Please cite the source for any additional article that you use for information. The Glass-Steagall Act of 1933 effectively separated commercial banking from investment banking. In 1999, the Gramm-Leach-Bliley Act repealed the Glass-Steagall Act, and allowed for the rise of several very large banks with both significant commercial and investment bank activities. Do you think that the repeal of the Glass-Steagall Act had a significant role to play in aggravating the financial crisis of the late 2000s? Support your arguments with at least one outside source.

What Is GlassSteagall? The 82Year Old Banking Law That Stirred the Debate

Neil Irwin OCT. 14, 2015

Eight times in Tuesday nights Democratic debate, candidates mentioned a law that Congress passed in 1933, was signed by Franklin Delano Roosevelt, and hasnt been the law of the land in the United States for 16 years.

This prompts some obvious questions. What is the GlassSteagall Act, why do the candidates Bernie Sanders and Martin OMalley want to reinstate it, and how did it come to star in a presidential debate in 2015?

What is the GlassSteagall Act?

When people talk about banking, they are talking about two broad classes of activities. Commercial banking is what happens at your neighborhood branch: You deposit money in a checking or savings account, and the bank uses those deposits to make loans to consumers or small businesses. Investment banking refers to the kind of banking activity more common on Wall Street, like helping large companies issue stock or bonds in order to fund themselves, and trading securities in hope of making a profit.

In the depths of the Great Depression, a widespread view was that the nations ills stemmed from these two types of banking having become intertwined. Problems on Wall Street rippled through the financial system to cause ordinary depositors to lose money and ordinary bank lending to dry up.

The governments response was the Banking Act of 1933, commonly known as the GlassSteagall Act (for the bills sponsors, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama), which required that commercial banking and securities activities be separated, not to take place within the same financial institution.

Why and how was it repealed?

Over the years, banks chafed at the limits on what businesses they could enter. The largest banks found themselves at a competitive disadvantage with banks from Europe that faced no such limitations and could offer both commercial and investment banking services to clients. Smaller banks in the United States wanted to begin offering investment management services.

Bankers and many regulators argued that the risks GlassSteagall aimed to guard against were overstated (and indeed regulators began allowing activity that violated the spirit of the law well before it was formally repealed). In 1999, Congress passed and Bill Clinton signed the GrammLeachBliley Act, overturning Glass Steagall.

The action allowed the rise of several very large banks in the United States with business lines that cut across both commercial lending and securities business, particularly Citigroup, JPMorgan Chase and Bank of America. Those three banks alone have combined assets of about $6.5 trillion, or 36 percent of the United States gross domestic product.

So did that cause the financial crisis?

Not exactly! In a popular retelling (see for example this version from Aaron Sorkins HBO show Newsroom), it was the repeal of GlassSteagall that unleashed the era of Wall Street risktaking and the 2008 global financial crisis.

Theres no question that aggressive risktaking by financial firms was a key driver of the crisis. But the arguments that GlassSteagalls repeal that is, the commingling of investment banking and commercial banking within the same firm was a major cause are tenuous.

Of the big firms that got into trouble and helped trigger the crisis, only a few were the megabanks enabled by the action on GlassSteagall.

Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley were all traditional investment banks heading into the crisis. Fannie Mae and Freddie Mac were governmentsponsored housing finance companies. A.I.G. was an insurance company. Some of the banks that were most aggressive about making subprime and other risky mortgage loans included Washington Mutual and Countrywide, both of which were organized as a savings and loan in the runup to the crisis. Wachovia was a big commercial bank that had also gotten into the insurance and securities businesses but it collapsed not because of those activities but because of its topofthemarket acquisition of mortgage lender Golden West.

It is true that two of the biggest bailout recipients were megabanks with both commercial and investment banking arms, Citigroup and Bank of America. And while JPMorgan Chase and Wells Fargo weathered the crisis relatively well, they also accepted bailouts at the insistence of the Treasury and Federal Reserve in 2008.

In other words, the megabanks that were enabled by GlassSteagall repeal were certainly among the firms that caused the crisis, and did require bailouts. It is less clear that they were meaningfully more culpable than companies whose structure had nothing to do with the GlassSteagall repeal, or that the existence of both commercial banking and investment banking under the same corporate entity was a primary reason they got into trouble.

The stronger arguments for GlassSteagall repeal as a cause of the crisis are also subtler ones. The investment manager Barry Ritholtz, for example, has argued that the repeal of GlassSteagall may not have caused the crisis but its repeal was a factor that made it much worse by allowing the mid2000s credit bubble to inflate larger than it otherwise would have and making banks more complex and thus prone to failure.

How does the Volcker Rule fit into this?

The DoddFrank financial reform law in 2010 included a rule that aimed to reduce risky activity in megabanks in other words, to address some of the same vulnerabilities that GlassSteagall was designed to prevent without breaking up the banks completely.

The Volcker Rule, named for the former Fed chairman Paul Volcker, aims to prevent systemically important banks from engaging in casinostyle trading activity. So, for example, Citigroup can still help a company issue bonds, but isnt allowed to run an internal hedge fund in which traders place giant speculative bets on the direction of the Japanese yen.

Shaping those rules has been a hardfought battle between financial reform advocates and the banks, and Hillary Clinton has proposed toughening it, including by eliminating a provision of the DoddFrank Act that allows banks to invest in risky hedge funds.

In other words, refinement of the Volcker Rule is a pathway for advocates of tougher limitations on banks risktaking who do not want to break them up entirely.

So why is GlassSteagall so central to the Democratic debate?

GlassSteagall repeal is a useful cudgel for Bernie Sanders and Martin OMalley to use against Hillary Clinton, not least because her husband signed the law that repealed it and because it is more instantly recognizable to many Democratic primary voters than, say, the triparty repo market (a key part of the socalled shadow banking system that was one of the key transmission mechanisms for the 2008 crisis).

It allows them a point of differentiation with Mrs. Clinton, whose financial reform plan, released last week, includes big new fees on the biggest banks and new powers for regulators to break them up, but does not propose breaking up big banks outright.