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Keyboard yes A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse.[197] The continuing development of the crisis has prompted in some quarters fears of a global economic collapse although there are now many cautiously optimistic forecasters in addition to some prominent sources who remain negative.[198] The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown.[199]DELL Precision M4500 Laptop Keyboard Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years.[200] Three days later UBS economists announced that the "beginning of the end" of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: capitalinjection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the world's central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, SONY VAIO VGN-FS715F Laptop Keyboard but that in economic terms "the worst is still to come".[201] UBS quantified their expected recession durations on October 16: the Eurozone's would last two quarters, the United States' would last three quarters, and the United Kingdom's would last four quarters.[202] The economic crisis in Iceland involved all three of the country's major banks. Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.[203]HP Pavilion G60-230 Laptop Keyboard At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the early 1980s recession with negative 2009 growth for the U.S., Eurozone, UK; very limited recovery in 2010; but not as bad as the Great Depression.[204]HP Pavilion DV7-3065dx Laptop Keyboard The Brookings Institution reported in June 2009 that U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007. "The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the U.S. consumer as a source of global demand." With a recession in the U.S. and the increased savings rate of U.S. consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia,[205] 9.8% in the Euro area and 21.5% for Mexico.[206]ACER Aspire 5610Z Laptop Keyboard Some developing countries that had seen strong economic growth saw significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to zero in 2009, and Kenya may achieve only 3–4% growth in 2009, down from 7% in 2007. According to the research by the Overseas Development Institute, reductions in growth can be attributed to falls in trade, commodity prices, investment and remittances sent from migrant workers (which reached a record $251 billion in 2007, but have fallen in many countries since).[207] This has stark implications and has led to a dramatic rise in the number of households living below the poverty line, be it 300,000 in Bangladesh or 230,000 in Ghana.[207]HP COMPAQ NX6325 Laptop Keyboard The World Bank reported in February 2009 that the Arab World was far less severely affected by the credit crunch. With generally good balance of payments positions coming into the crisis or with alternative sources of financing for their large current account deficits, such as remittances, Foreign Direct Investment (FDI) or foreign aid, Arab countries were able to avoid going to the market in the latter part of 2008. This group is in the best position to absorb the economic shocks. HP Mini 210-1072TU Laptop Keyboard They entered the crisis in exceptionally strong positions. This gives them a significant cushion against the global downturn. The greatest impact of the global economic crisis will come in the form of lower oil prices, which remains the single most important determinant of economic performance. Steadily declining oil prices would force them to draw down reserves and cut down on investments. Significantly lower oil prices could cause a reversal of economic performance as has been the case in past oil shocks. Initial impact will be seen on public finances and employment for foreign workers.[208]  HP 636376-001 Laptop Keyboard The output of goods and services produced by labor and property located in the United States—decreased at an annual rate of approximately 6% in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods.[209] The U.S. unemployment rate increased to 10.1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964.[210][211]HP Mini 210-1099TU Laptop Keyboard Typical American families did not fare as well, nor did those "wealthy-but-not wealthiest" families just beneath the pyramid's top. On the other hand, half of the poorest families did not have wealth declines at all during the crisis. The Federal Reserve surveyed 4,000 households between 2007 and 2009, and found that the total wealth of 63 percent of all Americans declined in that period. 77 percent of the richest families had a decrease in total wealth, while only 50 percent of those on the bottom of the pyramid suffered a decrease.[212][213][214]ACER TravelMate 3002WTCi Laptop Keyboard On November 3, 2008, the European Commission at Brussels predicted for 2009 an extremely weak growth of GDP, by 0.1%, for the countries of the Eurozone (France, Germany, Italy, Belgium etc.) and even negative number for the UK (−1.0%), Ireland and Spain. On November 6, the IMF at Washington, D.C., launched numbers predicting a worldwide recession by −0.3% for 2009, averaged over the developed economies. On the same day, the Bank of England and the European Central Bank, respectively, reduced their interest rates from 4.5% down to 3%, and from 3.75% down to 3.25%. As a consequence, starting from November 2008, several countries launched large "help packages" for their economies. ASUS F3F Laptop Keyboard The U.S. Federal Reserve Open Market Committee release in June 2009 stated: ...the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, TOSHIBA Satellite U305-S5097 Laptop Keyboard the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.[215] Economic projections from the Federal Reserve and Reserve Bank Presidents include a return to typical growth levels (GDP) of 2–3% in 2010; an unemployment plateau in 2009 and 2010 around 10% with moderation in 2011; and inflation that remains at typical levels around 1–2%.[216]HP Mini 210-2010ee Laptop Keyboard The U.S. Federal Reserve and central banks around the world have taken steps to expand money supplies to avoid the risk of a deflationary spiral, in which lower wages and higher unemployment lead to a self-reinforcing decline in global consumption. In addition, governments have enacted large fiscal stimulus packages,  ACER TravelMate 2350 Laptop Keyboard by borrowing and spending to offset the reduction in private sector demand caused by the crisis. The U.S. executed two stimulus packages, totaling nearly $1 trillion during 2008 and 2009.[217] The U.S. Federal Reserve's new and expanded liquidity facilities were intended to enable the central bank to fulfill its traditional lender-of-last-resort role during the crisis while mitigating stigma, broadening the set of institutions with access to liquidity, and increasing the flexibility with which institutions could tap such liquidity.[218]HP Pavilion dv6-2132ec Laptop Keyboard This credit freeze brought the global financial system to the brink of collapse. The response of the Federal Reserve, the European Central Bank, and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased US$2.5 trillion of government debt and troubled private assets from banks. SONY VAIO VGN-NW130D Laptop Keyboard This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks.[179] In October 2010, Nobel laureate Joseph Stiglitz explained how the U.S. Federal Reserve was implementing another monetary policy —creating currency— as a method to combat the liquidity trap.[219]  HP Pavilion G6-1223TX Laptop Keyboard By creating $600 billion and inserting[clarification needed] this directly into banks, the Federal Reserve intended to spur banks to finance more domestic loans and refinance mortgages. However, banks instead were spending the money in more profitable areas by investing internationally in emerging markets. Banks were also investing in foreign currencies, which Stiglitz and others point out may lead to currency warswhile China redirects its currency holdings away from the United States.[220]DELL Inspiron 510m Laptop Keyboard Governments have also bailed out a variety of firms as discussed above, incurring large financial obligations. To date, various U.S. government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. For a summary of U.S. government financial commitments and investments related to the crisis, see CNN – Bailout Scorecard. Significant controversy has accompanied the bailout, leading to the development of a variety of "decision making frameworks", to help balance competing policy interests during times of financial crisis.[221] HP Envy 15 Laptop Keyboard United States President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection,executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.