Glass-Steagall

     The Banking Act of 1933, more commonly known as the Glass-Steagall Act (because of Senator Carter Glass and Representative Henry Steagall, the bill's sponsors), was a piece of landmark legislation which prevented commercial banks from engaging in investment banking.

Carter Glass and Henry Steagall

     Between 1929 and 1933, more than 4,000 banks in the U.S. had shut down, burdening depositors with more than $400 million in loses.This drove the Senate to launch a series of investigations on the causes of the Great Depression called the Pecora Commission. The United States Senate Committee on Banking and Currency, headed by chief counsel Ferdinand Pecora, uncovered through a series of hearings a wide range of abusive practices on the part of the banks, including a variety of conflicts of interest, notably between commercial banking and securities activities. The hearings provoked immense public support for increased banking regulation, allowing the Banking Act to be pushed through Congress, and signed by President Roosevelt on June 16, 1933. The law gave banks one year to decide whether to stop trading securities, and gain access to the low interest credit of the Federal Reserve, or to become investment banks, and forgo any privileges. The law helped rebuild trust in the American economy, and allowed banks to fail in the future without creating a crisis, ending the pattern of financial panics that had been common in the U.S.,

Repeal
By the early 1980's, anti-regulation advocates had begun to influence legislation in Washington weakening regulations and causing events like the Savings and Loan Crisis of 1986-1995. In 1987, the Federal Reserve Board voted 3-2 to allow banks to engage in a range of securities underwriting activities. Deregulation was expanded in the first Bush presidency, when Treasury Secretary James Baker allowed banks to underwrite municipal bonds. In 1998, banker Sanford Weil, who owned a multitude of insurance, commercial, and investment banks, proposed a merger with Citicorp, a clear violation of Glass-Steagall. However, neither the Clinton administration nor the Federal Reserve took any action to prevent the merger, and in 1999, Bill Clinton signed the Financial Modernization Act into law, effectively repealing Glass-Steagall, which many argue contributed to the financial meltdown of 2008, allowing commercial banks to buy and sell mortgage-backed securities.