With recent breathtaking events bringing the once-mighty Bear Stearns to its knees and shaking financial markets to the core, I can’t help remembering a time when the banking industry was fairly stodgy, operating on slim profit margins and an entrenched policy of conservative behavior. (Not that there weren’t occasional rule-benders.)
For many years, banking was mostly a sleepy enterprise, with deals being done that in no way rivaled the excitement and risk of Wall Street (investment banking).
Then Glass-Steagall crumbled. For those who don’t know, the Glass-Steagall Act of 1933 separated investment banking and commercial banking activities to try to prevent the great crash of 1929 from ever happening again. It also lowered risk for investors through the protective barriers it mandated.
The crumbling actually began earlier, but sped up in the mid-1990s as bank holding companies began hungrily acquiring investment banks. In 1999, The Gramm-Leach-Bliley Act was passed by Congress to legitimize the acquisitions and dealings that were already happening. It repealed the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. Continue reading »