Pres. Obama and other politicians blame our current economic crisis on Congressional deregulation of the banking system. A 2008 article published in OpenSecrets.org explains what they mean, why Capitol Hill politicians did it, and who benefited.
The last time Congress seriously debated how to regulate the financial industry, the result was legislation that allowed the nation’s largest banks to get even larger and take risks that had been prohibited since the Great Depression. A look back at that debate, which was over the 1999 Financial Services Modernization Act, reveals that campaign contributions may have influenced the votes of politicians who, a decade later, are now grappling with the implosion of the giant banks they helped to foster.
Looking back at the vote on the 1999 act, and the campaign contributions that led up to it, the nonpartisan Center for Responsive Politics has found that those members of Congress who supported lifting Depression-era restrictions on commercial banks, investment banks and insurance companies received more than twice as much money from those interests than did those lawmakers who opposed the measure.
In 2008, until the U.S. government threw a taxpayer-funded lifeline this month to Wall Street banks drowning in a sea of bad debt, the potential for these financial giants to go under had been dismissed. The banks were “too big too fail.” It was the 1999 legislation, commonly referred to as Gramm-Leach-Bliley (for its sponsors’ names), that cleared the way for these companies to grow so large.
For decades before, the financial industry had been segregated by government regulations dating to 1933, when Congress passed, and President Franklin Roosevelt signed, legislation known as the Glass-Steagall Act. Sponsored by a former Treasury Secretary known as the “father of the Federal Reserve,” Virginia Democrat Carter Glass, and Alabama Democrat Henry Steagall, the law responded to concerns that over-speculation by banks during the 1920s contributed to the stock market crash of 1929 and, in turn, the Great Depression. Commercial banks were taking too many risks with their depositors’ money. Glass-Steagall set up a regulatory wall between investment banking and commercial banking, prohibiting commercial banks from underwriting insurance or securities.
Sixty-six years later, in 1999, the financial services industry succeeded in essentially shattering Glass-Steagall, after putting a number of cracks in the law over the intervening years.
The congressional vote on Gramm-Leach-Bliley in November 1999 was not close. The bill passed handily with bipartisan support in both the House of Representatives and Senate, 450-64 between the two chambers. President Bill Clinton supported the legislation and readily signed it. There were some strong arguments for the bill, chiefly that American banks were too constrained to compete with German and Japanese banks. There was also criticism that the legislation was pushed through too quickly and that it didn’t modernize the marketplace’s regulatory system. Pressing most aggressively for Gramm-Leach-Bliley was Citigroup, which had merged its bank with Travelers insurance company, and needed a change in federal law to keep the giant corporation together.
There was little difference in the money collected by Republicans who supported the bill and those who opposed it; the 255 GOP supporters collected an average of $179,175, while the opponents in their ranks-and there were only five of them-collected $171,890. On the Democratic side, however, there was a wide gulf, as the graph indicates. The 195 Democrats who supported the Financial Services Modernization Act had received an average of $179,920 in the two years and 10 months leading up to its passage, while the 59 Democrats who opposed it received just $83,475.
Many of the Democrats who voted for Gramm-Leach-Bliley are still in Congress, as are many of the Republicans.
The new law paved the way for financial institutions, which were already large, to get even larger, and it put businesses that the nation’s financial regulators had intentionally segregated under the same umbrella once again. Critics of Gramm-Leach-Bliley predicted that if these mega-banks were to ever fail, the impact on the U.S. and global economy would be so great that the public treasury — i.e. taxpayers — would have to rescue them.
Nine years later, Congress is debating a proposal from the Treasury Secretary to assume the bad investments that are weighing down the nation’s financial institutions, at taxpayer expense. And lobbyists representing the financial services industry are trying to once again shape fast-moving legislation to their clients’ benefit.
I wonder how much money Congressional politicians have or will receive for bailing out their profitable benefactors.
Source: OpenSecrets.org, Sept. 23, 2008.