Now that we're coming upon the next Presidential election, it is important to remember that every vote counts. The repeal of the Glass-Steagall Act shows how important just one vote really is.

Some people believe that the Glass-Steagall Act, which was slowly repealed through the Depository Institutions Deregulation and Monetary Control Act and  Gramm-Leach-Bliley Act, was a major contributor to the current housing bubble.

The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drums up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.

The purpose of the Glass-Steagall Act was to control speculation and prohibit a bank from owning other financial institutions which would create a conflict of interest, such as investment banks and insurance companies. The Glass-Steagall Act was enacted in 1933 after excessive risk-taking that contributed to the Great Depression. Jean-Marie Eveillard, of First Eagle Funds, has said: "Glass-Steagall protected bankers against themselves.Bankers are sheep. They don't mind going over the cliff if everyone else goes over the cliff."

The reason banks were giving out such risky loans is that they were able to securitize them and sell them as mortgage backed securities and other collateralized debt obligations to investors. With the ability to both create loans and then underwrite, securitize and sell mortgage backed instruments under one roof, it is easy for banks to create a ponzi-like scheme.

PBS has a very good history of the repeal of the Glass-Steagal Act on their website. The financial industry had been lobbying to remove the regulations since the 1960's, spending over $200 million in it's lobbying efforts and $150 million more in political contributions just during the 1997-1998 election cycle. It kept getting hung up in the House but finally passes in 1998 with a vote of 214-213. Just one vote might have prevented this whole mess. [updated: 9/21/2008] Ooops! I mistakenly referenced the Financial Services Act of 1998 thanks to Kay who pointed that out in the comments. The Financial Services Act of 1998 was also one of Phil Gramm's legislations and contained the same provisions regarding allowing commercial and investment banks as well as other financial institutions to merge. Phil Gramm at the time was a Republican Senator or Texas and is currently Senator John McCain's economic advisor. Maybe it's unofficial now after he called us a "nation of whiners".

The vote in the house for the Gramm-Leach-Bliley Act wasn't as close, 362-57 in favor. About 75% of Democrats and 93% of Republicans in The House voted in favor of it. The Senate vote was 90-8 in favor. All but 6 Democrats and 1 Republican voted in favor. One Republican, Senator John McCain didn't vote. In Kay's comments she mentioned that this was a non-partisan action and I provided some information on how each party voted, which I didn't do when I originally wrote this. Both parties voted for this to get passed in a Republican majority Congress and it was signed into law by a Democrat, President Bill Clinton. The bill had more than 2/3rds of the votes in both houses so it was pretty much veto proof. I'm kind of happy I made the mistake because I'd like to read the full text of each of the two legislations to see what the difference was. Gramm's first legislation had much more opposition from both parties.

Looking into it a little more, it seems the Financial Services Act of 1998 came back in 1999 then after the House and Senate both voted for it, they got together and worked out their differences and the bill was overwhelmingly approved, as can be seen by the votes above.

Not everyone was happy with the legislation though. I ran across an Amendment by Democratic Senator Byron Dorgan that would limit derivatives. The amendment reads: "To prohibit insured depository institutions and credit unions from engaging in certain activities involving derivative financial instruments." Unfortunately it was voted down in a voice vote.

You can see this video warning about what would happen if Glass-Steagall was repealed. It's pretty much what's happening now.

After the Great Depression, federal (taxpayer) money was used to insure deposits and loans. Part of the price for that insurance was regulations that would keep banks in line. If the financial institutions want the regulations to go away, so should the safety net.


That close vote was not for repeal of the Act. Read further down in the link you gave. The final repeal--Grammm-Leach-Bliley was not at all a close vote in either the House or Senate. And Clinton chose to sign rather than veto. This was a nonpartisan action in the end.

Posted by Kay on September 17, 2008 at 04:21 PM EDT #

I didn't link that properly. The Financial Services Act of 1998 would have repealed the portions of the Glass-Steagall Act that prohibited banking, insurance, securities and other financial products to be provided from the same entity. The bill I linked to never was voted on by the Senate but it seems the Gramm-Leach-Bliley Act superseded it. I'll look into this more and make corrections.

