November 12, 1999 President Clinton signs the Gramm-Leach-Bliley Act; courtesy of the William J. Clinton Library
The Congressional elections of 1994 established, for the time being, the political ascendency of anti-regulatory reformers. Led by U.S. Representative Newt Gingrich (R-GA), and epitomized by the electoral compact referred to as the “Contract with America,” the electorate rebuked President Clinton and the Democratic Party by electing 54 new Republican Representatives and eight new Republican Senators. For the first time in forty years, Republicans held control of both the Senate and House. One fundamental premise of the Contract with America called for limitations on government regulations and laws which Republicans contended hurt economic competitiveness. 37
When U.S. Senator Phil Gramm (R-TX), a proponent of reduced regulation and now chairman of the Senate Committee on Banking, Housing and Urban Affairs, introduced the Gramm-Leach-Bliley bill, the climate for banking reform had shifted. Senator Gramm argued that the bill would overturn “the key provision of the Glass-Steagall Act that divided the American financial system, that created competition that was largely inefficient and costly, unstable and not in the public interest.” 38 Gramm envisioned an openly competitive banking industry freed from the artificial and outdated regulations from a bygone, antiquated era. For Gramm, the Gramm-Leach-Bliley Act was a final step on the path of deregulation, leading to a one-stop marketplace for consumers of financial and securities products. Efficiency, competition and market choice became the mantra of industry groups supporting the legislation, such as the American Bankers Association.
Voices of caution and concern raised significant objections. U.S. Senator Jack Reed (D-RI) cautioned that eliminating the separation wall would result in increased consolidation among the financial services industry, leading to the risk of “too big to fail” businesses so large that the government would, in the event of a crisis, be forced to bail them out with public funds. 39
U.S. Senator Byron Dorgan (D-ND) warned about mergers and consolidation. His critique was that depositors would not withdraw their funds even if the bank’s underlying assets depreciated by virtue of risky and failing investments. This adverse incentive, called “moral hazards,” would effectively encourage banks to “pursue relatively risky loans and investments in hope that higher returns will strengthen their balance sheets.” Dorgan cautioned that “Americans are unaware that Congress and the President have just agreed to put us all at extraordinary financial and personal risk.” 40 But with Senator Gramm at the helm of the Senate Banking Committee, and U.S. Representative James Leach (R-IA) as chair of the House Committee on Banking and Financial Services, the die was cast for the repeal of Glass-Steagall. 41
The history of the passage of the Gramm-Leach-Bliley Act demonstrates that the process of financial reform was not characterized by immediacy, but instead, a multi-decade, arduous effort, culminating when the political atmosphere advocating for decreased regulation and increased financial competition won the day.
(37) June 1, 1995 100 Days That Shook the World?.
(38) November 1999 Senate Banking Committee Press Release.
(39) 145 Congressional Record, S 28,334 (November 4, 1999).
(40) 145 Congressional Record, S13,896 (November 4, 1999).
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