What the Financial Services Industry Puts Together Let No Person Put Asunder: How the Gramm-Leach-Bliley Act Contributed to the 2008-2009 American Capital Markets Crisis

Abstract

The current Subprime Financial Crisis has shaped up to be one of the most dramatic and impactful events in the past few decades. No one particular factor or reason fully accounts for why the American economy suffered set-backs unseen since the Great Depression of the 1930’s. Some of the roots the current financial crisis started taking hold in 1999, when Congress passed the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act. Gramm-Leach-Bliley brought about sweeping deregulation to the financial services industry. In essence, Gramm-Leach-Bliley swept away almost six (6) decades of financial services regulation precipitated by the Great Depression of the 1930’s. Gramm-Leach-Bliley explicitly repealed the Glass-Steagall Act passed in the 1930’s to stamp out much of the evil that caused the Great Depression.

2009 is a momentous year: We are marking the tenth anniversary of passage of the Gramm-Leach-Bliley Act. This Article posits that passage of the Gramm-Leach-Bliley Act in 1999 and the Republican push for deregulation, and more importantly repeal of the firewalls established by the Glass-Steagall Act, among many factors helps account for why we find ourselves in the midst of one of the worst and deepest financial crises in our nation’s history. This Article examines the Senate debates leading up to the passage of the Gramm-Leach-Bliley Act. Interestingly, a number of politicians at the time issued powerful criticisms, predictions, and forecasts that should have been taken seriously as warning of what was to come. Most notably, Senators Byron Dorgan (D), North Dakota, Russell Feingold (D), Wisconsin, Barbara Mikulski (D), Maryland, stood out as vocal critics.

To gain further insight into the reach and effect of the Gramm-Leach-Bliley Act, this Article examines the deregulatory effect of the legislation on two (2) corporations in particular. This Article conducts case studies of Citigroup and Bank of America to understand the impact of deregulation under Gramm-Leach-Bliley. This Article examines whether firewalls are necessary or needed in the financial services industry. As the TARP Program has demonstrated, many have made the argument that some institutions are “too big to fail.” This Article explores what a return to Glass-Steagall regulation would look like. Alternatively, this Article explores a three-tiered approach to financial services industry regulation. Finally, this Article explores whether we should let financial service industry institutions fail from a market efficiency standpoint, in the absence of strong regulation in the form of firewalls or stringent regulatory oversight.

Keywords: Gramm-Leach-Bliley, Financial Services Modernization Act of 1999, Glass-Steagall Act, TARP, Citigroup, Bank of America, Subprime Financial Crisis, American Capital Markets Crisis, Too Big To Fail, Systemically Important Financial Institutions, Deregulation

JEL Classification: D21, D23, D63, E3, E32, E51, E61, E63, E65, G1, G14, G18, G21, G22, G28, G34, G38, H1, H11, K