Posted by Tom on September 17, 2008 at 10:41 PM EDT #

I don't get how a banks "ability to both create loans and then underwrite, securitize and sell mortgage backed instruments under one roof" makes it easy for them to "create a ponzi-like scheme."

Can you please explain that?

A third party could buy those loans and sell them as securities, just as well. Right?

Posted by Matt on September 18, 2008 at 02:53 AM EDT #

That's right Matt. Just like musical chairs. The next guy sells them down the line to the next guy....until the music stops.
That's when you discover that the originator of the loans (who did the original securitizing)grossly overestimated the value and worth of the item. The one holding the item when the music stops (or the company that was stupid enough to insure the item) is the loser. Since Fannie and Freddie bought the stuff and were holding it when the music stopped that puts them in the shit. Now that the Government has bailed them out the only person who is really screwed is the taxpayer. Aren't you glad the world is safe for hedge fund managers and the wizards of Wall Street?

Posted by viretarmis on September 18, 2008 at 11:52 AM EDT #

And by "music stopping", I mean defaults on the underlying loans which shouldn't have been made in the first place. I mean judgment day for the banks that were leveraged at a ratio of 30-1...

Posted by viretarmis on September 18, 2008 at 11:56 AM EDT #

How was the Glass-Steagle Act necessary or linked to the Recovery Acts of FDR?
I heard that there is a Senate Bill to reinstate Glass-Steagle before any more stimulus is enacted. What would be the effects for future recovery i it could be approved?

Posted by Dorothy Shaw on August 31, 2012 at 11:47 AM EDT #


Missed this comment before, sorry for the late response. Basicaly, the point of seperation is because it reduces the incentive and ability to commit fraud or otherwise manipulate the market.

Lets look at the different aspects. Creating loans if fairly simple. Someone needs money to buy a home and the bank is in a position to loan them the money.

Mortgage underwriters determine how good the loan is, if the value of the home is appropriate to the amount being borrowed, if the borrower has good credit and the ability to repay the loan.

Securitization. After the great depression, the banks needed more liquidity to continue to give out mortgages. Thay may have $1bln in deposits but once they loan out $1bln minus required reserves they can't give out any more loans. So entities like Fannie Mae came about to buy these mortgages from banks to replensih their cash. They then repackage the mortgages and guarantee them when they sell to investors as mortgage backed securities or collateralized debt obligations.

From my understanding, the GSE's Fannie Mae, Freddie Mac and Ginnie Mae (in the order that they were created) were the primary institutions that were the conduit between the primary and secondary mortgage markets. In the 1980's is when private label securitization started.

Now think of them independantly. The bank is responsible to protect the money of it's depositors. The underwriter needs to give a good risk assessment to the bank otherwise the bank could be in trouble. An underwriter that can't do a good job won't be in business very long. Entities that securitize mortgages have some responsibility to the investors that buy their securities.

The real problem is with securitization. That's where the quick money is. You're not waiting 15-30 years for the borrower to repay their mortgage. You give out a mortgage to a borrower and in relatively no time you realize your profit and pass off the risk to other investors.

The banks made money from origination fees and from">selling foreclosed properties at artificially inflated prices but the real money was in the secondary market. So with all entities under one roof, it's easier to get the bank and the underwriter to loosen standards so that the volume of mortgages keep coming in to be securitized and sold.

If they are seperate entities, it is in their financial interest to do their jobs properly. At least harder for them to collude.

If you've ever bought a used car, think of how unwise it would be to pick out a car, ask the dealer's loan officer if you're getting a good price and rate and the dealer's mechanic if the car is in good condition. They're all have an inherit incentive to get you into the car and it doesn't really benefit them to be completely honest with you.

Posted by Tom on September 20, 2008 at 10:20 PM EDT #

How can they manipulate the market if there is greater competition spawned by deregulation?

Yes securitization was a problem, because the bad loans were treated as good loans by wall street because government regulated credit rating agencies put their stamp of approval on them. That and the GSEs were encouraged by HUD to buy up some $434 Billion of subprime mortgages between 2004-2006.

If there was any manipulation, it was from the federal government, who evidently wanted everyone to own a house.

