Vol. 1999-9
On
November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
(GLB) Act, an attempt at financial modernization almost two decades in the
making. The President said that the
legislation “is truly historic,” adding that “we have done right by the
American people” (New York Times, November 13, 1999).
Precisely what the President had in mind was not spelled out in the Times
article, but doubtless it was along the lines of Treasury Secretary Lawrence
Summers’ statement at the same ceremony: “With this bill, the American
financial system takes a major step forward toward the 21st Century
– one that will benefit American consumers, business, and the national
economy.” Probably the fairest description of that assessment is that
not everyone agrees. There is no
firm consensus on the importance of what happened.
To
be sure, there are those who see the new legislation as the fulfillment of
long-awaited, fundamental financial reform, well worth the twenty years of
struggle and anguish required to make it a reality.
One such, among many, was Senator Christopher Dodd of Connecticut who,
echoing the Treasury Secretary, said: “I welcome this day as a day of success
and triumph.” (American Banker, November 5, 1999).
Supporters of the new legislation filled the columns of the financial
press by claiming the achievement of “freedom from archaic restrictions,”
pointing to the advantages of “one-stop shopping,” and confidently
predicting an “unleashing of creativity” in banking and finance.
On
the other hand, there are those who regard the new Act quite differently. For example, Senator Paul Wellstone of Minnesota offered the
populist take on the new legislation, stating that it is “the wrong kind of
modernization . . . it concentrates more and more power in fewer and fewer
people.” The Minnesota Democrat
warned that it was likely to be harmful to consumers and taxpayers generally,
leading to “higher fees, decreased lending in low- and middle-income
neighborhoods, and a credit crunch for small business.”
He finished with a populist flourish:
“Today’s lust for global gigantism has swept aside the voices of
prudence” (American Banker, November 5, 1999).
Besides
the more or less predictable reactions of those with a vested political stake in
the new legislation, or some ideological axes to grind, there were the more
pragmatic assessments by experienced observers of the Washington financial
scene, who tend to view the legislation as doing little more than clearing away
some of the debris left over from prior congresses, as well as contributing to
the modernization drive long since set in motion by the market and technological
change. Very broadly, that
judgement seems to be that although Congress did some necessary things, along
with some that were harmful, on balance its efforts
probably were
worthwhile. Still, the new Act does
not amount to very much when measured against the immense task that lies ahead
if true modernization of the American financial system is to be accomplished.
Other commentators agree, probably taking issue only with the Texas
Senator’s estimate of a ten-year wait. For
example, The Economist (October 30, 1999) focused on the failure of the
Congress to do anything about modernizing the nation’s supervision of
financial institutions, which it characterized as “hopelessly fragmented and
costly.” The editors of The
Economist went on to remind readers that “History is liberally dotted with
crises caused by liberalizing finance without improving supervision.”
From another corner, the editors of Barron’s saw the Act’s
major defect as its failure to deal with deposit insurance reform, which they
regard as crucial. The first
sentence of Barron’s editorial was indicative of the reaction: “If
Sen. Phil Gramm and Rep. Jim Leach are lucky, their names will not be remembered
as long as Sen. Carter Glass and Rep. Henry Steagall.”
The editorial then went on to point out that Messrs. Glass and Steagall
had long been remembered because of their connection with “one of the worst
pieces of legislation in 20th century America” (Barron’s,
November 1, 1999).
My assessment is that, on balance, something useful was accomplished by
the enactment of the financial modernization legislation, but only at
considerable potential cost. Moreover,
the job to be done has barely been started.
It was while thinking of this and pondering how to title this report,
that a phrase out of World War II history came to mind.
The Battle of El Alamein, which took place in Egypt in the Fall of 1942,
pitted British forces commanded by General Montgomery against the German and
Italian troops commanded by General Erwin Rommel. At that point, Britain had been at war with Germany for a
little more than three years, but apart from several notable defensive successes
those years had seen an almost unrelieved string of defeats.
The battle at Alamein was Britain’s first major victory, and it was
greeted exuberantly by the English public.
The Prime Minister, Winston Churchhill, while giving fulsome praise to
the British and Empire forces, nonetheless warned a prestigious London audience
in November of 1942: “Now this is
not the end. It is not even the
beginning of the end. But it is,
perhaps, the end of the beginning” (Bartlett’s, 1980, p. 746).
And in fact the war would go on for another three years.
This report consists of four Sections.
The first describes briefly, almost in summary fashion, the key items
included in S. 900, signed into law by President Clinton.
I made this decision primarily because it is clear that every major law
firm, banker association, and consulting organization will be offering written
materials as well as hosting conferences that will examine in explicit detail
the many facets of the Act. There
is no need for me to attempt to do something similar, not only because I could
not do it as well as most of these organizations but also because the essential
story here is not what the enacted legislation says but, rather, how well the
Act accomplished what it set out to do. Thus
Section II focuses on the key modernization objective, eliminating barriers to
affiliations among the various financial industries.
Section III deals with some regulatory implications of the changes
accomplished, while Section IV summarizes the discussion as well as identifying
briefly several of the important tasks yet to be done.