[222][223][224] In January 2010, Obama proposed additional regulations limiting the ability of banks to engage in proprietary trading. The proposals were dubbed "The Volcker Rule", in recognition of Paul Volcker, who has publicly argued for the proposed changes.[225][226]HP Pavilion dv6-3178ee Laptop Keyboard The U.S. Senate passed a regulatory reform bill in May 2010, following the House which passed a bill in December 2009. These bills must now be reconciled. TheNew York Times provided a comparative summary of the features of the two bills, which address to varying extent the principles enumerated by the Obama administration.[227] For instance, the Volcker Rule against proprietary trading is not part of the legislation, though in the Senate bill regulators have the discretion but not the obligation to prohibit these trades. HP Pavilion dv6-3047eo Laptop Keyboard European regulators introduced Basel III regulations for banks.[228] It increased capital ratios, limits on leverage, narrow definition of capital (to exclude subordinated debt), limit counter-party risk, and new liquidity requirements.[229] Critics argue that Basel III doesn’t address the problem of faulty risk-weightings. TOSHIBA Satellite A305 Laptop Keyboard Major banks suffered losses from AAA-rated created by financial engineering (which creates apparently risk-free assets out of high risk collateral) that required less capital according to Basel II. Lending to AA-rated sovereigns has a risk-weight of zero, thus increasing lending to governments and leading to the next crisis.[230] Johan Norberg argues that regulations (Basel III among others) have indeed led to excessive lending to risky governments (see European sovereign-debt crisis) and the ECB pursues even more lending as the solution.[231]HP 519265-001 Laptop Keyboard At least two major reports were produced by Congress: the Financial Crisis Inquiry Commission report, released January 2011, and a report by the United States Senate Homeland Security Permanent Subcommittee on Investigations entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse (released April 2011). TOSHIBA Satellite M645-S4070 Laptop Keyboard In Iceland in April 2012, the special Landsdómur court convicted former Prime Minister Geir Haarde of mishandling the 2008–2012 Icelandic financial crisis. As of 2012, in the United States, a large volume of troubled mortgages remained in place. It had proved impossible for most homeowners facing foreclosure to refinance or modify their mortgages and foreclosure rates remained high.[236]HP 519265-001 Laptop Keyboard The US recession that began in December 2007 ended in June 2009, according to the U.S. National Bureau of Economic Research (NBER)[237] and the financial crisis appears to have ended about the same time. In April 2009 TIME Magazine declared "More Quickly Than It Began, The Banking Crisis Is Over."[238] The United States Financial Crisis Inquiry Commission dates the crisis to 2008.[239][240] President Barack Obama declared on January 27, 2010, "the markets are now stabilized, and we've recovered most of the money we spent on the banks."[241]HP 636376-001 Laptop Keyboard The New York Times identifies March 2009 as the "nadir of the crisis" and notes that "Most stock markets around the world are at least 75 percent higher than they were then. Financial stocks, which led the markets down, have also led them up." Nevertheless, the lack of fundamental changes in banking and financial markets, worries many market participants, including the International Monetary Fund.[242]HP Envy 15 Laptop Keyboard The financial crises generated many articles and books outside of the scholarly and financial press, including articles and books by author William Greider, economist Michael Hudson, author and former bond salesman Michael Lewis, Kevin Phillips, and investment broker Peter Schiff. DELL NSK-DCK01 Laptop Keyboard In May 2010 premiered Overdose: A Film about the Next Financial Crisis,[243] a documentary about how the financial crisis came about and how the solutions that have been applied by many governments are setting the stage for the next crisis. The film is based on the book Financial Fiasco by Johan Norberg and featuresAlan Greenspan, with funding from the libertarian think tank The Cato Institute. Greenspan is responsible for de-regulating the derivatives market while chairman of the Federal Reserve. HP Mini 110-3135dx Laptop Keyboard In October 2010, a documentary film about the crisis, Inside Job directed by Charles Ferguson, was released by Sony Pictures Classics. It was awarded an Academy Award for Best Documentary of 2010. HP G42-415DX Laptop Keyboard The Glass–Steagall Act is a term often applied to the entire Banking Act of 1933, after its Congressional sponsors, Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama.[1] The term Glass–Steagall Act, however, is most often used to refer to four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms.[2] This article deals with that limited meaning of the Glass–Steagall Act. A separate article describes the entire Banking Act of 1933. HP G42-380TX Laptop Keyboard Starting in the early 1960s federal banking regulators interpreted provisions of the Glass–Steagall Act to permit commercial banks and especially commercial bank affiliates to engage in an expanding list and volume of securities activities.[3] By the time the affiliation restrictions in the Glass–Steagall Act were repealed through the Gramm–Leach–Bliley Act of 1999 (GLBA), many commentators argued Glass–Steagall was already “dead.”[4] Most notably, Citibank’s 1998 affiliation with Salomon Smith Barney, HP Mini 110-3000 CTO Laptop Keyboard one of the largest US securities firms, was permitted under the Federal Reserve Board’s then existing interpretation of the Glass–Steagall Act.[5] President Bill Clinton publicly declared "the Glass–Steagall law is no longer appropriate."[6] Many commentators have stated that the GLBA’s repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the late-2000s financial crisis.[7][8][9] Some critics of that repeal argue it permitted Wall Street investment banking firms to gamble with their depositors' money that was held in affiliated commercial banks.[10]HP Envy 15 Laptop Keyboard  Lenovo 3000 Y500 Laptop Keyboard Others have argued that the activities linked to the financial crisis were not prohibited (or, in most cases, even regulated) by the Glass–Steagall Act.[11]Commentators, including former President Clinton in 2008 and the American Bankers Association in January 2010, have also argued that the ability of commercial banking firms to acquire securities firms (and of securities firms to convert into bank holding companies) helped mitigate the financial crisis.[12]Compaq Presario CQ42-228LA Laptop Keyboard Two separate United States laws are known as the Glass–Steagall Act. Both bills were sponsored by DemocraticSenator Carter Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency. ACER K032130A1 Laptop Keyboard The Glass–Steagall Act of 1932 authorized Federal Reserve Banks to (1) lend to five or more Federal Reserve System member banks on a group basis or to any individual member bank with capital stock of $5 million or less against any satisfactory collateral, not only “eligible paper,” and (2) issue Federal Reserve Bank Notes (i.e.,paper currency) backed by US government securities when a shortage of “eligible paper” held by Federal Reserve banks would have required such currency to be backed by gold.[13] The Federal Reserve Board explained that the special lending to Federal Reserve member banks permitted by the 1932 Glass–Steagall Act would only be permitted in “unusual and temporary circumstances.”[14] TOSHIBA Satellite A305 Laptop Keyboard The entire Banking Act of 1933 (the 1933 Banking Act), which is described in a separate article, is also often referred to as the Glass–Steagall Act.[15] Over time, however, the term Glass–Steagall Act came to be used most often to refer to four provisions of the 1933 Banking Act that separated commercial banking from investment banking.[2] Congressional efforts to “repeal the Glass–Steagall Act” referred to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms).[16] Those efforts culminated in the 1999Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.[17]TOSHIBA Satellite L755-S5246 Laptop Keyboard The article on the 1933 Banking Act describes the legislative history of that Act, including the Glass–Steagall provisions separating commercial and investment banking. As described in that article, between 1930 and 1932 Senator Carter Glass (D-VA) introduced several versions of a bill (known in each version as the Glass bill) to regulate or prohibit the combination of commercial and investment banking and to establish other reforms (except deposit insurance) similar to the final provisions of the 1933 Banking Act.