Glass-Steagall Accord Reached
After Last-Minute Deal Making
By MICHAEL SCHROEDER
Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- Lawmakers are poised to pass historic legislation that
would sweep away Depression-era banking laws and usher in a new era of
vast financial supermarkets.
House and Senate conferees reached an
agreement with the White House early Friday
on a compromise bill to eliminate
financial-services restrictions dating back to
the 1930s that have prevented banking, insurance and securities firms from
fully entering each other's businesses. The pact follows several failed efforts
to do away with the Glass-Steagall Act over more than two decades, and
came just hours after even top negotiators thought the talks would once
again collapse this year. Before the last-gasp negotiations began late
Thursday night, White House economic adviser Gene Sperling told
Treasury Secretary Lawrence Summers that the odds of a deal were just
one in three.
The logjam was broken with a post-midnight compromise between the
White House and Senate Banking Committee Chairman Phil Gramm, a
conservative Texas Republican, over community-lending requirements.
Furious lobbying and deal making by all sides in the debate preceded the
agreement. Rep. Jesse Jackson Jr. (D., Ill.) at one point sent an e-mail to
6,000 supporters warning that President Clinton might agree "to language
... that would be devastating" to the law, and giving direct phone lines for
Mr. Summers and Mr. Sperling for community activists to call the chief
Mr. Gramm, in turn, pressed industry lobbyists
desperate for a deal to turn up the heat on the
White House and wavering Democrats to give
a little to him. Thursday afternoon, he phoned
top executives from trade groups and the
largest New York financial firms, including
Citigroup, Morgan Stanley Dean Witter &
Co. and Chubb Corp. At a Thursday night
meeting, Mr. Gramm told Citigroup lobbyist Roger Levy -- in a voice loud
enough for a nearby lobbyist to hear -- "You get [Citigroup Co-Chairman]
Sandy Weill on the phone right now. Tell him to call the White House and
get [them] moving or I'm going to shut this conference down."
Vote May Come This Week
The House and Senate could vote on the measure as soon as this week,
and President Clinton has signaled that he will sign it into law, pending a
review of final language.
"When this potentially historic agreement is finalized, it will strengthen
economy and help consumers, communities and businesses across
America," Mr. Clinton said in a prepared statement.
The legislation would benefit the economy "by promoting financial
innovation, lower capital costs and greater international competitiveness,"
Mr. Summers said. It would also provide "a greater variety of financial
services for consumers at a cheaper price," said Mr. Gramm, one of the
bill's chief sponsors. Advocates say the legislation will give consumers the
opportunity to shop for almost any financial service -- from certificates of
deposit to life insurance to online stock trading -- in one place.
Like laws deregulating the rail, airline, utility and telecommunications
industries, the Financial Services Modernization Act of 1999 could result in
more megamergers as banks, insurers and securities firms seek to assure
their survival in an industry likely to be dominated by a few huge
companies. With the stroke of the president's pen, investment firms like
Merrill Lynch & Co. and banks like Bank of America Corp. are expected
to be on the prowl for acquisitions.
Consumer Groups Complain
But consumer groups that feel burned by the 1996 law deregulating the
telecommunications industry say the new financial behemoths are unlikely
to pass cost savings on to average customers. Critics also say the bill
doesn't go far enough to protect individuals' private financial information,
and they suspect that the new conglomerates will find ways to get around
provisions requiring minimum levels of lending in low- and middle-income
"Through this whole process, the average investor, depositor, taxpayer
homeowner were at best a mere afterthought," said Michigan's John
Dingell, the ranking minority member of the House Commerce Committee.
"There's been a great rush to create financial institutions that are at the
same time too big to fail, too big to bother, and too big to care."
The overhaul would update and standardize rules governing financial
industries that were developed piecemeal by regulators over the years
while Congress repeatedly tried, and until now failed, to break down
barriers created by the 1933 Glass-Steagall Act. Regulators gradually
allowed banks to buy securities firms and insurers, with some restrictions
on lines of business permitted. The new legislation would remove those
restrictions and put brokerage firms and insurers on a par with banks by
allowing them to enter the full range of financial businesses.
Financial services are now a far cry from the simple separation of bankers
and brokers envisioned by the Glass-Steagall Act's chief sponsors, Sen.
Carter Glass of Virginia and Rep. Henry Steagall of Alabama. The most
striking example of that is Citigroup Inc., with more than 100 million
customers and over 4,000 offices worldwide, offering everything from
consumer banking and insurance to corporate finance and securities
underwriting. The creation of the company in last year's Citicorp-Travelers
Group Inc. merger was among the factors that propelled Congress to again
take up the industry-overhaul legislation. The bill will give Citigroup a freer
hand in operating the Travelers insurance business and its big brokerage
firm, Salomon Smith Barney.
Banks began agitating for such legislation in the late 1970s, but
deregulation wasn't widely embraced until President Bush's administration.
His effort to repeal restrictions faded amid the savings-and-loan crisis,
which threatened to wipe out some large banks, including Citicorp, in
But the battle lines had been clearly drawn: Banks wanted to get into the
securities and insurance businesses, but securities firms and insurance
companies wanted to keep banks out. Banking regulators -- the Federal
Reserve and the Treasury Department's Comptroller of the Currency --
issued interpretations of the laws that allowed banks to sell insurance
through subsidiaries and to trade and underwrite securities. Bank holding
companies, such as Citicorp, were allowed to have securities affiliates as
long as they produced no more than 25% of total revenue.
