the banking system. Hoenig argues it is not necessary to regulate “shadow banking system” lenders as banks if those lenders are prohibited from issuing liabilities that function like bank demand deposits. He suggests that requiring money market funds to redeem shares at the funds’ fluctuating daily net asset values would prevent those funds from functioning like bank checking accounts and that eliminating special Bankruptcy Code treatment for repurchase agreements would delay repayment of those transactions in a bankruptcy and thereby end their treatment as “cash equivalents” when the “repo” HP Mini 110-3000 CTO Laptop Keyboard was funding illiquid, long term securities. By limiting the ability of “shadow banks” to compete with traditional banks in creating “money-like” instruments, Hoenig hopes to better assure that the safety net is not ultimately called upon to “bail them [i.e., shadow banks such as Bear Stearns and AIG during the financial crisis] out in a crisis.” He proposes to deal with actual commercial banks by imposing “Glass–Steagall-type boundaries” so that banks “that have access to the safety net should be restricted to certain core activities that the safety net was intended to protect—making loans and taking deposits—and related activities consistent with the presence of the safety net.”[377]COMPAQ Presario CQ40-117TU Laptop Keyboard Although the UK's ICB and the commentators presenting the proposals described above to modify banks or banking regulation address issues beyond the scope of the Glass–Steagall separation of commercial and investment banking, each specifically examines Glass–Steagall. The ICB stated Glass–Steagall had been “undermined in part by the development of derivatives.”[378] The ICB also argued that the development before 1999 of “the world’s leading investment banks out of the US despite Glass–Steagall in place at the time” should caution against assuming the “activity restrictions” it recommended in its “ringfencing” proposal would hinder UK investment banks from competing internationally.[379] Compaq Presario C769US Laptop CPU Cooling Fan Boston University economist Laurence J. Kotlikoff suggests commercial banks only became involved with CDOs, SIVs, and other “risky products” after Glass–Steagall was “repealed,” but he rejects Glass–Steagall reinstatement (after suggesting Paul Volcker favors it) as a “non-starter” because it would give the “nonbank/shadow bank/investment bank industry” a “competitive advantage” without requiring it to pay for the “implicit” “lender-of-last-resort” protection it receives from the government.[380] DELL Studio 1450 Laptop CPU Cooling Fan Robert Litan and Arthur Wilmarth presented their “narrow bank” proposals as a basis for eliminating Glass–Steagall (and other) restrictions on bank affiliates.[381] Writing in 1993, Jane D’Artista and Tom Schlesinger noted that “the ongoing integration of financial industry activities makes it increasingly difficult to separate banking and securities operations meaningfully” but rejected Glass–Steagall repeal because “the separation of banking and securities functions is a proven, least-cost method of preventing the problems of one financial sector from spilling over into the other” (which they stated was “most recently demonstrated in the October 1987 market crash.”)[382]HP Mini 110-1100SL Laptop CPU Cooling Fan During the Senate debate of the bill that became the Dodd-Frank Act, Thomas Hoenig wrote Senators Maria Cantwell and John McCain (the co-sponsors of legislation to reinstate Glass–Steagall Sections 20 and 32) supporting a “substantive debate” on “the unintended consequences of leaving investment banking commingled with commercial banking” and reiterating that he had “long supported” reinstating “Glass–Steagall-type laws” to separate “higher risk, often more leveraged, activities of investment banks” Toshiba Satellite L645D-S4052 Laptop CPU Cooling Fan from commercial banking. Hoenig agreed with Paul Volcker, however, that “financial market developments” had caused underwriting corporate bonds (the prohibition of which Volcker described as the purpose of Glass–Steagall[327]), and also underwriting of corporate equity, revenue bonds, and “high quality asset-backed securities,” to be “natural extensions of commercial banking.” Instead of reinstating Glass–Steagall prohibitions on such underwriting, Hoenig proposed restoring “the principles underlying the separation of commercial and investment banking firms.”[383]SONY Vaio VGN-NW310F/B Laptop CPU Cooling Fan In Mainland Europe, some scholars have suggested Glass–Steagall should be a model for any in-depth reform of bank regulation:[384] notably in France where SFAFand World Pensions Council (WPC) banking experts have argued that "a new Glass–Steagall Act" should be viewed within the broader context of separation of powers in European Union law.[385]HP Pavilion dv5-2147la Laptop CPU Cooling Fan This perspective has gained ground after the unraveling of the Libor scandal in July 2012, with mainstream opinion leaders such as the Financial Timeseditorialists calling for the adoption of an EU-wide "Glass Steagall II".[386] Compaq Presario C755EF Laptop CPU Cooling Fan On July 25, 2012, former Citigroup Chairman and CEO Sandy Weill, considered one of the driving forces behind the considerable financial deregulation and “mega-mergers” of the 1990s, surprised financial analysts in Europe and North American by “calling for splitting up the commercial banks from the investment banks. In effect, he says: bring back the Glass–Steagall Act of 1933 which led to half a century, free of financial crises.”[387]HP Mini 110-1120SL Laptop CPU Cooling Fan TOSHIBA NB205-N313/P laptop keyboard HP Mini 210-2170nr laptop keyboard HP G62-b21SL laptop keyboard

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