[18] On January 25, 1933, during the lame duck session of Congress following the 1932 elections, TOSHIBA Satellite L755-SP5102CL Laptop Keyboard the Senate passed a version of the Glass bill that would have required commercial banks to eliminate their securities affiliates.[19] The final Glass–Steagall provisions contained in the 1933 Banking Act reduced from five years to one year the period in which commercial banks were required to eliminate such affiliations.[20] Although the deposit insurance provisions of the 1933 Banking Act were very controversial, and drew veto threats from President Franklin Delano Roosevelt, President Roosevelt supported the Glass–Steagall provisions separating commercial and investment banking, and Representative Steagall included those provisions in his House bill that differed from Senator Glass’s Senate bill primarily in its deposit insurance provisions.[21]HP 508112-001 Laptop Keyboard As described in the 1933 Banking Act article, many accounts of the Act identify the Pecora Investigation as important in leading to the Act, particularly its Glass–Steagall provisions, becoming law.[22] While supporters of the Glass–Steagall separation of commercial and investment banking cite the Pecora Investigation as supporting that separation,[23] Glass–Steagall critics have argued that the evidence from the Pecora Investigation did not support the separation of commercial and investment banking.[24]HP Mini 110-1120SL Laptop CPU Cooling Fan The Glass–Steagall Act was primarily directed at restricting banks and their affiliates underwriting or distributing securities. Senator Glass, Representative Steagall, Ferdinand Pecora, and others claimed banks had abused this activity to sell customers (including correspondent banks) high risk securities.[32] As particular “conflicts of interest,” they alleged bank affiliates had underwritten corporate and foreign government bonds to repay loans made by their affiliated banks or, in the opposite direction, banks had lent to or otherwise supported corporations that used the bank’s affiliate to underwrite their bonds.[33]TOSHIBA NB205-N313/P laptop keyboard Sections 16 and 5(c) meant no member bank of the Federal Reserve System could underwrite or distribute corporate or other non-governmental bonds.[25] Sections 20 and 32 meant such a bank could not own (directly or through the same bank holding company) a company “engaged primarily in” such underwriting or other securities activities nor have any director or employee that was also a director or employee of such a company.[34]HP Mini 210-2170nr laptop keyboard Senator Glass, Representative Steagall, and others claimed banks had made too many loans for securities speculation and too many direct bank investments in securities.[35] As described in the article on the Banking Act of 1933, non-“Glass–Steagall” provisions of the 1933 Banking Act restricted those activities.[36]  HP G62-b21SL laptop keyboard Among the Glass–Steagall provisions, Sections 16 and 5(c) prevented a Federal Reserve member bank from investing in equity securities[37] or from “dealing” in debt securities as a market maker or otherwise.[38] Section 16 permitted national banks (and Section 5(c) permitted state member banks) to purchase for their own accounts “marketable” debt securities that were “investment securities” approved by the Comptroller of the Currency. The Comptroller interpreted this to mean marketable securities rated “investment grade” by the rating agencies or, if not rated, a security that is the “credit equivalent.”[38]HP Pavilion dv6-2174ca laptop keyboard Even before Glass–Steagall, however, national banks had been prohibited from investing in equity securities and could only purchase as investments debt securities approved by the Comptroller. Section 16’s major change was (through the Comptroller’s interpretation) to limit the investments to “investment grade” debt and to repeal the McFadden Act permission for national banks to act as “dealers” in buying and selling debt securities. Section 5(c) applied these national bank restrictions to state chartered banks that were members of the Federal Reserve System.[39]SONY VAIO VGN-FS195VP laptop keyboard Section 16 itself required banks to purchase only “marketable” securities, so that it contemplated (and required) that the securities be traded in a liquid market. The Office of the Comptroller, like the Securities and Exchange Commission, distinguished between a “trader” and a “dealer.” A “trader” buys and sells securities “opportunistically” HP AETT9U00010 Laptop Keyboard based on when it thinks prices are low or high. A “dealer” buys and sells securities with customers to provide “liquidity” or otherwise provides buy and sell prices “on a continuous basis” as a market maker or otherwise.[40]The Comptroller of the Currency, therefore, ruled that Section 16 permitted national banks to engage in “proprietary trading” of “investment securities” for which it could not act as a “dealer.”[41] Thus, Glass–Steagall permitted “banks to invest in and trade securities to a significant extent” and did not restrict trading by bank affiliates, although the Bank Holding Company Act did restrict investments by bank affiliates.[42]TOSHIBA Satellite L505-S6959 laptop keyboard None of these prohibitions applied to “bank-eligible securities” (i.e., US government and state general obligation securities). Banks were free to underwrite, distribute, and deal in such securities.[25] As explained in the article on the Banking Act of 1933, if the 1933 Banking Act had not been amended, it would have required all federally insured banks to become members of the Federal Reserve System.[43] Instead, because that requirement was removed through later legislation, the United States retained a dual banking system in which a large number of state chartered banks remained outside the Federal Reserve System.[44] This meant they were also outside the restrictions of Sections 16, 20, and 32 of the Glass–Steagall Act.[45] As described below, this became important in the 1980s when commentators worried large commercial banks would leave the Federal Reserve System to avoid Glass–Steagall’s affiliation restrictions.[46]HP Pavilion dm3-1020CA Laptop Keyboard Although Section 21 of the Glass–Steagall Act was directed at preventing securities firms (particularly traditional private partnerships such as J.P. Morgan & Co.) from accepting deposits, it prevented any firm that accepted deposits from underwriting or dealing in securities (other than “bank-eligible securities” after the 1935 Banking Act’s “clarification”). This meant Section 21, unlike the rest of Glass–Steagall, applied to savings and loans and other “thrifts,” state nonmember banks, and any other firm or individual in the business of taking deposits.[28] This prevented such “depository institutions” from being securities firms. SONY VAIO VGN-FS415M Laptop Keyboard It did not prevent securities firms, such as Merrill Lynch, from owning separate subsidiaries that were thrifts or state chartered, non-Federal Reserve member banks.[47] As described below, this became important when securities firms used “unitary thrifts” and “nonbank banks” to avoid both Glass–Steagall affiliation restrictions and holding company laws that generally limited bank holding companies to banking businesses[48] and savings and loan holding companies to thrift businesses.[49]SONY VAIO VGN-AR570 Laptop Keyboard Section 21 was not the only Glass–Steagall provision that treated differently what a company could do directly and what it could do through a subsidiary or other affiliate. As described in the Banking Act of 1933 article, Senator Glass and other proponents of separating commercial banks from investment banking attacked the artificiality of distinguishing between banks and their securities affiliates.[50] Sections 20[27] and 32[29] of the Glass–Steagall Act, however, distinguished between what a bank could do directly and what an affiliated company could do.[51]SAMSUNG R522 Laptop Keyboard No bank covered by Section 16’s prohibitions could buy, sell, underwrite, or distribute any security except as specifically permitted by Section 16.[25] Under Section 21, no securities firm (understood as a firm “in the business” of underwriting, distributing, or dealing in securities) could accept any deposit.[28]ACER Aspire 5742 Laptop Keyboard Glass–Steagall’s affiliation provisions did not contain such absolute prohibitions. Section 20 only prohibited a bank from affiliating with a firm “engaged principally” in underwriting, distributing, or dealing in securities.