What the financial services industry puts together let no person put asunder: how the Gramm-Leach-Bliley Act contributed to the 2008-2009 American capital markets crisis.

• Author: Grant, Joseph Karl

ABSTRACT

The current subprime financial crisis has shaped up to be one of the most dramatic and impactful events in the past few decades. No one particular factor fully accounts for why the American economy suffered setbacks unseen since the Great Depression of the 1930s. Some of the roots of the current financial crisis started taking hold in 1999 when Congress passed the Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act. Gramm-Leach-Bliley brought about sweeping deregulation to the financial services industry. In essence, Gramm-Leach-Bliley swept away almost six decades of financial services regulation precipitated by the Great Depression of the 1930s. Gramm-Leach-Bliley explicitly repealed the Glass-Steagall Act passed in the 1930s to stamp out much of the evil that caused the Great Depression.

The year 2009 is a momentous year: it marks the ten-year anniversary of the passage of the Gramm-Leach-Bliley Act. This article posits that passage of the Gramm-Leach-Bliley Act in 1999, the Republican push for deregulation, and--most importantly--repeal of the firewalls established by the Glass-Steagall Act accounts for why America is in the midst of one of the worst and deepest financial crises in our nation's history. This article examines the Senate debates leading up to the passage of the Gramm-Leach-Bliley Act. Interestingly, a number of politicians issued powerful criticisms, predictions, and forecasts around the time of the passage of Gramm-Leach-Bliley that should have been taken seriously. Most notably, Senators Byron Dorgan (D-ND), Russell Feingold (D-WI), and Barbara Mikulski (D-MD) stood out as vocal critics.

To gain further insight into the reach and effect of the Gramm-Leach-Bliley Act, this article examines the deregulatory effect of the legislation on two corporations in particular: Citigroup and Bank of America. This article then examines whether firewalls are necessary in the financial services industry. As the Troubled Asset Relief Program ("TARP") has demonstrated, some institutions are "too big to fail." This article explores what a return to Glass-Steagall regulation would do to prevent the "too big to fail" problem. Alternatively, it explores a three-tiered approach to financial services industry regulation. Finally, it explores whether we should let financial service industry institutions fail from a market efficiency standpoint, in the absence of strong regulation in the form of firewalls or stringent regulatory oversight.

1. INTRODUCTION II. THE LEGISLATIVE LANDSCAPE FOR BANKS IN AMERICA 1933-1999: A BRIEF HISTORICAL OVERVIEW III. GLASS-STEAGALL: ARGUMENTS FOR AND AGAINST MAINTENANCE AND REPEAL LEADING UP TO PASSAGE OF GRAMM-LEACH-BLILEY IV. GRAMM-LEACH-BLILEY: A JOURNEY THROUGH THE LEGISLATIVE DEBATE AND RECORD IN THE SENATE A. Gramm-Leach-Bliley: The Legislative Journey to Passage B. Storm Clouds Gathering: Senatorial Expressions of Caution and Concern V. BANKING CASE STUDIES: A LOOK AT THE IMPACT OF GRAMM-LEACH-BLILEY ON CITIGROUP AND BANK OF AMERICA A. Citigroup: The Rise and Fall of an American Banking Giant B. Bank of America: A Failure All Too Big VI. FOR SAFETY'S AND SOUNDNESS'S SAKE: GLASS-STEAGALL'S REINCARNATION: THE CASE FOR "RE-REGULATION". VII. ALTERNATIVES TO THE REINCARNATION OF GLASS-STEAGALL AND "RE-REGULATION". A. Is Stringent Regulation of "Too Big to Fail" Financial Institutions Needed?: A Three-Tiered Regulatory Approach B. Too Big to Fail?: An Examination of Market Efficiency and Moral Hazard VIII. CONCLUSION I. INTRODUCTION

   The 2008-2009 financial/economic market crisis has staggered the United States capital markets, and has stunned and set back the global economy. Unlike some watershed events in our nation's and the world's history, the capital markets meltdown will not just end on a date certain in 2009: it promises to have a lasting impact on our lives for years and perhaps generations to come. In America, both Wall Street and Main Street have been rocked by the collapse of the capital markets. Neighborhoods are uninhabited due to foreclosures; banks and other financial institutions have gone under water; industrial giants have been forced into bankruptcy; individuals have lost their life's savings; and retirement and pension plans have all felt the sting of the collapse. The current financial crisis has been one of the deepest and most injurious events to take place during our lifetimes.

