The Pecora Investigation
Its been three years since the market crashed. It turns out the crash didn't plunge us to rock bottom, or if it did, we still sank deeper and deeper until our very identity as Americans was staked to the ocean floor, cold and misshaped by the depth of our fall. That's the way it still is today. 1932 marks a sad year for these 48 states of our broken-spirited union. One in every four men is out of work. If you've been behind the grind you should know that Senate just passed Resolution 84. Now the Committee on Banking and Coins...err, Currency, whatever they're called now we're just bumping gums, but they're gonna go an' take a look into the shady dealings of banks buying and selling stocks with our hard-earned money without even asking! Damn crumbs...
I should have known. Nearly a year's gone by and the investigation's gone nowhere. I heard they hired a new chief counsel, again. Some fella named Ferdinand Pecora. At least he looks like he's got more potential than the last. He's a fan favorite in the states though, lots of folks have been writing in letters to the government to tell about their troubles since the crash and how glad we all are that someone's finally got to doing something about it. It's necessary, nothing's going to get better if this distrust of banking keeps up. Fletcher replaced Norbeck as the chairman of the Committee on Banking and Currency and gave Pecora a hand with Resolution 56 by letting him look into the goings-on of private banks too.
Armed with the power of subpoena, Pecora went after top-ranking officials of the banking world. A subpoena is a court document forces a person to give testimony or provide requested evidence or else face penalty. This let Pecora bring bigwigs like Charles Mitchell, the Chairman of National City Bank to the stand and expose their wrongdoings in the full eye of the public. Before the final publishing, Pecora's banking analysis served as a basis for the smaller Glass Acts which culminated in the Glass-Steagall Act being passed as part of the Banking Act of 1933, about a month after the Pecora Investigations' final report came out.
Its been three years since the market crashed. It turns out the crash didn't plunge us to rock bottom, or if it did, we still sank deeper and deeper until our very identity as Americans was staked to the ocean floor, cold and misshaped by the depth of our fall. That's the way it still is today. 1932 marks a sad year for these 48 states of our broken-spirited union. One in every four men is out of work. If you've been behind the grind you should know that Senate just passed Resolution 84. Now the Committee on Banking and Coins...err, Currency, whatever they're called now we're just bumping gums, but they're gonna go an' take a look into the shady dealings of banks buying and selling stocks with our hard-earned money without even asking! Damn crumbs...
I should have known. Nearly a year's gone by and the investigation's gone nowhere. I heard they hired a new chief counsel, again. Some fella named Ferdinand Pecora. At least he looks like he's got more potential than the last. He's a fan favorite in the states though, lots of folks have been writing in letters to the government to tell about their troubles since the crash and how glad we all are that someone's finally got to doing something about it. It's necessary, nothing's going to get better if this distrust of banking keeps up. Fletcher replaced Norbeck as the chairman of the Committee on Banking and Currency and gave Pecora a hand with Resolution 56 by letting him look into the goings-on of private banks too.
Armed with the power of subpoena, Pecora went after top-ranking officials of the banking world. A subpoena is a court document forces a person to give testimony or provide requested evidence or else face penalty. This let Pecora bring bigwigs like Charles Mitchell, the Chairman of National City Bank to the stand and expose their wrongdoings in the full eye of the public. Before the final publishing, Pecora's banking analysis served as a basis for the smaller Glass Acts which culminated in the Glass-Steagall Act being passed as part of the Banking Act of 1933, about a month after the Pecora Investigations' final report came out.
The Glass-Steagall Act
The investigation of the causes behind the stock market crash was taking too long, and Senator Carter Glass feared that Congress couldn't wait before taking action and signing in preventative legislation. From 1930 until 1932, in the three years proceeding Banking Act of 1933, Sen. Glass introduced bills known as Glass Bills that aimed to to keep investment and commercial banking apart and to have stronger Federal Board supervision of banking activities to prevent another upsurge of speculative credit. Glass did not believe in the deposit insurance championed by Sen. Steagall, advocating that the government should be able to buy the assets of failed banks and hold the until the market was ready and willing to buy back the assets.
