Glass-Steagall Act: The Senators And Economists Who Got It Right
The footage of him speaking on the Senate floor has become something of a cult flick for the particularly wonky progressive. The date was November 4, 1999. Senator Byron Dorgan, in a patterned red tie, sharp dark suit and hair with slightly more color than it has today, was captured only by the cameras of CSPAN2.
"I want to sound a warning call today about this legislation," he declared, swaying ever so slightly right, then left, occasionally punching the air in front of him with a slightly closed fist. "I think this legislation is just fundamentally terrible."
The legislation was the repeal of the Glass-Steagall Act (alternatively known as Gramm Leach Bliley), which allowed banks to merge with insurance companies and investment houses. And Dorgan was, at the time, on a proverbial island with his concerns. Only eight senators would vote against the measure -- lionized by its proponents, including senior staff in the Clinton administration and many now staffing President Obama, as the most important breakthrough in the worlds of finance and politics in decades.
"It was more like a tidal wave in 1999," the North Dakota Democrat recalled of that vote in an interview with the Huffington Post. "You've seen the roll call. We didn't really have to deal with push back because they had such a strong, strong body of support for what they call modernization that the vote was never in doubt... The title of the bill was 'The Financial Modernization Act.' And so if you don't want to modernize, I guess you're considered hopelessly old fashioned."
Ten years later, Dorgan has been vindicated. His warning that banks would become "too big to fail" has proven basically true in the wake of the current financial crisis. He seems eerily prescient for claiming then that Congress would "look back ten years time and say we should not have done this." But he wasn't entirely alone. Sens. Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin and Richard Bryan also cast nay votes.
As did Sen. Russ Feingold, who, in a statement from his office, recalled that "Gramm-Leach-Bliley was just one of several bad policies that helped lead to the credit market crisis and the severe recession it helped cause."
The late Sen. Paul Wellstone also opposed the bill, warning at the time that Congress was "about to repeal the economic stabilizer without putting any comparable safeguard in its place."
Outside government, doomsday-ing over the repeal of Glass-Steagall seemed far more palatable a position to take. Edward Kane, a finance professor at Boston College, warned that "nobody will be able to discipline a Citigroup" once the legislation passed, because the banks would be too big and the issues too complex.
"It made it possible for the very big firms to take risks in away that would require a great deal of investment risk and time for regulatory agencies," Kane recalled ten years later. "You had people who could basically outplay the regulators."
Jeffrey Garten, who at the time had left his post as Undersecretary of Commerce for International Trade at the Clinton White House, wrote in the New York Times that if these new "megabanks" were to falter, "they could take down the entire global financial system with them."
"Sooner or later, perhaps starting with the next serious economic downturn," he wrote, "the US will have to confront one of the great challenges of our times: how does a sovereign nation govern itself effectively when politics are national and business is global?"
Consumer protection advocate Ralph Nader, meanwhile, was far more succinct in his skepticism. "We will look back at this and wonder how the country was so asleep," he said at the time. "It's just a nightmare."
When the Senate voted to pass Gramm-Leach-Bliley by a vote of 90-8, it reversed what was, for more than six decades, a framework that had governed the functions and reach of the nation's largest banks. No longer limited by laws and regulations commercial and investment banks could now merge. Many had already begun the process, including, among others, J.P. Morgan and Citicorp. The new law allowed it to be permanent. The updated ground rules were low on oversight and heavy on risky ventures. Historically in the business of mortgages and credit cards, banks now would sell insurance and stock.
Nevertheless, the bill did not lack champions, many of whom declared that the original legislation -- forged during the Great Depression -- was both antiquated and cumbersome for the banking industry. Congress had tried 11 times to repeal Glass-Steagall. The twelfth was the charm.
"Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century," said then-Treasury Secretary Lawrence Summers. "This historic legislation will better enable American companies to compete in the new economy."
"I welcome this day as a day of success and triumph," said Sen. Christopher Dodd, (D-Conn.).
"The concerns that we will have a meltdown like 1929 are dramatically overblown," said Sen. Bob Kerrey, (D-Neb.).
"If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world," said Sen. Chuck Schumer, D-N.Y. "There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive."
Looking back, members of Congress have tried to downplay the significance of their support. One high-ranking Hill aide notes that his boss, who voted for the bill, did so because banks were already beginning to merge with investment houses. It should be noted, additionally, that Dodd and Schumer were able to hammer out, as part of the legislation, the Community Reinvestment Act, which required banks to extend lines of credit to predominantly minority areas.
Officials from the Clinton White House, meanwhile, shift between defensiveness and repentance. One former high-ranking official argued that while the legislation changed the balance between a bank's commercial and non-commercial activities, the problem was not necessarily the blurring of those lines. "What really brought the economy to its knees was the incredibly over-leveraged and unregulated risks taken by these non commercial banks." In short: there wasn't enough oversight.
"The White House task force meetings covered a whole series of these issues," said the official. "A lot of people raised serious questions about how far we were going. And it wasn't just here. There were a whole series of issues around the same time in which the Treasury was always promoting the interest of big finance. It was true under [Bob] Rubin and at least as true under Larry [Summers]."
Not everyone looks back at that vote with regret. The repeal of the law, they argue, was responsible for the sharp growth that the market experienced in the subsequent years. Moreover, the argument goes, if not for the over-leveraging of credit in the housing market the gut shot that many major banks endured could have been avoided.
That said, the concept of regulation has, over the past decade, taken on a drastic shift in public perception, from being viewed as a hindrance to economic growth to a guardrail from future disaster. And spearheading that effort at revamping the regulatory system is the same senator who foresaw the problem in the first place.
"I'm from a little small town of 300 people in North Dakota," Dorgan told the Huffington Post. "Where I grew up, we have seen a history... of some of the larger banks and difficulties farmers have had in dealing with some of the larger banks over the last century or so. And so, my own view about these issues is that there needs to be, to the extent that you can, create a free market that works with price competition and product differentiation and so on, but there needs to be a referee with a whistle and a striped shirt, I mean the free market sometimes needs referees."