November 5, 1999
Congress Passes Wide-Ranging Bill Easing Bank Laws
Issue in Depth
Banking Reform: Beyond Glass-Steagall
By STEPHEN LABATON
ASHINGTON -- Congress approved landmark legislation on
Thursday that opens the door for a new
era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper
to enter one another's businesses.
The measure, considered by many
the most important banking legislation in 66 years, was approved in the
Senate by a vote of 90 to 8 and in the
House Thursday night by 362 to 57. The bill
will now be sent to the president,
who is expected to sign it, aides said.
It would become one of the most
significant achievements this year
by the White House and the Republicans leading the 106th Congress.
"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," Treasury Secretary Lawrence H. Summers said.
"This historic legislation will better
enable American companies to compete in the new economy."
The decision to repeal the Glass-Steagall Act of 1933 provoked dire
warnings from a handful of dissenters that the deregulation of Wall
Street would someday wreak havoc
on the nation's financial system. The
original idea behind Glass-Steagall
was that separation between bankers and brokers would reduce the
potential conflicts of interest that
were thought to have contributed to
the speculative stock frenzy before
the Depression.
Thursday's action followed a rich Congressional debate about the history
of finance in America in this century,
the causes of the banking crisis of the
1930's, the globalization of banking
and the future of the nation's economy.
Administration officials and many
Republicans and Democrats said the
measure would save consumers billions of dollars and was necessary to
keep up with trends in both domestic
and international banking. Some institutions, like Citigroup, already
have banking, insurance and securities arms but could have been forced
to divest their insurance underwriting under existing law. Many foreign
banks already enjoy the ability to
enter the securities and insurance
industries.
"The world changes, and we have
to change with it," said Senator Phil
Gramm of Texas, who wrote the law
that will bear his name along with
the two other main Republican sponsors, Representative Jim Leach of
Iowa and Representative Thomas J.
Bliley Jr. of Virginia. "We have a
new century coming, and we have an
opportunity to dominate that century
the same way we dominated this
century. Glass-Steagall, in the midst
of the Great Depression, came at a
time when the thinking was that the
government was the answer. In this
era of economic prosperity, we have
decided that freedom is the answer."
In the House debate, Leach
said, "This is a historic day. The
landscape for delivery of financial
services will now surely shift."
But consumer groups and civil
rights advocates criticized the legislation for being a sop to the nation's
biggest financial institutions. They
say that it fails to protect the privacy
interests of consumers and community lending standards for the disadvantaged and that it will create more
problems than it solves.
The opponents of the measure
gloomily predicted that by unshackling banks and enabling them to
move more freely into new kinds of
financial activities, the new law
could lead to an economic crisis
down the road when the marketplace
is no longer growing briskly.
"I think we will look back in 10
years' time and say we should not
have done this but we did because we
forgot the lessons of the past, and
that that which is true in the 1930's is
true in 2010," said Senator Byron L.
Dorgan, Democrat of North Dakota.
"I wasn't around during the 1930's or
the debate over Glass-Steagall. But I
was here in the early 1980's when it
was decided to allow the expansion of
savings and loans. We have now decided in the name of modernization
to forget the lessons of the past, of
safety and of soundness."
Senator Paul Wellstone, Democrat
of Minnesota, said that Congress had
"seemed determined to unlearn the
lessons from our past mistakes."
"Scores of banks failed in the
Great Depression as a result of unsound banking practices, and their
failure only deepened the crisis,"
Wellstone said. "Glass-Steagall was
intended to protect our financial system by insulating commercial banking from other forms of risk. It was
one of several stabilizers designed to
keep a similar tragedy from recurring. Now Congress is about to repeal
that economic stabilizer without
putting any comparable safeguard in
its place."
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because
it was the failure of the Federal
Reserve in carrying out monetary
policy, not speculation in the stock
market, that caused the collapse of
11,000 banks. If anything, the supporters said, the new law will give
financial companies the ability to
diversify and therefore reduce their
risks. The new law, they said, will
also give regulators new tools to supervise shaky institutions.
"The concerns that we will have a
meltdown like 1929 are dramatically
overblown," said Senator Bob Kerrey, Democrat of Nebraska.
Others said the legislation was essential for the future leadership of
the American banking system.
"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 Senator Charles E. Schumer,
Democrat of New York. "There are
many reasons for this bill, but first
and foremost is to ensure that U.S.
financial firms remain competitive."
But other lawmakers criticized the
provisions of the legislation aimed at
discouraging community groups
from pressing banks to make more
loans to the disadvantaged. Representative Maxine Waters, Democrat
of California, said during the House
debate that the legislation was
"mean-spirited in the way it had
tried to undermine the Community
Reinvestment Act." And Representative Barney Frank, Democrat of
Massachusetts, said it was ironic
that while the legislation was deregulating financial services, it had begun a new system of onerous regulation on community advocates.
Many experts predict that, even
though the legislation has been trailing market trends that have begun to
see the cross-ownership of banks,
securities firms and insurers, the
new law is certain to lead to a wave
of large financial mergers.
The White House has estimated
the legislation could save consumers
as much as $18 billion a year as new
financial conglomerates gain economies of scale and cut costs.
Other experts have disputed those
estimates as overly optimistic, and
said that the bulk of any profits seen
from the deregulation of financial
services would be returned not to
customers but to shareholders.
These are some of the key provisions of the legislation:
¶Banks will be able to affiliate
with insurance companies and securities concerns with far fewer restrictions than in the past.
¶The legislation preserves the regulatory structure in Washington and
gives the Federal Reserve and the
Office of Comptroller of the Currency roles in regulating new financial
conglomerates. The Securities and
Exchange Commission will oversee
securities operations at any bank,
and the states will continue to regulate insurance.
¶It will be more difficult for industrial companies to control a bank.
The measure closes a loophole that
had permitted a number of commercial enterprises to open savings associations known as unitary thrifts.
One Republican Senator, Richard
C. Shelby of Alabama, voted against
the legislation. He was joined by seven Democrats: Barbara Boxer of
California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A.
Mikulski of Maryland, Dorgan
and Wellstone.
In the House, 155 Democrats and
207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it.
Fifteen members did not vote.
Tucked away in the legislation is a
provision that some experts on Thursday
warned could cost insurance policyholders as much as $50 billion. The 20
provision would allow mutual insurance companies to move to other
states to avoid payments they would
otherwise owe policyholders as they
reorganize their corporate structure.
Many states, including New York
and New Jersey, do not allow such
relocations without the consent of the
insurer's domicile state. But the
legislation before Congress would
pre-empt the states.
Both the Metropolitan Life Insurance Company and the Prudential
Life Insurance Company are in the
midst of reorganizing into stock-based corporations that are requiring them to pay billions of dollars to
policyholders from years of accumulated surplus. In exchange, the policyholders give up their ownership in
the mutual insurance company.
The legislation would permit any
mutual insurance company to avoid
making surplus payments to policyholders by simply moving to states
with more permissive laws and setting up a hybrid corporate structure
known as a mutual holding company.
The provision was inserted by
Representative Bliley at the urging
of a trade association. It attracted
little opposition because it was attached to a provision that forbids
insurers from discriminating
against domestic-violence victims.
In a letter sent to Congress this
week, Summers said that the
provision "could allow insurance
companies to avoid state law protecting policyholders, enriching insiders at the expense of consumers."