Please read these and tell me where I'm wrong:

Posted by Matt on September 24, 2008 at 04:39 PM EDT #

I think the federal government played a big role in this mess as well. And it seems very suspicious that after the deregulation they encouraged homeownership then stepped in to stop state from implementing predatory lending regulation that would have forced people to take a closer look at the subprime mortgages they were originating, securitizing and investing in.

It seems like the federal government cleared the way for the banks to manipulate the market and encouraged it by letting the federal reserve do what they did.

I also wrote more about the government's role in increasing home ownership in a previous post.

The deregulation we're talking about here, that the repeal of Glass-Steagall facilitated did not increase competition, it decreased it.

The GSE's were part of the ponzi-scheme Where banks would write bad loans then sell them off to realize their profit before the consequences were understood. HUD and the FHA did seem concerned about banks that were artificially inflating house prices after foreclosure but it doesn't seem that the rules did anything to control it.

I don't think it was any one thing that led us here.

Posted by Tom on September 24, 2008 at 07:40 PM EDT #

So what you're saying is that back in the 1980s, long before the repeal of Glass-Steigal, private securitization was already going on and that Fannie Mae and Freddie Mac were already involved in securitization. So this repeal clearly did NOT start mortgage securitization but arguably speeded it up for companies other then Fannie and Freddie. Thanks. That's helpful. Deregulation may have played some part but government interference in the markets through Fannie and Freddie's special status is clearly a problem. And now we're getting even more government interference. But don't you worry. Obama and McCain have both promised us "21st century regulation" to go along with this ill advised bailout.

Posted by John on October 19, 2008 at 11:38 PM EDT #

I disagree regarding your assertions about the repeal of Glass-Steagall Act being the root of this problem. Take Fannie Mae out of the equation and this never would have happened.

Posted by Mark on September 30, 2008 at 11:43 AM EDT #

You can disagree all you want but you haven't said anything to back it up.

The GSE's were a part of it but this probably could have happened without them. Other companies were securitizing mortgages. You can see some of the junk secondary mortgages Goldman Sachs was issuing in that link.

Even if it were true that you could take the GSE's out and the bubble wouldn't have happened that doesn't mean the deregulation that Wall St was pushing for wasn't the cause. You could even say if homeowners didn't buy houses the bubble wouldn't have happened.

That might be true too, but they weren't the root of the problem. The whole thing was like one giant expensive Rube Goldberg machine. Where if one part failed the whole thing stops. But there were people trying to keep it going. Like when states tried to enact anti predatory lending laws.

The thing you have to look at is who got the ball rolling. And that's clearly Wall St. Who else was fighting for 30 years and spending millions for deregulation?

The whole issue with the GSE's is that people want to blame the democrats in an election year.

It's nonesense. There's enough blame to go around and Gramm-Leach-Bliley proves it. Republican sponsored bill, republican majority congress, bi partisan support and signed by a Democratic President.

Posted by Tom on September 30, 2008 at 12:44 PM EDT #

the underlying problem here though is, We need to get better educated about what's going on in our government. We spend more time watching reality television than what's going on in our country and that is gonna be our downfall.

Posted by ian on October 07, 2008 at 11:20 PM EDT #


I couldn't agree more.

Posted by Tom on October 22, 2008 at 05:54 AM EDT #

I think it's just as wrong to try to solely blame the republicans in an election year as it is the democrats. Fannie Mae and Freddie Mac are a government created near monopoly.

They were involved in 70% of home mortgages and by their GSE status they were exempt from SEC oversight. Let's be honest. If deregulation in general is bad then deregulating a couple of GSEs operating as a duopoly is 10 times worse.

I can't blame other companies for wanting to get in on the government sponsored gravy train. The Fannie Mae securities market looked good because of the seeming government promise to "bailout out" Fannie no matter what happened.

I know democrats are EXTREMELY defensive about this because it shows poorly on both FDR (he created it) and Johnson (he made it a "private" GSE in order take it off the books when trying to justify Vietnam costs). If dems would stop and think about it for a minute there's no need to be so defensive. Fannie Mae MIGHT have been needed for the New Deal. But it should have been allowed to continue afterwards. FDR was dead by the time it was clear Fannie Mae was no longer needed. And Johnson's actions were just another example of the slimy depths he would sink to in order to support an unpopular and illegal war in Vietnam.