[27] Under Section 32, a bank could not share employees or directors with a company “primarily engaged” in underwriting, distributing, or dealing in securities.[29] Lenovo ThinkPad Edge E520 Laptop Keyboard This difference (which would later be termed a “loophole”) provided the justification for the “long demise of Glass–Steagall” through regulatory actions that largely negated the practical significance of Sections 20 and 32 before they were repealed by the GLBA.[1] The fact Sections 16, 20, and 32 only restricted Federal Reserve member banks was another feature that made the Glass–Steagall Act less than “comprehensive” and, in the words of a 1987 commentator, provided “opportunities for banking institutions and their lawyers to explore (or, perhaps more accurately, to exploit).”[52]SONY 147915321 Laptop Keyboard President John F. Kennedy’s appointee as Comptroller of the Currency, James J. Saxon, was the next public official to challenge seriously Glass–Steagall’s prohibitions. As the regulator of national banks, Saxon was concerned with the competitive position of commercial banks. In 1950 commercial banks held 52% of the assets of US financial institutions. By 1960 that share had declined to 38%. Saxon wanted to expand the powers of national banks.[59]HP 636191-001 Laptop Keyboard In 1963, the Saxon-led Office of the Comptroller of the Currency (OCC) issued a regulation permitting national banks to offer retail customers “commingled accounts” holding common stocks and other securities.[60] This amounted to permitting banks to offer mutual funds to retail customers.[61] Saxon also issued rulings that national banks could underwrite municipal revenue bonds.[62] Courts ruled that both of these actions violated Glass–Steagall.[63]ACER Aspire 5810T-8929 Laptop Keyboard In rejecting bank sales of accounts that functioned like mutual funds, the Supreme Court explained in Investment Company Institute v. Camp that it would have given “deference” to the OCC’s judgment if the OCC had explained how such sales could avoid the conflicts of interest and other “subtle hazards” Glass–Steagall sought to prevent and that could arise when a bank offered a securities product to its retail customers.[64] Lenovo ThinkPad Edge E520 Laptop Keyboard Courts later applied this aspect of theCamp ruling to uphold interpretations of Glass–Steagall by federal banking regulators.[3] As in the Camp case, these interpretations by bank regulators were routinely challenged by the mutual fund industry through the Investment Company Institute or the securities industry through the Securities Industry Associationas they sought to prevent competition from commercial banks.[65]COMPAQ Presario CQ40-117TU Laptop Keyboard Commercial banks withdrew from the depressed securities markets of the early 1930s even before the Glass–Steagall prohibitions on securities underwriting and dealing became effective.[53] Those prohibitions, however were controversial. A 1934 study of commercial bank affiliate underwriting of securities in the 1920s found such underwriting was not better than the underwriting by firms that were not affiliated with banks. That study disputed Glass–Steagall critics who suggested securities markets had been harmed by prohibiting commercial bank involvement.[54] A 1942 study also found that commercial bank affiliate underwriting was not better (or worse) than nonbank affiliate underwriting, but concluded this meant it was a “myth” commercial bank securities affiliates had taken advantage of bank customers to sell “worthless securities.”[55] Compaq Presario C769US Laptop CPU Cooling Fan Senator Glass’s “repeal” effort In 1935 Senator Glass attempted to repeal the Glass–Steagall prohibition on commercial banks underwriting corporate securities. Glass stated Glass–Steagall had unduly damaged securities markets by prohibiting commercial bank underwriting of corporate securities.[56] The first Senate passed version of the Banking Act of 1935 included Glass’s revision to Section 16 of the Glass–Steagall Act to permit bank underwriting of corporate securities subject to limitations and regulations.[57] DELL Studio 1450 Laptop CPU Cooling Fan President Roosevelt opposed this revision to Section 16 and wrote Glass that “the old abuses would come back if underwriting were restored in any shape, manner, or form.” In the conference committee that reconciled differences between the House and Senate passed versions of the Banking Act of 1935, Glass’s language amending Section 16 was removed.[58]HP Mini 110-1100SL Laptop CPU Cooling Fan Regulation Q limits on interest rates for time deposits at commercial banks, authorized by the 1933 Banking Act, first became “effective” in 1966 when market interest rates exceeded those limits.[66] This produced the first of several “credit crunches” during the late 1960s and throughout the 1970s as depositors withdrew funds from banks to reinvest at higher market interest rates.[67] Toshiba Satellite L645D-S4052 Laptop CPU Cooling Fan When this “disintermediation” limited the ability of banks to meet the borrowing requests of all their corporate customers, some commercial banks helped their “best customers” establish programs to borrow directly from the “capital markets” by issuing commercial paper.[68] Over time, commercial banks were increasingly left with lower credit quality, or more speculative, corporate borrowers that could not borrow directly from the “capital markets.”[69]SONY Vaio VGN-NW310F/B Laptop CPU Cooling Fan Eventually, even lower credit quality corporations and (indirectly through “securitization”) consumers were able to borrow from the capital markets as improvements in communication and information technology allowed investors to evaluate and invest in a broader range of borrowers.[70] Banks began to finance residential mortgages through securitization in the late 1970s.[71] During the 1980s banks and other lenders used securitizations to provide “capital markets” funding for a wide range of assets that previously had been financed by bank loans.[72] In losing “their preeminent status as expert intermediaries for the collection, processing, and analysis of information relating to extensions of credit”, banks were increasingly “bypassed” as traditional “depositors” invested in securities that replaced bank loans.[73]HP Pavilion dv5-2147la Laptop CPU Cooling Fan In 1977 Merrill Lynch introduced a “cash management account” that allowed brokerage customers to write checks on funds held in a money market account or drawn from a “line of credit” Merrill provided.[74] The Securities and Exchange Commission (SEC) had ruled that money market funds could “redeem” investor shares at a $1 stable “net asset value” despite daily fluctuations in the value of the securities held by the funds. This allowed money market funds to develop into “near money” as “investors” wrote checks (“redemption orders”) on these accounts much as “depositors” wrote checks on traditional checking accounts provided by commercial banks.[75] Compaq Presario C755EF Laptop CPU Cooling Fan Also in the 1970s savings and loans, which were not restricted by Glass–Steagall other than Section 21,[47] were permitted to offer “negotiable order of withdrawal accounts” (NOW accounts). As with money market accounts, these accounts functioned much like checking accounts in permitting a depositor to order payments from a “savings account.”[76]HP Envy 15 Laptop Keyboard Helen Garten concluded that the “traditional regulation” of commercial banks established by the 1933 Banking Act, including Glass–Steagall, failed when nonbanking firms and the “capital markets” were able to provide replacements for bank loans and deposits, thereby reducing the profitability of commercial banking.[77] While he agreed traditional bank regulation was unable to protect commercial banks from nonbank competition, Richard Vietor also noted that the economic and financial instability that began in the mid-1960s both slowed economic growth and savings (reducing the demand for and supply of credit) and induced financial innovations that undermined commercial banks.[78]TOSHIBA Satellite L200 laptop keyboard Hyman Minsky agreed financial instability had returned in 1966 and had only been constrained in the following 15 years through Federal Reserve Board engineered “credit crunches” to combat inflation followed by “lender of last resort” rescues of asset prices that produced new inflation. Minsky described ever worsening periods of inflation followed by unemployment as the cycle of rescues followed by credit crunches was repeated.[67] Minsky, however, supported traditional banking regulation[79]  Lenovo 45N2240 laptop keyboard and advocated further controls of finance to “promote smaller and simpler organizations weighted more toward direct financing.”