Glass–Steagall Act The Glass–Steagall Act is a term often applied to the entire Banking Act of 1933, after its Congressional sponsors, Senator Carter Glass (D) of Virginia, and Representative Henry B. Steagall (D) of Alabama.[1] The term Glass–Steagall Act, however, is most often used to refer to four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms.[2] This article deals with that limited meaning of the Glass–Steagall Act. A separate article describes the entire Banking Act of 1933. Starting in the early 1960s federal banking regulators interpreted provisions of the Glass– Steagall Act to permit commercial banks and especially commercial bank affiliates to engage in an expanding list and volume of securities activities.[3] By the time the affiliation restrictions in the Glass–Steagall Act were repealed through the Gramm–Leach–Bliley Act of 1999 (GLBA), many commentators argued Glass–Steagall was already “dead.”[4] Most notably, Citibank’s 1998 affiliation with Salomon Smith Barney, one of the largest US securities firms, was permitted under the Federal Reserve Board’s then existing interpretation of the Glass–Steagall Act.[5] President Bill Clinton publicly declared "the Glass–Steagall law is no longer appropriate."[6] Many commentators have stated that the GLBA’s repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the late-2000s financial crisis.[7][8][9] Some critics of that repeal argue it permitted Wall Street investment banking firms to gamble with their depositors' money that was held in affiliated commercial banks.[10] Others have argued that the activities linked to the financial crisis were not prohibited (or, in most cases, even regulated) by the Glass–Steagall Act.[11] Commentators, including former President Clinton in 2008 and the American Bankers Association in January 2010, have also argued that the ability of commercial banking firms to acquire securities firms (and of securities firms to convert into bank holding companies) helped mitigate the financial crisis.[12] Name confusion: 1932 and 1933 Glass–Steagall Acts Sen. Carter Glass (D—Va.) and Rep. Henry B. Steagall (D—Ala.-3), the co-sponsors of the Glass–Steagall Act. Two separate United States laws are known as the Glass–Steagall Act. Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency. The Glass–Steagall Act of 1932 authorized Federal Reserve Banks to (1) lend to five or more Federal Reserve System member banks on a group basis or to any individual member bank with capital stock of $5 million or less against any satisfactory collateral, not only “eligible paper,” and (2) issue Federal Reserve Bank Notes (i.e., paper currency) backed by US government securities when a shortage of “eligible paper” held by Federal Reserve banks would have required such currency to be backed by gold.[13] The Federal Reserve Board explained that the special lending to Federal Reserve member banks permitted by the 1932 Glass–Steagall Act would only be permitted in “unusual and temporary circumstances.”[14] The entire Banking Act of 1933 (the 1933 Banking Act), which is described in a separate article, is also often referred to as the Glass–Steagall Act.[15] Over time, however, the term Glass– Steagall Act came to be used most often to refer to four provisions of the 1933 Banking Act that separated commercial banking from investment banking.[2] Congressional efforts to “repeal the Glass–Steagall Act” referred to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms).[16] Those efforts culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.[17] Legislative history of the Glass–Steagall Act Main article: Banking Act of 1933 The article on the 1933 Banking Act describes the legislative history of that Act, including the Glass–Steagall provisions separating commercial and investment banking. As described in that article, between 1930 and 1932 Senator Carter Glass (D-VA) introduced several versions of a bill (known in each version as the Glass bill) to regulate or prohibit the combination of commercial and investment banking and to establish other reforms (except deposit insurance) similar to the final provisions of the 1933 Banking Act.[18] On January 25, 1933, during the lame duck session of Congress following the 1932 elections, the Senate passed a version of the Glass bill that would have required commercial banks to eliminate their securities affiliates.[19] The final Glass–Steagall provisions contained in the 1933 Banking Act reduced from five years to one year the period in which commercial banks were required to eliminate such affiliations.[20] Although the deposit insurance provisions of the 1933 Banking Act were very controversial, and drew veto threats from President Franklin Delano Roosevelt, President Roosevelt supported the Glass–Steagall provisions separating commercial and investment banking, and Representative Steagall included those provisions in his House bill that differed from Senator Glass’s Senate bill primarily in its deposit insurance provisions.[21] As described in the 1933 Banking Act article, many accounts of the Act identify the Pecora Investigation as important in leading to the Act, particularly its Glass–Steagall provisions, becoming law.[22] While supporters of the Glass–Steagall separation of commercial and investment banking cite the Pecora Investigation as supporting that separation,[23] Glass–Steagall critics have argued that the evidence from the Pecora Investigation did not support the separation of commercial and investment banking.[24] The Glass–Steagall provisions separating commercial and investment banking The Glass–Steagall separation of commercial and investment banking was in four sections of the 1933 Banking Act (sections 16, 20, 21, and 32).[2] Section 16 Section 16 prohibited national banks from purchasing or selling securities except for a customer’s account (i.e., as a customer’s agent) unless the securities were purchased for the bank’s account as “investment securities” identified by the Comptroller of the Currency as permitted national bank investments. Section 16 also prohibited national banks from underwriting or distributing securities.[25] Section 16, however, permitted national banks to buy, sell, underwrite, and distribute US government and general obligation state and local government securities. Such securities became known as “bank-eligible securities.”[25] Section 5(c) of the 1933 Banking Act (sometimes referred to as the fifth Glass–Steagall provision) applied Section 16’s rules to Federal Reserve System member state chartered banks.[26] Section 20 Section 20 prohibited any member bank of the Federal Reserve System (whether a state chartered or national bank) from being affiliated with a company that “engaged principally” in “the issue, flotation, underwriting, public sale, or distribution” of securities.[27] Section 21 Section 21 prohibited any company or person from taking deposits if it was in the business of “issuing, underwriting, selling, or distributing” securities.[28] Section 32 Section 32 prohibited any Federal Reserve System member bank from having any officer or director in common with a company “engaged primarily” in the business of “purchasing, selling, or negotiating” securities, unless the Federal Reserve Board granted an exemption.[29] 1935 clarifying amendments Sections 16 and 21 contradicted each other. The Banking Act of 1935 “clarified” that Section 21 would not prevent a deposit taking company from engaging in any of the securities underwriting and dealing activities permitted by Section 16. It also amended Section 16 to permit a bank to purchase stocks, not only debt securities, for a customer’s account.[30] The Banking Act of 1935 amended Section 32 to make it consistent with Section 20 and to prevent a securities company and bank from having any employee (not only any officer) in common. With the amendment, both Sections 20 and 32 applied to companies engaged in the “issue, flotation, underwriting, public sale, or distribution” of securities.[31] Prohibitions apply to dealing in and underwriting or distributing securities The Glass–Steagall Act was primarily directed at restricting banks and their affiliates underwriting or distributing securities. Senator Glass, Representative Steagall, Ferdinand Pecora, and others claimed banks had abused this activity to sell customers (including correspondent banks) high risk securities.[32] As particular “conflicts of interest,” they alleged bank affiliates had underwritten corporate and foreign government bonds to repay loans made by their affiliated banks or, in the opposite direction, banks had lent to or otherwise supported corporations that used the bank’s affiliate to underwrite their bonds.[33] Sections 16 and 5(c) meant no member bank of the Federal Reserve System could underwrite or distribute corporate or other non-governmental bonds.[25] Sections 20 and 32 meant such a bank could not own (directly or through the same bank holding company) a company “engaged primarily in” such underwriting or other securities activities nor have any director