Here are a couple of good jeopardy questions. Category- US Banking, 20th Century.
What's the difference between notorious bank robber John Dillinger and Sandy Weill, former CEO of Citigroup? Answer: Dillinger had a gun.
What's the difference between John Dillinger and Robert Rubin, former head of the U.S. Treasury? Answer: Dillinger was wanted by the Law; Rubin was the Law.
For sixty-six years, between the Great Depression under FDR and the Great Repression under Ronald Reagan, there was a "Chinese Wall" that separated investment and commercial banking. The Glass-Steagall Act enacted in 1933 prohibited commercial banks from participating in investment banking activities. Banks were forced to choose between straightforward lending and underwriting stocks and bonds.
In 1956, the law was extended with the Bank Holding Act which restricted banks from owning non-banking institutions like insurance companies. The purpose of the law was to eliminate the conflicts of interest that contributed to the stock-market crash of 1929. Additionally, Glass-Steagall established the Federal Deposit Insurance Corporation guaranteeing individual deposits by the federal government.
All that went out the window with the enactment of the Gramm-Leach-Bliley Act of 1999. This law effectively repealed any restrictions that had safeguarded banking for most of the twentieth century.
Deposits were now at the mercy of the cowboy bankers. Commercial banks could use depositor cash to invest in toxic sub-prime mortgage securities, "weapons of financial mass destruction" aka credit default swaps, and structured products like the dubious collateralized debt obligations saddling taxpayers with 100% of the risk.
Depositor's savings were supplying mortgage loans to porn stars with 500 credit scores, pear-shaped pools for bucket shop lenders, and surround-sound entertainment systems for bank executives' luxury jets.
Yippee! There was a big boozy bond market party going on between 1999 and 2008. All on the America taxpayer's dime-only you weren't invited.
One Man's Dream.
Glass-Steagall repealer Phil Gramm is right. Things change with time and laws need updating.
Poor Johnny D didn't even know all he needed for his get rich quick scheme was a job at the bank and a better suit. The days of "stick-em-up" bank robbery are long over-nowadays with a friend in government all you need to do is change the law!
Sandy Weill, CEO of Traveler's, the huge insurance corporation, had a dream. To create the first one stop shopping "financial supermarket" and in the process reap a billion dollar fortune for himself. The dream pushed him to buy the securities firm Salomon Brothers and combine it with retail brokerage firm Smith Barney. The banking king merged the new Salomon Smith Barney and Traveler's and commercial banking giant Citicorp in 1998.
Only there was one little teeny weeny problem... it was illegal. The remnants of Glass-Steagall which had been whittled down through the Reagan and Clinton years by banking lobbyists and the Federal Reserve stood in the way. Not to worry, CEO Weill had non-partisan buddies in Senator Phil Gramm, U.S. Treasury Secretary Rubin and his Deputy Treasury Secretary Larry Summers (yes the one with the big shadow behind little Timmy Geithner).
Weill, along with his faithful triumvirate, persuaded President Clinton and Fed Chief Greenspan to support overturning the "outdated" Glass-Steagall. With the swoop of the pen, Clinton signed the new Gramm-Leach-Bliley Act into law allowing commercial and investment banking under one roof –something that had not been done since Herbert Hoover. Furthermore, banks would now be free to merge with other banks, insurance companies, securities firms, pizza franchises...(Ok, that's a joke. I thought a supermarket might need some food.)
With the reversal of the official regulator Glass-Steagall, any conflict of interest and risk to taxpayers and investors was completely swept aside. The biggest government bank bailout only nine years ahead was set in motion.
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