[80] Writing from a similar “neo-Keynesian perspective, Jan Kregel concluded that after World War II non-regulated financial companies, supported by regulatory actions, developed means to provide bank products (“liquidity and lending accommodation”) more cheaply than commercial banks through the “capital markets.”[81] Kregel argued this led banking regulators to eliminate Glass–Steagall restrictions to permit banks to “duplicate these structures” using the capital markets “until there was virtually no difference in the activities of FDIC-insured commercial banks and investment banks.”[82]Acer eMachines G730Z laptop keyboard Comptroller Saxon had feared for the competitive viability of commercial banks in the early 1960s.[59] The “capital markets” developments in the 1970s increased the vulnerability of commercial banks to nonbank competitors. As described below, this competition would increase in the 1980s.[83]Packard Bell PEW72 laptop keyboard In 1967 the Senate passed the first of several Senate passed bills that would have revised Glass–Steagall Section 16 to permit banks to underwrite municipal revenue bonds.[84] In 1974 the OCC authorized national banks to provide “automatic investment services,” which permitted bank customers to authorize regular withdrawals from a deposit account to purchase identified securities.[85] In 1977 the Federal Reserve Board staff concluded Glass–Steagall permitted banks toprivately place commercial paper. In 1978 Bankers Trust began making such placements.[86] As described below, in 1978, the OCC authorized a national bank to privately place securities issued to sell residential mortgages in a securitization[87]Packard Bell NEW95 laptop keyboard Commercial banks, however, were frustrated with the continuing restrictions imposed by Glass–Steagall and other banking laws.[88] After many of Comptroller Saxon’s decisions granting national banks greater powers had been challenged or overturned by courts, commercial banking firms had been able to expand their non-securities activities through the “one bank holding company.”[89] Because the Bank Holding Company Act only limited nonbanking activities of companies that owned two or more commercial banks, “Lenovo 04W0872 laptop keyboard one bank holding companies” could own interests in any type of company other than securities firms covered by Glass–Steagall Section 20. That “loophole” in the Bank Holding Company Act was closed by a 1970 amendment to apply the Act to any company that owned a commercial bank.[90] Commercial banking firm’s continuing desire for greater powers received support when Ronald Reagan became President and appointed banking regulators who shared an “attitude towards deregulation of the financial industry.”[91]Packard Bell PEW91 laptop keyboard In 1982, under the chairmanship of William Isaac, the FDIC issued a “policy statement” that state chartered non-Federal Reserve member banks could establish subsidiaries to underwrite and deal in securities. Also in 1982 the OCC, under Comptroller C. Todd Conover, approved the mutual fund company Dreyfus Corporationand the retailer Sears establishing “nonbank bank” subsidiaries that were not covered by the Bank Holding Company Act. The Federal Reserve Board, led by Chairman Paul Volcker, asked Congress to overrule both the FDIC’s and the OCC’s actions through new legislation.[92]TOSHIBA NB205-N313/P laptop keyboard The FDIC’s action confirmed that Glass–Steagall did not restrict affiliations between a state chartered non-Federal Reserve System member bank and securities firms, even when the bank was FDIC insured.[45] State laws differed in how they regulated affiliations between banks and securities firms.[93] In the 1970s, foreign banks had taken advantage of this in establishing branches in states that permitted such affiliations.[94] Although the International Banking Act of 1978 brought newly established foreign bank US branches under Glass–Steagall, foreign banks with existing US branches were “grandfathered” and permitted to retain their existing investments. Through this “loophole” Credit Suisse was able to own a controlling interest in First Boston, a leading US securities firm.[95]Lenovo 45N2071 Laptop Keyboard After the FDIC’s action, commentators worried that large commercial banks would leave the Federal Reserve System (after first converting to a state charter if they were national banks) to free themselves from Glass–Steagall affiliation restrictions, as large commercial banks lobbied states to permit commercial bank investment banking activities.[46]ACER K032130A1 Laptop Keyboard The OCC’s action relied on a “loophole” in the Bank Holding Company Act (BHCA) that meant a company only became a “bank holding company” supervised by the Federal Reserve Board if it owned a “bank” that made “commercial loans” (i.e., loans to businesses) and provided “demand deposits” (i.e., checking accounts). A “nonbank bank” could be established to provide checking accounts (but not commercial loans) or commercial loans (but not checking accounts). The company owning the nonbank bank would not be a bank holding company limited to activities “closely related to banking.” This permitted Sears, GE, and other commercial companies to own “nonbank banks.”[48]DELL V-0604BIAS1-US Laptop Keyboard Glass–Steagall’s affiliation restrictions applied if the nonbank bank was a national bank or otherwise a member of the Federal Reserve System. The OCC’s permission for Dreyfus to own a nationally chartered “nonbank bank” was based on the OCC’s conclusion that Dreyfus, as a mutual fund company, earned only a small amount of its revenue through underwriting and distributing shares in mutual funds. Two other securities firms, J. & W. Seligman & Co. and Prudential-Bache, established state chartered non-Federal Reserve System member banks to avoid Glass–Steagall restrictions on affiliations between member banks and securities firms.[96]HP 576835-001 Laptop Keyboard Although Paul Volcker and the Federal Reserve Board sought legislation overruling the FDIC and OCC actions, they agreed bank affiliates should have broader securities powers. They supported a bill sponsored by Senate Banking Committee Chairman Jake Garn (R-UT) that would have amended Glass–Steagall Section 20 to cover all FDIC insured banks and to permit bank affiliates to underwrite and deal in mutual funds, municipal revenue bonds, commercial paper, and mortgage-backed securities. On September 13, 1984, the Senate passed the Garn bill in an 89-5 vote, but the Democratic controlled House did not act on the bill.[97]TOSHIBA Satellite L775-S7245 Laptop Keyboard In 1987, however, the Senate (with a new Democratic Party majority) joined with the House in passing the Competitive Equality Banking Act of 1987 (CEBA). Although primarily dealing with the savings and loan crisis, CEBA also established a moratorium to March 1, 1988, on banking regulator actions to approve bank or affiliate securities activities, applied the affiliation restrictions of Glass–Steagall Sections 20 and 32 to all FDIC insured banks during the moratorium, and eliminated the “nonbank bank” loophole for new FDIC insured banks (whether they took demand deposits or made commercial loans) except industrial loan companies. Existing “nonbank banks”, however, were “grandfathered” so that they could continue to operate without becoming subject to BHCA restrictions.[98]HP Compaq G50-126NR Laptop Keyboard The CEBA was intended to provide time for Congress (rather than banking regulators) to review and resolve the Glass–Steagall issues of bank securities activities. Senator William Proxmire (D-WI), the new Chairman of the Senate Banking Committee, took up this topic in 1987.[99]DELL NSK-D8001 Laptop Keyboard Wolfgang Reinicke argues that Glass–Steagall “repeal” gained unexpected Congressional support in 1987 because large banks successfully argued that Glass–Steagall prevented US banks from competing internationally.[100] With the argument changed from preserving the profitability of large commercial banks to preserving the “competitiveness” of US banks (and of the US economy), Senator Proxmire reversed his earlier opposition to Glass–Steagall reform.[101] Proxmire sponsored a bill that would have repealed Glass–Steagall Sections 20 and 32 and replaced those prohibitions with a system for regulating (and limiting the amount of) bank affiliate securities activities.[102] He declared Glass–Steagall a “protectionist dinosaur.”[103]HP G42-415DX Laptop Keyboard By 1985 commercial banks provided 26% of short term loans to large businesses compared to 59% in 1974. While banks cited such statistics to illustrate the “decline of commercial banking,” Reinicke argues the most influential factor in Congress favoring Glass–Steagall “repeal” was the decline of US banks in international rankings. In 1960 six of the ten largest banks were US based, by 1980 only two US based banks were in the top ten, and by 1989 none was in the top twenty five.