Deregulation Paper

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Matthew Williams
Professor Clifford Bryan
FIN 330
4/15/2014

Gramm-Leach-Bliley Act
The financial crisis of 2008 is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. First signs of the crisis started to show in 2007 when the price of houses started to fall rapidly in the United States and then around the world. This financial crisis resulted in the failure of many large US financial institutions, banks to be bailout by the United States government, and the stock markets around the world were affected. One of the major issues leading to the financial crisis was the rising default on subprime lending. Large financial institutions were in completion with each other for revenue and market share, so these mortgage lenders relaxed underwriting standards and offered risker mortgages to less creditworthy borrowers. One of the major reasons why the financial market began to fail was the United States Government’s deregulation of standards, which benefited the financial institutions. One of the deregulation acts that many believe had a major influence on the financial crisis was the Gramm-Leach-Bliley Act or the Financial Services Modernization Act of 1999. This act repealed part of the Glass-Steagall Act of 1933, which removed barriers in the market among banking companies, securities companies and insurance companies that did not allow these institutions from acting as any combination of an investment bank, a commercial bank, or an insurance company. The passing of this new act by Congress it allowed banking companies, securities companies and insurance companies to consolidate and it failed to give the SEC or any other financial regulatory agency the authority to regulate large investment bank holding companies. The official description of the act is “An Act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes.”1 Many financial institutions at this time wanted an act like this to be passed so they could consolidate companies in order to become “too big to fail.” Only a year prior to this act being passed, Citicorp a large commercial bank holding company merged with the insurance company Travelers Group. This merger developed a conglomerate called Citigroup, which combined banking, securities and an insurance corporation. The merger was a direct violation of the Glass-Steagall Act of 1933 and the Bank Holding Act of 1956.2 The Federal Reserve gave Citigroup a wavier because of the Gramm-Leach-Bliley Act being developed at the same time to allow these kinds of mergers. Less than one year from this merger, the Gramm-Leach-Bliley Act was passed to legalize these types of mergers on a permanent basis. The act also repealed Glass-Steagall Act of 1933 conflict of interest prohibitions "against simultaneous service by any officer, director, or employee of a securities firm as an officer, director, or employee of any member bank.”1 In 1987 the Congressional Research Service, also known as Congress’ “think tank,” prepared a report that investigated the case for keeping the Glass-Steagall Act and for revising the Act.3 Senator Phil Gramm introduced the respective reports to the U.S. Senate, while Representative Jim Leach introduced the respective report to the U.S. House of Representatives. The third lawmaker associated with the bill was Rep. Thomas J. Bliley, Jr. In both houses of Congress, debates broke out both in favor and apposing the reports. On of the major member of Congress that apposed the deregulation of the Glass-Steagall Act was Representative John Dingell who argued that the bill would result in the banks becoming “too big to fail.” He also stated if this bill was passed in the future the Federal Government would need to bailout banks that come in financial problems.4 The Act had a hard time passing through both...
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