Financial Freedom SG

In 1933, during the midst of the Great Depression, the United States senators Carter Glass and Congressman Henry Steagall pushed the Glass-Steagall Act which effectively separated the commercial banking and investment banking.

Research by the Congressional Research Service found that:

In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s.

Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.

In the 1999, this act was repealed by a bill introduced by Senators Phil Gramm and House of Representative Jim Leach.

This repeal enabled the formation of huge financial institutions like Citigroup which was formed by the merger of Citibank and the Travelers Group. More importantly, it allowed banks to underwrite and trade instruments in mortgage back securities and collateralized debt obligations which are sometimes called structured investment vehicles. Whatever that means.

And we all know what happened in 2007 when it all fell down.

The same people doing research in Congress has concluded that the repeal of the Glass-Steagall Act contributed to the financial crisis of 2007-2009.

Hence the former Federal Reserve chairman Paul Volcker is recommending that the two different parts of the banks be separated again. Along with powerful states in Europe like France, Germany and Italy who are all looking at some form of legislations based on the Glass-Steagall Act.

A return to restrict banking activities is supported by past treasury secretaries and also prominent financial figures like George Soros, former Citibank honcho John Reed and John Bogle.

The crux is that bank deposits are supported by government from failure and bank runs. If banks are allowed to put these money without the depositors knowledge to high risk investment products like the structured investment vehicles or whatever funny name people come up with, then another financial crisis is inevitable.

Sources

1. The Glass Steagall Act Wikipedia entry

2. Goldman Sachs and The Republicans

3. Volcker Rule: 5 Former Treasury Secretaries Back Obama’s Reforms

4. Glass Steagall vs the Volcker Rule