[83]DELL Vostro 3450 Laptop Keyboard In the late 1980s the United Kingdom and Canada ended their historic separations of commercial and investment banking.[104] Glass–Steagall critics scornfully noted only Japanese legislation imposed by Americans during the Occupation of Japan kept the United States from being alone in separating the two activities.[105]SONY VAIO PCG-FR315M Laptop Keyboard As noted above, even in the United States seventeen foreign banks were free from this Glass–Steagall restriction because they had established state chartered branches before the International Banking Act of 1978 brought newly established foreign bank US branches under Glass–Steagall.[95] Similarly, because major foreign countries did not separate investment and commercial banking, US commercial banks could underwrite and deal in securities through branches outside the United States. Paul Volcker agreed that, “broadly speaking,” it made no sense that US commercial banks could underwrite securities in Europe but not in the United States.[106]Compaq 6720s Laptop Keyboard Throughout the 1980s and 1990s scholars published studies arguing that commercial bank affiliate underwriting during the 1920s was no worse, or was better, than underwriting by securities firms not affiliated with banks and that commercial banks were strengthened, not harmed, by securities affiliates.[107] More generally, researchers attacked the idea that “integrated financial services firms” had played a role in creating the Great Depression or the collapse of the US banking system in the 1930s.[108] If it was “debatable” whether Glass–Steagall was justified in the 1930s, it was easier to argue that Glass–Steagall served no legitimate purpose when the distinction between commercial and investment banking activities had been blurred by “market developments” since the 1960s.[109]HP Pavilion dv3-2106tu Laptop Keyboard Along with the “nonbank bank” “loophole” from BHCA limitations, in the 1980s the “unitary thrift” “loophole” became prominent as a means for securities and commercial firms to provide banking (or “near banking”) products.[110] The Savings and Loan Holding Company Act (SLHCA) permitted any company to own a single savings and loan. Only companies that owned two or more savings and loan were limited to thrift related businesses.[49] Already in 1973 First Chicago Bankhad identified Sears as its real competitor.[111]Citicorp CEO Walter Wriston reached the same conclusion later in the 1970s.[112] By 1982, using the “unitary thrift” and “nonbank bank” “loopholes,” ACER Aspire 5610Z Laptop Keyboard

> Sears had built the “Sears Financial Network”, which combined “Super NOW” accounts and mortgage loans through a large California-based savings and loan, the Discover Card issued by a “nonbank bank” as a credit card, securities brokerage through Dean Witter Reynolds, home and auto insurance through Allstate, and real estate brokerage through Coldwell Banker.[113] By 1984, however, Walter Wriston concluded “the bank of the future already exists, and it’s called Merrill Lynch.”[114] In 1986 when major bank holding companies threatened to stop operating commercial banks in order to obtain the “competitive advantages” enjoyed by Sears and Merrill Lynch, FDIC Chairman William Seidman warned that could create “chaos.”[115]TOSHIBA Mini NB 505-SP0160 Laptop Keyboard In a 1987 “issue brief” the Congressional Research Service (CRS) summarized “some of” the major arguments Reflecting the significance of the “international competitiveness” argument, a separate CRS Report stated banks were “losing historical market shares of their major activities to domestic and foreign competitors that are less restricted.”[117]Lenovo 45N2036 laptop keyboard Separately, the General Accounting Office (GAO) submitted to a House subcommittee a report reviewing the benefits and risks of “Glass–Steagall repeal.” The report recommended a “phased approach” using a “holding company organizational structure” if Congress chose “repeal.” Noting Glass–Steagall had “already been eroded and the erosion is likely to continue in the future,” the GAO explained “coming to grips with the Glass–Steagall repeal question represents an opportunity to systematically and rationally address changes in the regulatory and legal structure that are needed to better address the realities of the marketplace.” The GAO warned that Congress’s failure to act was “potentially dangerous” in permitting a “continuation of the uneven integration of commercial and investment banking activities.”[118]SONY VAIO VPCF126FM Laptop Keyboard As Congress was considering the Proxmire Financial Modernization Act in 1988, the Commission of the European Communities proposed a “Second Banking Directive”[119] that became effective at the beginning of 1993 and provided for the combination of commercial and investment banking throughout the European Economic Community.[120] Whereas United States law sought to isolate banks from securities activities, the Second Directive represented the European Union’s conclusion that securities activities diversified bank risk, strengthening the earnings and stability of banks.[121]ACER Aspire 7736ZG Laptop Keyboard The Senate passed the Proxmire Financial Modernization Act of 1988 in a 94-2 vote. The House did not pass a similar bill, largely because of opposition from Representative John Dingell (D-MI), chairman of the House Commerce and Energy Committee.[122]DELL 0454RX Laptop Keyboard In April 1987, the Federal Reserve Board had approved the bank holding companies Bankers Trust, Citicorp, and J.P. Morgan & Co. establishing subsidiaries (“Section 20 affiliates”) to underwrite and deal in residential mortgage-backed securities, municipal revenue bonds, and commercial paper. Glass–Steagall’s Section 20 prohibited a bank from affiliating with a firm “primarily engaged” in underwriting and dealing in securities. The Board decided this meant Section 20 permitted a bank affiliate to earn 5% of its revenue from underwriting and dealing in these types of securities that were not “bank-eligible securities,” HP Envy 15 Laptop Keyboard subject to various restrictions including “firewalls” to separate a commercial bank from its Section 20 affiliate.[123] Three months later the Board added “asset-backed securities” backed by pools of credit card accounts or other “consumer finance assets” to the list of “bank-ineligible securities” a Section 20 affiliate could underwrite. Bank holding companies, not commercial banks directly, owned these Section 20 affiliates.[124]TOSHIBA Satellite L775-S7245 Laptop Keyboard In 1978 the Federal Reserve Board had authorized bank holding companies to establish securities affiliates that underwrote and dealt in government securities and other bank-eligible securities.[125] Federal Reserve Board Chairman Paul Volcker supported Congress amending Glass–Steagall to permit such affiliates to underwrite and deal in a limited amount of bank-ineligible securities, but not corporate securities.[126] In 1987, Volcker specifically noted (and approved the result) that this would mean only banks with large government securities activities would be able to have affiliates that would underwrite and deal in a significant volume of “bank-ineligible securities.”[127]HP Pavilion DV7-3065dx Laptop Keyboard A Section 20 affiliate with a large volume of government securities related revenue would be able to earn a significant amount of “bank-ineligible” revenue without having more than 5% of its overall revenue come from bank-ineligible activities.[128] Volcker disagreed, however, that the Board had authority to permit this without an amendment to the Glass–Steagall Act. Citing that concern, Volcker and fellow Federal Reserve Board Governor Wayne Angell dissented from the Section 20 affiliate orders.[129] HP Mini 110-3135dx Laptop Keyboard Senator Proxmire criticized the Federal Reserve Board’s Section 20 affiliate orders as defying Congressional control of Glass–Steagall. The Board’s orders meant Glass–Steagall did not prevent commercial banks from affiliating with securities firms underwriting and dealing in “bank-ineligible securities,” so long as the activity was “executed in a separate subsidiary and limited in amount.”[130]SONY VAIO VGN-CS31S/V Laptop Keyboard After the Proxmire Financial Modernization Act of 1988 failed to become law, Senator Proxmire and a group of fellow Democratic senior House Banking Committeemembers (including future Committee Ranking Member John LaFalce (D-NY) and future Committee Chairman Barney Frank (D-MA)) wrote the Federal Reserve Board recommending it expand the underwriting powers of Section 20 affiliates.