The biggest securities firms and insurers, fearful of being gobbled up
banks, pushed overhaul efforts for the past two years. Banks also joined
with competing financial firms in lobbying Congress because they wanted
to obtain the power to underwrite insurance.
With widespread industry support, both the House and the Senate
approved a financial-services overhaul earlier this year -- the first time that
both chambers had done so. Last summer, a 66-member conference
committee was formed to reconcile the two significantly different bills. The
Senate version, sponsored by the strong-willed Mr. Gramm, had few of
the consumer protections the House had adopted, raising the specter of a
Approval of the compromise bill was set in motion 10 days ago when a
logjam was broken on the technical issue of who would regulate the
financial conglomerates. The committee adopted a deal worked out by
Fed Chairman Alan Greenspan and Mr. Summers that divided up
The Fed and Treasury had sparred for months over which regulator should
have primary authority. They agreed on a framework that would allow
national banks to place certain activities, including securities underwriting,
in bank subsidiaries, which are regulated by the Treasury's Office of the
Comptroller of the Currency. Insurance underwriting and real-estate
development would be restricted to holding-company affiliates, which are
overseen by the Fed. The Treasury Department and the Fed agreed to
reconsider in five years whether merchant-banking activities can be
operated as a bank subsidiary, which isn't permitted now.
Community Lending Debate
As the conference committee bogged down on controversial consumer
issues, the administration signaled its eagerness to bargain. The toughest
sticking point was the treatment of the Community Reinvestment Act,
which requires banks to write loans in low- and moderate-income
neighborhoods. On Oct. 18, Mr. Summers and Mr. Sperling kicked off a
week of intense, on-again, off-again negotiations with Mr. Gramm to
thrash out a deal to preserve bank community-lending requirements.
The CRA debate was a showdown between the White House and Mr.
Gramm, who opposes letting the government tell banks how to lend
money. The White House objected that the bill would have reduced the
frequency of CRA-compliance examinations for rural and other small
banks with less than $250 million in assets, and that it didn't penalize
expansion-minded banks for having an unsatisfactory record on community
Prospects for a bill were dimming on Thursday when the White House
rejected Mr. Gramm's "final" offer after seven hours of talks. House
Banking Committee Chairman Jim Leach (R., Iowa.) and Mr. Gramm
were determined to complete a bill, even without White House agreement.
Assuming they could win approval from the full House and Senate, the
lawmakers' strategy was to force the president either to accept a
weakened CRA or veto the bill and face the political consequences. The
White House, meanwhile, was already preparing to kill the measure and
was lining up Democratic leaders to support a veto, an administration
The end-game began about 9 p.m. Thursday night, with Mr. Gramm
huddled in a packed private meeting room, leading negotiations along with
Democrats including Rep. John LaFalce of New York, Sen. Christopher
Dodd of Connecticut and New York Sen. Charles Schumer. Each
proposal was being vetted by Treasury Department Undersecretary Gary
Gensler, who, along with other aides, was in contact with Mr. Summers by
phone every 20 minutes, tracking progress from his home study.
The stickiest issue was requiring banks to maintain a satisfactory CRA
rating. The administration refused to back down until it won assurances
that banks with bad records on community lending couldn't get into new
When Republicans yielded to that demand at about 12:30 a.m. Friday, the
final piece of the settlement was working out language requiring community
groups to disclose loans or grants from banks that were part of CRA
programs, which Mr. Gramm had sought. Mr. Leach announced a deal at
Mr. Gramm's hard-line rhetoric gradually dissolved into compromises that,
one by one, removed the White House's objections. The conferees found
middle ground, for instance, on the emotional subject of privacy
protections for consumers' personal financial information. Pushed by a
bipartisan outcry for strengthening Mr. Gramm's tepid protections,
lawmakers managed to make incremental changes. The bill gives
customers the right to block financial institutions from selling personal
information to outside firms or sharing it with them, but not from doing such
things with affiliates. Financial firms also must disclose privacy policies and
practices for sharing information among banking, insurance and securities
But consumer groups and a bipartisan coalition led by Rep. Edward
Markey (D., Mass.) and Sens. Richard Shelby (R., Ala.) and Richard
Bryan (D., Nev.), said that the committee and the White House had caved
in to special interests. They vowed to push separate legislation beefing up
safeguards for consumers' financial information. "This is a travesty," said
Mr. Bryan. "The complete lack of adequate protections is simply
Mr. Gramm and the Republicans also were dealt a setback when banking
interests, led by the American Bankers Association and the Independent
Community Bankers of America, won a major battle to close a loophole
that allowed nonfinancial companies to get into the banking business
through the back door by buying or chartering a so-called unitary thrift
Of the 650 unitary thrifts, or thrifts with just one office, 27 are currently
owned by nonfinancial firms. Critics, including the White House, argued
that such a mixing of banking and commerce could encourage risky
lending, lead to crony capitalism and create unfair competition.
A Wal-Mart Stores Inc. proposal in June to buy a small Oklahoma savings
and loan association sent shivers through small-town bankers, who feared
their fate could be similar to that of local mom-and-pop retailers unable to
compete with the retail juggernaut. The bill would prohibit Wal-Mart from
buying or chartering a thrift and operating Wal-Mart-brand banking
operations in any of its 1,725 stores nationwide.
The bill would allow nonfinancial companies to operate only thrifts for
which they had sought charters before May 4 and would prohibit
nonfinancial companies from chartering or buying thrifts in the future.