“We did not create the problems,” said Senate Democratic floor leader Harry Reid of Nevada on Sept. 26, amid the frantic efforts to assemble a Wall Street bailout package.
Such comments have been common since the crisis unfolded, as Democrats have tried to distance themselves from the fiasco, but an examination of the record of legislation that lifted regulation of Wall Street and allowed rampant mergers and predatory practices show the Democrats were in on the act.
On Sept. 16, Reid laid the blame for the Wall Street crisis at the feet of a measure called the Gramm-Leach-Bliley Act, enacted in 1999. In an interview with the Hill newspaper, Reid blasted former John McCain advisor Phil Gramm “who, as a senator, was responsible for deregulation in the financial services industries that paved the way for much of this crisis to occur. It was Phil Gramm who pushed legislation through a Republican Senate that allowed firms like Enron to avoid regulation … and it was Phil Gramm’s legislation that now allows Wall Street traders to bid up the price of oil, leaving us to pay the bill.”
But Reid voted for Gramm’s legislation.
It was 3:30 in the afternoon of Nov. 4, 1999, in the District of Columbia when the final momentous vote was cast. The Senate was voting on the conference version of Senate Bill 900, now known as the Gramm-Leach-Bliley Act and also called the “Financial Services Modernization Act.” It was so modern that it was taking the financial system back to the rules under which financial institutions operated in the 1920s.
Nevada’s senators, both Democrats, split on S. 900. Six months earlier, Reid and his longtime political partner, Sen. Richard Bryan, had both voted against an earlier version, but now Reid was switching sides. It passed the Senate 90-8. One member, John McCain, did not vote. (He had supported the earlier version.) Only seven out of 40 Democrats voted against the bill. One out of 45 Republicans voted against it.
Late that night, 43 minutes before midnight, the House also voted on the conference report. Nevada’s two House members, Democrat Shelley Berkley and Republican Jim Gibbons, both voted for it. So, again, did most Democrats—151 out of 205—as did 210 out of 225 Republicans.
It was truly a bipartisan action, and since President Bill Clinton supported the bill, his signature was assured. He signed it on Nov. 12.
What the Congress had passed and Clinton approved was a dismantling of the second Glass-Steagall Act of 1933, which had barred banks from the insurance and investment businesses. It also repealed portions of the Bank Holding Company Act of 1956, which had prohibited a bank holding company from owning non-financial companies.
Glass-Steagall was passed to end activities that had led to the Great Depression. It sought to eliminate the conflicts of interest created when banks were permitted to underwrite stocks and bonds. Before that, ordinary investors were damaged by banks who had a larger interest in promoting stocks than in protecting investors. The new law forced banks to choose between lending or brokering.
Unleashing the Street
In 1999, the Nation magazine predicted that the enactment of S. 900 would “usher in another round of record-breaking mergers, as companies rush to combine into ‘one stop shopping’ holding operations, concentrating financial power in trillion-dollar global giants and paving the way for future taxpayer bailouts of too-big-to-fail financial corporations. Regulation of this new universe will be minimal, with powers scattered among a half-dozen federal agencies and fifty state insurance departments—none with sufficient clout to do the job.”
President Clinton and his fellow Democrats did not agree. At the signing ceremony, Clinton said, “Today I am pleased to sign into law S. 900, the Gramm-Leach-Bliley Act. … Removal of barriers to competition will enhance the stability of our financial services system. Financial services firms will be able to diversify their product offerings and thus their sources of revenue.”
Also at that ceremony, Republican Sen. Gramm of Texas, the principal sponsor of S. 900, issued a statement: “In the 1930s, at the trough of the Depression, when Glass-Steagall became law, it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets. We are here today to repeal Glass-Steagall because we have learned that government is not the answer.”
It is an indication of how the relationship between corporate lobbyists and Congress has become like that of a master and pet that the corporate world was already acting as though S. 900 was law, so confident were they that it would pass. A year and a half earlier, on April 7, 1998, Citibank and Travelers had announced a merger, forming Citigroup. Why wait on a little thing like legality? Mergers were lined up like planes on a tarmac, just waiting for the signal for take off.
Repeal of Glass-Steagall provisions, together with the reluctance of the Clinton and Bush administrations to use antitrust law, led to the mammoth corporations that by 2008 were too big to be allowed to fail, holding the nation hostage to bigness.
A source close to Reid suggests the senator expected increased bigness from S. 900 but not the lack of regulation that resulted—”Proponents of the bill saw it as a way to fuel growth … GLB might have led to more firms becoming ‘too big to fail,’ certainly a regulatory hazard, but its purpose was not to relax regulation.”
Former president Clinton disagrees with Reid that S. 900 is the culprit in the Wall Street crisis. After last month’s financial disasters unfolded, Clinton told the Wall Street Journal, “On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence. But I can’t blame [the Republicans]. This wasn’t something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [banks] to go into the investment banking business as continental European investment banks could always do, that it might give us a more stable source of long-term investment.”
One sign of how cozy on corporate issues Republicans and Democrats have become with each other’s policies is that U.S. Rep. Jim Leach of Iowa, a Republican, was invited to speak at this year’s Democratic National Convention in Denver and is a founder of Republicans for Obama. That’s Leach as in Gramm-Leach-Bliley.
Why had Bryan been the only Nevada congressmember to vote against the bill? When he was governor, the 1987 Nevada Legislature had allowed banks to get into the insurance business. Bankers and their lobbyists trouped through Bryan’s office to try to convince the governor to sign the measure. But Clark County Sen. Robert Coffin’s talk of people going to banks for car loans and then being led across the lobby to the banks’ own insurance desk was more compelling to the governor. Bryan was steeped in the lessons and lore of the Great Depression, and so he vetoed that bill. He says now that the same impulses guided him in 1999.
“In my view, it was high risk to eliminate what I thought was an important regulator barrier that was set up in the wake of the collapse of the markets in the Great Depression,” Bryan said last week. “I was not persuaded that we ought to eliminate that regulator oversight. In light of what’s occurred, the idea of loosing the regulator oversight is pretty foolish. At the time, we were told that the intervening years [since 1933] had changed that underlying premise. There was tremendous lobbying by the financial institutions, the brokerages, the Wall Street community.”
But Bryan said nothing he heard made a convincing case to him that much had changed. Numerous financial crises, not just the Great Depression but panics in the 19th century and recessions in the 20th, convinced him that Glass-Steagall was still sound, and that to vote for S. 900 would leave the public exposed to financial predators.
“It seemed to me that the lessons of all the financial crises was that the free market could not be left entirely to itself. I don’t want to stifle the private sector, but the full impulses that have been with us since our ancestors rose on two feet are an inclination for greed and taking advantage of each other.”