[131] Expressing sentiments that Representative James A. Leach (R-IA) repeated in 1996,[132] Proxmire declared “Congress has failed to do the job” and “[n]ow it’s time for the Fed to step in.”[133]HP Envy 15 Laptop Keyboard Following Senator Proxmire’s letter, in 1989 the Federal Reserve Board approved Section 20 affiliates underwriting corporate debt securities and increased from 5% to 10% the percentage of its revenue a Section 20 affiliate could earn from “bank-ineligible” activities. In 1990 the Board approved J.P. Morgan & Co.underwriting corporate stock. With the commercial (J.P. Morgan & Co.) and investment (Morgan Stanley) banking arms of the old “House of Morgan” both underwriting corporate bonds and stocks, Wolfgang Reinicke concluded the Federal Reserve Board order meant both firms now competed in “a single financial market offering both commercial and investment banking products,” which “Glass–Steagall sought to rule out.” Reinicke described this as “de facto repeal of Glass–Steagall.”[134]COMPAQ Presario C700 Laptop Keyboard No Federal Reserve Board order was necessary for Morgan Stanley to enter that “single financial market.” Glass–Steagall only prohibited investment banks from taking deposits, not from making commercial loans, and the prohibition on taking deposits had “been circumvented by the development of deposit equivalents”, such as the money market fund.[135] Glass–Steagall also did not prevent investment banks from affiliating with nonbank banks[48] or savings and loans.[49][136]DELL PVDG3 Laptop Keyboard Citing this competitive “inequality,” before the Federal Reserve Board approved any Section 20 affiliates, four large bank holding companies that eventually received Section 20 affiliate approvals (Chase, J.P. Morgan, Citicorp, and Bankers Trust) had threatened to give up their banking charters if they were not given greater securities powers.[137] Following the Federal Reserve Board’s approvals of Section 20 affiliates a commentator concluded that the Glass–Steagall “wall” between commercial banking and “the securities and investment business” was “porous” for commercial banks and “nonexistent to investment bankers and other nonbank entities.”[138]TOSHIBA Satellite L750-ST4N02 Laptop Keyboard Alan Greenspan had replaced Paul Volcker as Chairman of the Federal Reserve Board when Proxmire sent his 1988 letter recommending the Federal Reserve Board expand the underwriting powers of Section 20 affiliates. Greenspan testified to Congress in December 1987, that the Federal Reserve Board supported Glass–Steagall repeal.[139] Although Paul Volcker “had changed his position” on Glass–Steagall reform “considerably” during the 1980s, he was still “considered a conservative among the board members.” With Greenspan as Chairman, the Federal Reserve Board “spoke with one voice” in joining the FDIC and OCC in calling for Glass–Steagall repeal.[140]TOSHIBA NB100-11G Laptop Keyboard By 1987 Glass–Steagall “repeal” had come to mean repeal of Sections 20 and 32. The Federal Reserve Board supported “repeal” of Glass–Steagall “insofar as it prevents bank holding companies from being affiliated with firms engaged in securities underwriting and dealing activities.”[141] The Board did not propose repeal of Glass Steagall Section 16 or 21. Bank holding companies, through separately capitalized subsidiaries, not commercial banks themselves directly, would exercise the new securities powers.[16]HP Envy 15 Laptop Keyboard Banks and bank holding companies had already gained important regulatory approvals for securities activities before Paul Volcker retired as Chairman of the Federal Reserve Board on August 11, 1987.[142] Aside from the Board’s authorizations for Section 20 affiliates and for bank private placements of commercial paper, by 1987 federal banking regulators had authorized banks or their affiliates to (1) sponsor closed end investment companies,[143] (2) sponsor mutual funds sold to customers in individual retirement accounts,[144] (3) provide customers full service brokerage (i.e., advice and brokerage),[145] and (4) sell bank assets through “securitizations.”[146]HP 636376-001 Laptop Keyboard In 1982 E. Gerald Corrigan, president of the Federal Reserve Bank of Minneapolis and a close Volcker colleague, published an influential essay titled “Are banks special?” in which he argued banks should be subject to special restrictions on affiliations because they enjoy special benefits (e.g., deposit insurance and Federal Reserve Bank loan facilities) and have special responsibilities (e.g., operating the payment system and influencing the money supply). The essay rejected the argument that it is “futile and unnecessary” to distinguish among the various types of companies in the “financial services industry.”[147]DELL Vostro 1014 Laptop Keyboard While Paul Volcker’s January 1984, testimony to Congress repeated that banks are “special” in performing “a unique and critical role in the financial system and the economy,” he still testified in support of bank affiliates underwriting securities other than corporate bonds.[126] In its 1986 Annual Report the Volcker led Federal Reserve Board recommended that Congress permit bank holding companies to underwrite municipal revenue bonds, mortgage-backed securities, commercial paper, and mutual funds and that Congress “undertake hearings or other studies in the area of corporate underwriting.”[148] As described above, in the 1930s Glass–Steagall advocates had alleged that bank affiliate underwriting of corporate bonds created “conflicts of interest.”[33]TOSHIBA Mini NB 505-SP0160 Laptop Keyboard In early 1987 E. Gerald Corrigan, then president of the Federal Reserve Bank of New York, recommended a legislative “overhaul” to permit “financial holding companies” that would “in time” provide banking, securities, and insurance services (as authorized by the GLBA 12 years later).[149] In 1990 Corrigan testified to Congress that he rejected the “status quo” and recommended allowing banks into the “securities business” through financial service holding companies.[150]HP Pavilion dm1-1010st Laptop Keyboard In 1991 Paul Volcker testified to Congress in support of the Bush Administration proposal to repeal Glass–Steagall Sections 20 and 32.[151] Volcker rejected the Bush Administration proposal to permit affiliations between banks and commercial firms (i.e., non-financial firms) and added that legislation to allow banks greater insurance powers “could be put off until a later date.”[152]Compaq Presario CQ42-228LA Laptop Keyboard Paul Volcker gave his 1991 testimony as Congress considered repealing Glass–Steagall sections 20 and 32 as part of a broader Bush Administration proposal to reform financial regulation.[153] In reaction to “market developments” and regulatory and judicial decisions that had “homogenized” commercial and investment banking, Representative Edward J. Markey (D-MA) had written a 1990 article arguing “Congress must amend Glass–Steagall.”[154] As chairman of a subcommittee of the House Commerce and Energy Committee, TOSHIBA Satellite l25-s1216 laptop keyboard Markey had joined with Committee Chairman Dingell in opposing the 1988 Proxmire Financial Modernization Act. In 1990, however, Markey stated Glass–Steagall had “lost much of its effectiveness” through market, regulatory, and judicial developments that were “tantamount to an ill-coordinated, incremental repeal” of Glass–Steagall. To correct this “disharmony” Markey proposed replacing Glass–Steagall’s “prohibitions” with “regulation.”[155] After the House Banking Committee approved a bill repealing Glass–Steagall Sections 20 and 32, HP Mini 210-2130nr laptop keyboard HP Mini 210-2006sa laptop keyboard Representative Dingell again stopped House action. He reached agreement with Banking Committee Chairman Henry B. Gonzalez (D-TX) to insert into the bill “firewalls” that banks claimed would prevent real competition between banks and securities firms.[156] The banking industry strongly opposed the bill in that form, and the House rejected it. The House debate revealed that Congress might agree on repealing Sections 20 and 32 while being divided on how bank affiliations with securities firms should be regulated.[157]TOSHIBA Satellite L775D-S7206 laptop keyboard In 1978 Bank of America issued the first residential mortgage-backed security that securitized residential mortgages not guaranteed by a government-sponsored enterprise (“private label RMBS”).[71] Also in 1978, the OCC approved a national bank, such as Bank of America, issuing pass-through certificates representing interests in residential mortgages and distributing such mortgage-backed securities to investors in a private placement.