Steagall won his case and the FDIC (Federal Deposit Insurance Corporation) was established. Now Americans would not lose all their money if their bank failed or was robbed, as long as the bank was FDIC-approved. While Glass-Steagall act is commonly used to refer to the entire banking act, it largely refers to four important sections of the bill that create limitations for banks that were members of the Federal Reserve:
The investigation of the causes behind the stock market crash was taking too long, and Senator Carter Glass feared that Congress couldn't wait before taking action and signing in preventative legislation. From 1930 until 1932, in the three years proceeding Banking Act of 1933, Sen. Glass introduced bills known as Glass Bills that aimed to to keep investment and commercial banking apart and to have stronger Federal Board supervision of banking activities to prevent another upsurge of speculative credit. Glass did not believe in the deposit insurance championed by Sen. Steagall, advocating that the government should be able to buy the assets of failed banks and hold the until the market was ready and willing to buy back the assets.
Steagall won his case and the FDIC (Federal Deposit Insurance Corporation) was established. Now Americans would not lose all their money if their bank failed or was robbed, as long as the bank was FDIC-approved. While Glass-Steagall act is commonly used to refer to the entire banking act, it largely refers to four important sections of the bill that create limitations for banks that were members of the Federal Reserve:
Section 16 prevented state and federal banks cannot buy or sell securities except for investment securities, government bonds, or if the customer requests that they do on their behalf
Section 20 prevented any (deposit) banks from affiliating with security-trading firms Section 21 banks can sell securities only if they do not accept deposits Section 32 prohibited commercial bank officers and directors from advising these firms |
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The full bill includes much more specific legislation, which were clarified and revised in the Banking Act of 1935. More often forgotten provisions of Glass-Steagall include the establishment of the Federal Open Market Committee and Regulation Q. The FOMC sought to combat unemployment and high inflation by setting target interest rates. Similarly, Regulation Q sought to fix interest by capping interest rates on deposit instruments like savings banks, as well as prohibiting banks from paying interest on business checking accounts.
Banks Get an Inch and then Take a Mile
Glass-Steagall stayed strong for nearly thirty years, and in 1956 the Bank Holding Company Act was passed to further its banking mission. But soon the 1960s brought about the first pressure-cracks in the Glass. Right when things were looking good, they started to fall and deregulation ran rampant. Lobbying was the new way of the 60s and the banks did everything in their power to be allowed back into the municipal bond market game. The Swinging 60s resurfaced the counterculture front that was seen throughout much of the Roaring 20s, but the similarities were not enough to remind people of why regulation was necessary.
As time funked and grooved its way into the 70s, brokerage firms that dealt in the riskier practices that were supposed to remain separate from commercial banking starting playing dress-up as commercial banks and expanding their services to include interest-accumulation money market accounts as well as checks, and credit/debit cards.
Reaganomics was the way of the 1980s and under President Reagan there was brutal deregulation. By the end of the 80s, Glass-Steagall looks like a windshield held together by duct tape. Heavy deregulation by the Reagan administration under Reaganomics The Federal Reserve Board reinterprets Section 20 to allow, on the premise that the legislation only specifies that banks cannot be "engaged principally" with underwriting. So by 1986 investment banking could make up to 5% of a banks total revenue. Well, that's not too bad...
Glass-Steagall stayed strong for nearly thirty years, and in 1956 the Bank Holding Company Act was passed to further its banking mission. But soon the 1960s brought about the first pressure-cracks in the Glass. Right when things were looking good, they started to fall and deregulation ran rampant. Lobbying was the new way of the 60s and the banks did everything in their power to be allowed back into the municipal bond market game. The Swinging 60s resurfaced the counterculture front that was seen throughout much of the Roaring 20s, but the similarities were not enough to remind people of why regulation was necessary.
As time funked and grooved its way into the 70s, brokerage firms that dealt in the riskier practices that were supposed to remain separate from commercial banking starting playing dress-up as commercial banks and expanding their services to include interest-accumulation money market accounts as well as checks, and credit/debit cards.
Reaganomics was the way of the 1980s and under President Reagan there was brutal deregulation. By the end of the 80s, Glass-Steagall looks like a windshield held together by duct tape. Heavy deregulation by the Reagan administration under Reaganomics The Federal Reserve Board reinterprets Section 20 to allow, on the premise that the legislation only specifies that banks cannot be "engaged principally" with underwriting. So by 1986 investment banking could make up to 5% of a banks total revenue. Well, that's not too bad...