Still, I have to give it to you. At least you aren't like some democrats who want to pretend Fannie Mae wasn't created and then nurtured by the government.

Posted by John on October 19, 2008 at 11:31 PM EDT #

I wouldn't call myself either a democrat or republican so not sure where you get that idea.

I think the GSE's should have been eliminated a long time ago. I don't think the secondary mortgage market is a good idea in general. It just makes banks middle men and middle men are just a waste.

This is staff report from the FRBNY in my opinion gives good details on what has been going on in the secondary mortgage market and how it caused this mess.

Posted by Tom on October 22, 2008 at 06:02 AM EDT #

Who did and did not vote for passage of the Gramm-Leach-Bliley Act? It took place on May 6, 1999. It was passed 54-44, almost strictly down party lines (The lone Democrat to vote for the bill was Ernest Hollings of South Carolina). Just so we're clear here - Biden and Reid voted against that bill. McCain voted for it.

We are lead to believe that Gramm-Leach-Bliley passed by a vote of 90-8 in the Senate thru a conference report, before being signed into law by President Bill Clinton.

The Conference Report is nothing but an editing session. During the session, a team picked from both the House and Senate meet in order to reconcile differences between the versions of the bills already passed in both chambers. This is the reason it took from May until November to get the bill passed. This is the reason GLBA passed that 4 November vote with such an overwhelming majority - it had already been approved in both houses, and the only formality left was for language to be amended by the conferees. The 4 November vote was not a vote on the merits of the bill. It was a vote on the language of the bill.

Blocking the conference report does not kill a vote. Even if the report was voted against by every last Democrat, it was going to get pushed through anyway."

Posted by Joe on October 14, 2008 at 09:32 PM EDT #

There are some key questions that neither this article nor the video clip even ATTEMPTS to address.

1) Considering Fannie and Freddie's crucial role in all of this, did they become merged with institutions outside their mortgage realm after the repeal of Glass-Steigal?

2) If yes to # 1 which industries?

3) Did Fannie and or Freddie deal in derivatives or any other form of mortgage securitization prior to 1999?

4) The Dorgan amendment was to prohibit "insured depository institutions and credit unions" from being involved with derivatives. Were there any statutes or regulations prior to this amendment that expressly prohibited that behavior? If yes what were they?

Posted by John on October 19, 2008 at 11:16 PM EDT #


You can't walk into a Freddie Mac or Fannie Mae branch and apply for a mortgage. They buy mortgages after they have been originated by lenders. I think too much emphasis is being put on Fannie and Freddie right now. They don't have direct contact with lenders. Ginnie Mae is heading down a different path and I'm trying to figure out what's going to happen there.

As for deriviatives, from my understanding, that's in the realm of Investment Banks and other financial institutions. Depository institutions have a bunch of different regulations.

By allowing commercial and investment banks to merge you bring that risky investment stuff near commercial bank's deposits.

The problem is that you put risky business near government insured business it can be a problem. Even with just putting risky business with sound business it's not good.

Look at what's been going on with GE. GE Consumer Finance is causing the whole company to hurt.

The point of these consolidations and mergers were to diversify risk, but what they really did was consolidate assets so they could put them all at risk.

That's what happened with other institutions as well.

Posted by Tom on October 22, 2008 at 06:08 AM EDT #

This discussion is great! You are right about repeal of the Glass-Steagall Act being the beginning of the end.

If you search wikepedia on it, you'll get quite an education. Doing away with it was more of a process than an event.

I got an MBA and worked in banking in the 80's. Then, banks and brokerage companies were just starting to merge, and there was lots of talk about the "Chinese Wall." The bankers and brokers were not supposed to share information. Yeah, sure.

In the end, the broker culture of "anything for fee income" won out over the more conservative banker philosophy of "let's get paid back." These two cultures don't mix. The lender will always be compromised to the broker in this unholy union.

Posted by Joyce on November 19, 2008 at 10:17 PM EST #

There's absolutely NOTHING about Gramm-Leach-Bliley that contributed to this crisis. Nothing!

