The Business of Banking: Before and after Gramm-Leach-Bliley

I. INTRODUCTION The Gramm-Leach-Bliley Actl was enacted with enormous, indeed histrionic fanfare at the end of 1999. The fanfare seems misplaced because Gramm-Leach-Bliley is not a very important statute. Ostensibly, the most important feature of the new law was the repeal of the Depression-era Glass-Steagall Act,2 which imposed a legal separation on the commercial and investment banking industries.3 However, over time, banks and investment banks had conspired with compliant regulators to punch giant holes in the statutory restrictions on combining commercial banking and investment banking. In other words, the Glass-Steagall Act was already a dead letter when Gramm-Leach-Bliley was passed. All the Act did was to formalize the death. Glass-Steagall was dead before Gramm-Leach-Bliley because federal regulators, particularly the Federal Reserve Board and the Comptroller, had already eviscerated the "Maginot Line" between commercial and investment banking through liberal regulatory interpretations of the statute long before the Act was passed. Thus Congress, in passing the Act, merely gave formal recognition to the changes that had been taking place in the marketplace over the past twenty years.4 One need not look further than the Bankers Trust Company acquisition of Alex Brown, or the Travelers Insurance business combinations with both CitiBank and Salomon Brothers for proof of the fact that, in large part, the new law simply gave formal recognition to changes that had already occurred in the financial markets. This Article will argue that the Gramm-Leach-Bliley Act was based on a premise about the business of banking that is fundamentally false. The articulated rationale for the passage of the Act was that technological developments had already occurred that eviscerated the traditional distinctions between these two activities. These technological innovations were making traditional commercial banking obsolete. Under this view, if the nation's commercial banks were to survive, they would have to move into new, more profitable areas like investment banking. As Laurence H. Meyer, a member of the Board of Governors of the Federal Reserve put it, "Part of the motivation for the [new] bill was to put US banking organizations in a more competitive position. To the extent that securities and banking are increasingly interconnected activities with power synergies, US banking organizations are better able to play in the global arena than they were before."5 In other words, the Gramm-Leach-Bliley Act was, at its core, ostensibly a bailout bill for the banking industry. The justification for the statute was that it was needed to rescue a commercial banking industry that was thought to be obsolete.6 Banks were thought to be in a "long downward spiral" caused by "deep structural problems" that threatened the existence of federally insured depository institutions and raised "the specter of ongoing deposit-insurance cases."7 The way to save the industry, the Act's proponents maintained, was to allow banks to merge with nonbanking financial firms. Such mergers would serve a variety of purposes. First, such mergers would be cheap substitutes for the costly bank failures that might occur if the industry were to collapse under the weight of its own desuetude. Second, mergers would make the United States financial services industry more competitive, particularly in international competitive markets. Finally, permitting financial services conglomerates to exist would assist the operation of the U.S. managerial labor markets by permitting highly skilled bankers to transfer their talents to other, more valuable activities such as investment banking or insurance.8 Alan Greenspan, the Chairman of the Federal Reserve Board was quite explicit about the fact that he was worried about the impending obsolescence of banks. Chairman Greenspan argued that "[p]ublic policy should be concerned with the decline in the importance of banking. …