You probably don't recognize that photo on the left. Ferdinand Pecora isn't exactly a household word in America these days. But it was the banking investigation he shepherded in early 1933 whose revelations led to three essential pieces of New Deal regulatory legislation, including the Securities Exchange Act.
Unfortunately, one of those pieces of legislation, the Glass-Steagall Act, was repealed in 1999 as a consequence of a high-level lobbying and flattering effort that generated a Republican congressional initiative. The repeal tore down the barrier placed by Glass-Steagall between commercial and investment banks. Nicknamed the Gramm-Leach-Bliley Act for the three men who introduced it, the repeal only garnered a single Democratic vote on its first round through the Senate, but when the final version landed on Bill Clinton’s desk, it had overwhelming, veto-proof support. Among those strongly favoring the move was Larry Summers, Clinton's last Treasury Secretary and now President Obama’s chief economic adviser.
Senator Maria Cantwell introduced legislation Wednesday to restore Glass-Steagall. Ironically, she was joined in this effort by Senator John McCain, one of whose presidential campaign advisers last year was Phil Gramm, the economist Senator who sponsored the repeal act a decade ago.
Nothing even vaguely radical in their bill. No conversion of the lemon socialism of the bailout into a sliver of the real thing. Just a return to a 75-year-old common-sense arrangement that was part of what FDR did, not to undermine capitalists but to rescue them.
If sanity were in charge instead of an oligarchy, the Cantwell-McCain Act ought to be slam dunk. But it won't be. What some people hopefully called the resurrection of the Pecora Commission, the Financial Crisis Inquiry Commission headed by Phil Angelides, the former California State Treasurer, should be greasing the skids. However, the commission, created by the Fraud Enforcement and Recovery Act of 2009 was signed into law in May and has yet to hold its first hearing. Its final report is due a year from now. And by then, you can be just about certain that Cantwell-McCain will be dead in the water.
Glass-Steagall, many of its detractors said in 1999 and earlier, was obsolete, a law without a purpose. In fact, they said, it was an obstacle to competing in a globalizing world. Moreover, they said, nothing like what happened in the 1920s could ever possibly happen again.
In his 1939 book, Wall Street Under Oath, Pecora succinctly described what the bankers had been up to prior to the crash a decade earlier: "Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker's stoutest allies."
When Pecora took over as the fourth and final commissioner of the banking probe, he discovered that its Republican-appointed investigators had left a few stones unturned. Thanks to pressure from FDR on the new Democrat-controlled Senate, Pecora’s request to extend the life of the commission was granted. He subpoenaed bankster after bankster into the hearing rooms to answer his pitbull questions in what a Time magazine cover headlined as "Wealth on Trial." He dug into their financial records. Read auditors' reports. He didn’t stop until he got answers. And resignations.
What was discovered was that the mixing of commercial and investment banking since the early 1900s had led to conflicts of interest and outright fraud. Risky investments with depositors’ money became common. As a consequence, the Glass-Steagall Act made it a felony for anyone to engage in deposit-taking and securities underwriting at the same time. The extending of credit, lending, and the use of credit, investing, were unlinked. For Federal Reserve member banks, the new law made it clear that these two activities must be separate both directly and by means of interlocking directorates in the boardrooms of the banks.
Over time, however, some loopholes in the act were exploited. In 1986, the Federal Reserve Board reinterpreted the act to allow commercial banks to have up to 5 percent of their gross revenues from investment banking business. Soon, this was raised to 10 percent.
In 1987, the Federal Reserve Board, over the objections of Chairman Paul Volcker, voted to further ease Glass Steagall restrictions. Even more relaxation occurred after Alan Greenspan - avid bank deregulating advocate, Ayn Rand fan and former director of J.P. Morgan - became chairman of the Federal Reserve Board in 1987. In 1996, the board reinterpreted Glass-Steagall once again to allow bank holding companies to own investment bank affililiates with up to 25 percent of their business in securities underwriting. The battered law awaited its coup de grâce, which came soon enough.
In 1998, the $70 billion merger of Travelers insurance (owner of the investment house Salomon Smith Barney) and Citicorp (the parent of Citibank) created Citigroup Inc., the world's largest financial services company. But the merger had somehow to get around Glass-Steagall, which was enacted in the first place to prevent precisely this kind of union. A full-court lobbying press began, with Traveler’s chief Sanford "Sandy" Weill meeting with Greenspan, who gave a thumbs-up.
But an OK from the chief wasn't enough. If Glass-Steagall remained on the books, the merged company would have only a few years before it must divest itself of the Traveler’s portion of the business.
Fortunately for Weill and John Reed, chairman of Citigroup, they found sympathetic ears throughout Washington, including in the White House. Shortly after the administration agrees to support repeal, Treasury Secretary Robert Rubin, who was formerly co-chair of Goldman Sachs, joins Citigroup as Weill’s right-hand man.
A year previously, when Weill had given Treasury advance notice of the merger, Rubin said: "You’re buying the government."
Indeed. Except for the fact of the multiple disasters of the Great Recession, with nearly 30 million Americans still unemployed or underemployed, nothing has changed since '99. As Senator Dick Durbin remarked last April:
And the banks – hard to believe in a time when we're facing a banking crisis that many of the banks created – are still the most powerful lobby on Capitol Hill. And they frankly own the place.
As gjohnsit reminded us Tuesday, there were some prescient voices of opposition a decade ago. For instance, Senator Byron Dorgan warned us about the repeal of Glass-Steagall when the legislation was passed:
'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. 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."
Some advocates have become apostates. Bloomberg pointed out Tuesday:
Former Citibank Chairman John S. Reed apologized in a Nov. 6 interview for helping engineer the bank’s merger with Travelers and for his role in building a company that took $45 billion in U.S. assistance. Reed also recanted his advocacy of the repeal of Glass-Steagall. ...
"We learn from our mistakes," Reed said in the interview. "When you’re running a company, you do what you think is right for the stockholders," Reed said. "Right now, I’m looking at this as a citizen."
But Jim Leach, of Gramm-Leach-Bliley, said in April that the repeal had nothing to do with the economic catastrophe inflicted on us.
One thing is certain, had the repeal not been enacted, we would have a lot less need for the Consumer Financial Protection Agency.
Said Cantwell in a press release:
"America can’t afford another financial crisis .... With big banks using depositor money to gamble on Wall Street, it’s only a matter of time. Banks need to be lending to small businesses and homeowners, not fueling risky Wall Street investment schemes. We must return stability, security and confidence to commercial banking for the American public. The first step is this bill."
In the House, support for repeal comes from Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts. They have introduced their own amendment on restoring Glass-Steagall.
The Cantwell-McCain bill will no doubt find a receptive audience on Capitol Hill. But it is unlikely to be big enough because the place has not changed much in the seven months since Senator Durbin described it.
• • • • • • •
[The Time magazine cover photo is of Robert Rubin, Alan Greenspan and Larry Summers from February 15, 1999, right after Gramm-Leach-Bliley repeal of Glass-Steagall was signed. h/t to Paul Krugman for the reminder.]