The part of Glass-Steagall that was repealed prohibited investment banks from combining with commercial banks or insurance companies.

But there were very few IBs that actually merged with CBs, and only ONE of those was near failure - Citigroup.

Lehman, an IB, had no CB.
Merill Lynch, an IB, had no CB.
Wachovia bought Halsey Stuart and AG Edwards late in the crisis.

None of the other CB failures had any part of investment banking.

The largest CB/IB combination, JP Morgan Chase, weathered the crisis better than any other bank.

All of the trading in derivatives were LEGAL prior to G-L-B.

CB/IB combinations have been legal and popular in Europe forever, and they did just fine. If the combination was risky, we'd see it there.

Europe, Asia, and Australia had housing bubbles too. None of them had and repealed Glass-Steagall in 1999.

So the hypothesis that repealing G-S in any way caused this crisis is soundly rejected. It wasn't even a peripheral cause. Arguments to the contrary are 100% fact-free.

The housing and financial crisis was caused by MANY factors. There was a worldwide search for yield from global capital imbalances and low treasury rates. The US and other countries had enormous subsidies and incentives for residential and commercial investment. GSE purchases of loans and MBS fed liquidity into the system. Affordable mortgages enabled people to bid prices up. These created soaring expectations of price appreciation, feeding the frenzy of buying and lending, and distorting asset pricing models. Risks that are normally diversified in MBS became systemic. Poor compensation structures rewarded short term gain through assumption of tail risk. Regulators were constrained by rules and political pressure from applying the brakes. Mistakes in risk weighting caused a coordinated regulatory arbitrage into MBS rather than treasuries. Lenders avoided risk of poor underwriting by selling loans to GSEs or for securitization. Municipalities, greedy for tax money, did nothing to restrain development. Federal Home Loan Banks were filling banks with advances for loan origination. Banks used flighty brokered deposits to fund loans. When residential prices peaked, banks turned to commercial loans and started a bubble there. We had two top rated tv programs about flipping houses!

So just about everyone from carpenters to developers, to buyers, to mortgage brokers to realtors, to loan officers, to government enterprises to investment bankers to television producers to regulators to politicians to Chinese ALL were to blame for this crisis.

You know who wasn't to blame? ME, the patient renter who didn't drink the housing and financial kool aid.

But guess who gets to pay for the bailouts of deadbeat borrowers, stupid bankers, low-skilled construction workers, corrupt politicians, and financial fat cats? ME.

Posted by POWinCA on February 01, 2011 at 04:14 AM EST #

That's not what the FCIC report states. President Obama is ignoring this report. The Federal Reserve and SEC didnt do their job for the last 10+ years. Wall Street is nothing more than the British Empire's Puppet. Get ready for inflation!!!!

Posted by Chad on March 08, 2011 at 11:12 PM EST #

Repeal of Glass-Steagall was a top 3 factor in the crisis. After repeal many institutions became to big to fail and interrelated because of their size and the riskiest forms of proprietary trading increased. Federal bailouts and other actions taken would have been much more muted if Glass-Steagall was in place. If you recall Greenspan supported repeal of Glass-Steagall because he believed markets were self correcting and it was in their self interest to self regulate. He admitted later, he was wrong. Either your comment that Glass Steagall "in any way caused" the crisis must be flawed, or Greenspan massively blundered in admitting his mistake. Furthermore, it is at best a child like argument (all the kids do xxxxxx, why can't we?) that Domestic Banks need more freedom to compete effectively with International Banks. If international banks are competing unfairly, it is far better for the US Gov't to restrict their access to U.S. markets. Glass Steagall was mostly effective in limiting domestic financial institutions from taking on excessively risky activity.

I don't disagree that Freddie and Fannie were disasters, but to me the other two major causes of the financial crisis are 1) financial institutions creating massive new derivative markets that regulators were oblivious to(like CDS) and 2) The Federal government supported loose lending standards and subsidized interest rates to promote greater home ownership. Freddie and Fannie with the right regulation and goals can be agents of good.

Posted by The other side of the story on June 10, 2011 at 01:31 AM EDT #

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