   Analyzing the capital markets meltdown from a legal perspective is essential in order to engage in transformative thinking and policymaking and to avoid repeating the mistakes of the present in the future. Because we are in the midst of the capital markets crisis, there is virtually no legal scholarship in existence that analyzes the roots of the current capital markets meltdown in real time, or more importantly, the way forward in the future from a legal perspective.

   Indeed, the current capital markets crisis has shaped up to be one of the most dramatic and impactful economic events in the past six decades. The causes of the current financial crisis are convoluted and complex. No one particular factor or reason fully accounts for why the American economy suffered setbacks unseen since the Great Depression of the 1930s. The current financial crisis has been "the worst financial crisis since the Great Depression [and] continues to roil and reshape the U.S. banking industry." (1) Some of the roots the current financial crisis started taking hold in 1999, when Congress passed the Financial Services Modernization Act of 1999, also known as the Graham-Leach-Bliley Act. (2) This act brought sweeping deregulation to the financial services industry. (3) For the financial services industry, the Gramm-Leach-Bliley Act "marked the end of regulation that addressed the perceived defects in the banking system thought to have caused the Great Depression." (4) The Graham-Leach-Bliley Act swept away almost six decades of financial services regulation precipitated by the Great Depression of the 1930s. (5) "Congress enacted [Gramm-Leach-Bliley] to address the need for increased competition in the financial services industry." (6) Graham-Leach-Bliley explicitly repealed the Glass-Steagall Act which was passed in the 1930s and designed to stamp out commercial speculation and other perceived evils that lawmakers at the time viewed as causing the Great Depression. (7) Thus, "[t]he [Gramm-Leach-Bliley Act] redesigned the regulatory structure that had been in place since the Great Depression." (8) The year 2009 is a momentous year: it marks the ten-year anniversary of the passage of the Gramm-Leach-Bliley Act. This article posits that the passage of the Gramm-Leach-Bliley Act in 1999, the Republican push for deregulation, and--most importantly--the repeal of the firewalls by the Glass-Steagall Act help to explain and account for why we find ourselves in the midst of one of the worst and deepest financial crises in our nation's history. Admittedly, the passage of the Gramm-Leach-Bliley Act is not the sole cause of the current capital markets crisis. (9) To assert so is elementary and fails to acknowledge a multifaceted web of mystery and intrigue that has led us to the position we find ourselves in today. Solving and accounting for all of the causes of the current capital markets crisis is like solving a good murder mystery: there are many potential killers with motive and opportunity, and several unsuspected twists and turns. To solve the financial crisis completely, it would take the likes of Angela Lansbury (10) or Agatha Christie (11) to determine the true culprit.

   Unwrapping the shell surrounding the current capital markets crisis is a complex undertaking. Interestingly, some key policymakers in Washington D.C. predicted storm clouds growing on the horizon in the debate leading up to the passage of Gramm-Leach-Bliley. Some of these predictions were actually quite prophetic. This article examines the Senate debates leading up to the passage of the Gramm-Leach-Bliley Act. Ironically, a number of politicians at the time issued powerful criticisms, predictions, and forecasts that should have been taken seriously as warning of what was to come. Most notably, Senators Byron Dorgan (D-ND), Russell Feingold (D-WI), and Barbara Mikulski (D-MD) stood out as vocal and articulate critics.

   To gain further insight into the reach and effect of the Gramm-Leach-Bliley Act, this article examines the deregulatory effect of the legislation on two corporations in particular: Citigroup and Bank of America. Furthermore, this article examines whether firewalls are necessary in the financial services industry. As the TARP Program has demonstrated, many have made the argument that some institutions are "too big to fail." Hence, this article addresses regulatory approaches that serve as an alternative to full reimplementation of Glass-Steagall type firewalls. Finally, this article explores whether we should let financial service industry institutions fail from a market efficiency standpoint, in the absence of strong regulation in the form of firewalls. Thus, this article presents an alternative to strong regulation, namely allowing some institutions that are "too big to fair' to do just that. Is the alternative to strong regulation (i.e., failure of "too big to fail" institutions) a dose of medicine we are willing to take?

   This article proceeds to examine the Gramm-Leach-Bliley Act in six parts. Part II provides a brief and abbreviated history of the legal and legislative landscape for banks in America that existed from 1933 through 1999. (12) Part III examines the arguments made for and against Gramm-Leach-Bliley in the 1980s, when banks started to lobby strongly for the repeal of the Glass-Steagall Act of 1933. (13) Part IV examines the legislative history surrounding the passage of Gramm-Leach-Bliley. (14) Part V examines the present day impact of Gramm-Leach-Bliley on banks...