[87SONY VAIO VGN-NW Series laptop keyboard In 1987 the OCC ruled that Security Pacific Bank could “sell” assets through “securitizations” that transferred “cash flows” from those assets to investors and also distribute in a registered public offering the residential mortgage-backed securities issued in the securitization.[159] This permitted commercial banks to acquire assets for “sale” through securitizations under what later became termed the “originate to distribute” model of banking.[160]  Lenovo ThinkPad Edge E520 laptop keyboard The OCC ruled that a national bank’s power to sell its assets meant a national bank could sell a pool of assets in a securitization, and even distribute the securities that represented the sale, as part of the “business of banking.”[161] This meant national banks could underwrite and distribute securities representing such sales, even though Glass–Steagall would generally prohibit a national bank underwriting or distributing non-governmental securities (i.e., non-“bank-eligible” securities).[162] The federal courts upheld the OCC’s approval of Security Pacific’s securitization activities, Packard Bell Easynote TK85 laptop keyboard with the Supreme Courtrefusing in 1990 to review a 1989 Second Circuit decision sustaining the OCC’s action. In arguing that the GLBA’s “repeal” of Glass–Steagall played no role in the late-2000s financial crisis, Melanie Fein notes courts had confirmed by 1990 the power of banks to securitize their assets under Glass–Steagall.[163]Packard Bell PEW91 laptop keyboard The Second Circuit stated banks had been securitizing their assets for “ten years” before the OCC’s 1987 approval of Security Pacific’s securitization.[164]As noted above, the OCC had approved such activity in 1978.[87] Jan Kregel argues that the OCC’s interpretation of the “incidental powers” of national banks “ultimately eviscerated Glass–Steagall.”[128]SONY VAIO VGN-CS115J/R laptop keyboard Continental Illinois Bank is often credited with issuing the first collateralized debt obligation (CDO) when, in 1987, it issued securities representing interests in a pool of “leveraged loans.”[165] By the late 1980s Citibank had become a major provider of “subprime” mortgages and credit cards.[166] Arthur Wilmarth argued that the ability to securitize such credits encouraged banks to extend more “subprime” credit.[167] Wilmarth reported that during the 1990s credit card loans increased at a faster pace for lower-income households than higher-income households and that subprime mortgage loan volume quadrupled from 1993–99, before the GLBA became effective in 2000.[168] HP Mini 311-1042TU laptop keyboard In 1995 Wilmarth noted that commercial bank mortgage lenders differed from nonbank lenders in retaining “a significant portion of their mortgage loans” rather than securitizing the entire exposure.[169] Wilmarth also shared the bank regulator concern that commercial banks sold their “best assets” in securitizations and retained their riskiest assets.[170]Packard Bell PEW91 laptop keyboard In the early 1980s commercial banks established asset backed commercial paper conduits (ABCP conduits) to finance corporate customer receivables. The ABCP conduit purchased receivables from the bank customer and issued asset-backed commercial paper to finance that purchase. The bank “advising” the ABCP conduit provided loan commitments and “credit enhancements” that supported repayment of the commercial paper. Because the ABCP conduit was owned by a third party unrelated to the bank, it was not an affiliate of the bank.[171] Through ABCP conduits banks could earn “fee income” and meet “customers’ needs for credit” without “the need to maintain the amount of capital that would be required if loans were extended directly” to those customers.[172]Lenovo 45N2141 laptop keyboard By the late 1980s Citibank had established ABCP conduits to buy securities. Such conduits became known as structured investment vehicles (SIVs).[173] The SIV’s “arbitrage” opportunity was to earn the difference between the interest earned on the securities it purchased and the On January 4, 1995, the new Chairman of the House Banking Committee, Compaq Presario CQ71-317EA laptop keyboard Representative James A. Leach (R-IA), introduced a bill to repeal Glass–Steagall Sections 20 and 32.[178] After being confirmed as Treasury Secretary Robert Rubin announced on February 28, 1995, that the Clinton Administration supported such Glass–Steagall repeal.[179] Repeating themes from the 1980s, Leach stated Glass–Steagall was “out of synch with reality”[180] and Rubin argued “it is now time for the laws to reflect changes in the world’s financial system.”[179]HP 550 Laptop Keyboard Leach and Rubin expressed a widely shared view that Glass–Steagall was “obsolete” or “outdated.”[181] As described above, Senator Proxmire[103] and Representative Markey[155] (despite their long-time support for Glass–Steagall) had earlier expressed the same conclusion. With his reputation for being “conservative” on expanded bank activities,[140] HP 367778-001 Laptop Keyboard former Federal Reserve Board Chairman Paul Volcker remained an influential commentator on legislative proposals to permit such activities.[182] Volcker continued to testify to Congress in opposition to permitting banks to affiliate with commercial companies and in favor of repealing Glass–Steagall Sections 20 and 32 as part of “rationalizing” bank involvement in securities markets.[183] Supporting the Leach and Rubin arguments, Volcker testified that Congressional inaction had forced banking regulators and the courts to play “catch-up” with market developments by “HP Pavilion DV6z artist edition 2 Laptop Keyboard sometimes stretching established interpretations of law beyond recognition.”[184] In 1997 Volcker testified this meant the “Glass–Steagall separation of commercial and investment banking is now almost gone” and that this “accommodation and adaptation has been necessary and desirable.”[185] He stated, however, that the “ad hoc approach” had created “uneven results” that created “almost endless squabbling in the courts” and an “increasingly advantageous position competitively” for “some sectors of the financial service industry and particular institutions.”[185] Similar to the GAO in 1988[118] and Representative Markey in 1990[155] Volcker asked that Congress “provide clear and decisive leadership that reflects not parochial pleadings but the national interest.”[185]SONY VAIO VGN-FS640 Laptop Keyboard Reflecting the regulatory developments Volcker noted, the commercial and investment banking industries largely reversed their traditional Glass–Steagall positions. Throughout the 1990s (and particularly in 1996), commercial banking firms became content with the regulatory situation Volcker described. They feared “financial modernization” legislation might bring an unwelcome change.[186] Securities firms came to view Glass–Steagall more as a barrier to expanding their own commercial banking activities than as protection from commercial bank competition. The securities industry became an advocate for “financial modernization” that would open a “two way street” for securities firms to enter commercial banking.[187]HP G42-415DX Laptop Keyboard In the early 1980s commercial banks began entering into interest rate and currency exchange “swaps” with customers. This “over-the-counter derivatives” market grew dramatically throughout the 1980s and 1990s.[175] In 1996 the OCC issued “guidelines” for national bank use of “credit default swaps” and other “credit derivatives.” Banks entered into “credit default swaps” to protect against defaults on loans. Banks later entered into such swaps to protect against defaults on securities. Banks acted both as “dealers” in providing such protection (or speculative “exposure”) to customers and as “hedgers” or “speculators” to cover (or create) their own exposures to such risks.[176]HP Mini 210-1190NR Laptop Keyboard Commercial banks became the largest dealers in swaps and other over-the-counter derivatives. Banking regulators ruled that swaps (including credit default swaps) were part of the “business of banking,” not “securities” under the Glass–Steagall Act.[177]HP Mini 110-3118cl Laptop Keyboard Commercial banks entered into swaps that replicated part or all of the economics of actual securities. Regulators eventually ruled banks could even buy and sell equity securities to “hedge” this activity.[177] Jan Kregel argues the OCC’s approval of bank derivatives activities under bank “incidental powers” constituted a “complete reversal of the original intention of preventing banks from dealing in securities on their own account.”[128]SONY VAIO VPCF126FM Laptop Keyboard Lenovo 63Y0047 Laptop Keyboard

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