On this day in economic and financial history...
The wall separating banking and investing firms fell into ruin on Nov. 12, 1999. With the stroke of a pen, President Bill Clinton made the Gramm-Leach-Bliley Act into law. Here is what he said that day, with emphasis added:
The Gramm-Leach-Bliley Act makes the most important legislative changes to the structure of the U.S. financial system since the 1930s. Financial services firms will be authorized to conduct a wide range of financial activities, allowing them freedom to innovate in the new economy. The Act repeals provisions of the Glass-Steagall Act that, since the Great Depression, have restricted affiliations between banks and securities firms. It also amends the Bank Holding Company Act to remove restrictions on affiliations between banks and insurance companies. It grants banks significant new authority to conduct most newly authorized activities through financial subsidiaries.
Removal of barriers to competition will enhance the stability of our financial services system. Financial services firms will be able to diversify their product offerings and thus their sources of revenue. They will also be better equipped to compete in global financial markets.
Gramm-Leach-Bliley was, in many ways, a direct legislative response to the merger between Citicorp and Travelers (NYSE:TRV) that created Citigroup (NYSE:C) the year before. The merger was not technically legal before Gramm-Leach-Bliley made Glass-Steagall obsolete, but after the legislation was passed, the new institution had no barriers in its path. Other megabanks were born in the years after Gramm-Leach-Bliley became law, particularly during the 2008 financial crisis, when the lack of a Glass-Steagall firewall between commercial and investment banks allowed Bank of America (NYSE:BAC) to buy Merrill Lynch and JPMorgan Chase (NYSE:JPM) to buy Bear Sterns.
On Nov. 12, 1999, the Dow Jones Industrial Average (DJINDICES:^DJI) stood at 10,769. Exactly one decade later, on Nov. 12, 2009, the index reached 10,197. Clearly, a decade of financial innovation had done little to increase shareholder wealth, and American taxpayers were on the hook for hundreds of billions of dollars in loans to floundering financial institutions. Citigroup and Bank of America had each received $45 billion. JPMorgan had been given $25 billion.
In the days leading up to the Act's passage, two voices spoke out most stridently against it, but they were largely ignored until much later. Representative John Dingell, in a session of the House on Nov. 4, 1999, warned that the Act would create "a group of institutions which are too big to fail." A day later, Senator Byron L. Dorgan warned that the country would look back "in ten years' time and say we should not have done this, but we did because we forgot the lessons of the past."
Was Gramm-Leach-Bliley the driving force behind the financial crisis? Jonathan R. Macey of Yale Law School argued otherwise less than two months after the Act was passed:
The Gramm-Leach-Bliley Act was enacted with enormous, indeed histrionic fanfare at the end of 1999. The fanfare seems misplaced because Gramm-Leach-Bliley is not a very important statute. ... The Glass-Steagall Act was already a dead letter when Gramm-Leach-Bliley was passed ... because federal regulators, particularly the Federal Reserve Board and the Comptroller [of the Currency], had already eviscerated the "Maginot Line" between commercial and investment banking through liberal regulatory interpretations of the statute long before the Act was passed."
No matter the root cause of the crisis, Gramm-Leach-Bliley's passage remains an unmistakable signal that things had truly changed for the financial industry. Today we mark that passage -- and, with any luck, we learn something from its aftermath.