A year later, banking giants J.P. Morgan and Citicorp convince the Federal Reserve Board to further deregulate Glass-Steagall and allow them to engage in a list of riskier services including municipal revenue bonds, mortgage-backed securities, and commercial papers. Paul Volcker was chairman of the board at the time and fought against the concessions, fearing reckless lending but in the end he was outvoted. Coincidentally I'm sure, Alan Greenspan, who had had been director of J.P. Morgan, became chairman of the Fed Board only months after the Board ignored Volcker. The Fed was much more sympathetic towards banking freedom after the change. Greenspan maintained his position as chairman through the dot-com bubble, only leaving the position in 2006 before the housing-bubble peaked.
Under Greenspan and a Fed Board working closely with the Bush Administration, deregulation came in a mudslide. 1989 brought a new wave of allowances to banks, increasing their investment-revenue cap from 5% to 10%. Meanwhile, J.P. Morgan, Citicorp, Banker's Trust, and Chase Manhattan were given the Fed green light to start dealing debt and equity securities. In 1990 J.P. Morgan was the first bank the Federal Reserve allowed to underwrite securities.
Congress spent the next decade trying to repeal the Glass-Steagall Act. By the end of 1996, the legislation still stands, but its soul is shattered and it's forced to lay on its deathbed as Congress increases the investment-revenue cap once again, this time from 10% to a whopping 25%. At this point Glass-Steagall was more relic than legislation, using its finals years and surviving ordinances in a futile attempt to keep banks away from owning companies that underwrite insurance.
Just when it looks like banks can't get any bigger, they get bigger. The end of the millennium is met with mergers. Bankers Trust buys out the security firm, Alex Brown & Co., officially combining the two types of banking for the first time in America. The worst of it came when the director of Travelers bank, Sandy Weills, and the director of Citicorp, John Reed agreed to a $70 billion merger, the biggest in history, resulting in Citigroup Inc. The company was given two years to divest to the point of full compliance with Glass-Steagall after it was approved by the Fed. As soon as the merger was complete however, Weills and Reed decided to play risky. They tossed divesting to the wayside and plunged headfirst into a quickly executed lobbying campaign, revitalizing Congressional efforts for full repeal. Several hundred million dollars are invested in the lobbying campaign and only a month later, House passes a vote to allow banks access to the insurance underwriting that had so long eluded them. Now that investment, underwriting, and insurance companies were free to combine unfettered, there was practically no limit to the size and power that these merged institutions could reach. On November 12, 1999, Clinton signs the Financial Services Modernization Act, to the praise and congratulations of Weills and Reed. Better known as the Gramm-Leach-Bliley Act, this fruit of conservative lobbying finally destroyed the already near-dead Glass-Steagall Act.
Under Greenspan and a Fed Board working closely with the Bush Administration, deregulation came in a mudslide. 1989 brought a new wave of allowances to banks, increasing their investment-revenue cap from 5% to 10%. Meanwhile, J.P. Morgan, Citicorp, Banker's Trust, and Chase Manhattan were given the Fed green light to start dealing debt and equity securities. In 1990 J.P. Morgan was the first bank the Federal Reserve allowed to underwrite securities.
Congress spent the next decade trying to repeal the Glass-Steagall Act. By the end of 1996, the legislation still stands, but its soul is shattered and it's forced to lay on its deathbed as Congress increases the investment-revenue cap once again, this time from 10% to a whopping 25%. At this point Glass-Steagall was more relic than legislation, using its finals years and surviving ordinances in a futile attempt to keep banks away from owning companies that underwrite insurance.
Just when it looks like banks can't get any bigger, they get bigger. The end of the millennium is met with mergers. Bankers Trust buys out the security firm, Alex Brown & Co., officially combining the two types of banking for the first time in America. The worst of it came when the director of Travelers bank, Sandy Weills, and the director of Citicorp, John Reed agreed to a $70 billion merger, the biggest in history, resulting in Citigroup Inc. The company was given two years to divest to the point of full compliance with Glass-Steagall after it was approved by the Fed. As soon as the merger was complete however, Weills and Reed decided to play risky. They tossed divesting to the wayside and plunged headfirst into a quickly executed lobbying campaign, revitalizing Congressional efforts for full repeal. Several hundred million dollars are invested in the lobbying campaign and only a month later, House passes a vote to allow banks access to the insurance underwriting that had so long eluded them. Now that investment, underwriting, and insurance companies were free to combine unfettered, there was practically no limit to the size and power that these merged institutions could reach. On November 12, 1999, Clinton signs the Financial Services Modernization Act, to the praise and congratulations of Weills and Reed. Better known as the Gramm-Leach-Bliley Act, this fruit of conservative lobbying finally destroyed the already near-dead Glass-Steagall Act.