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Sub-Prime: Glass-Steagall Act

September 23, 2008 Leave a comment Go to comments

The Glass-Steagall Act, a Depression-era measure was enacted to prevent cross-ownership of banking, securities and insurance companies. The original law was passed in the 1930s to constrain companies Congress deemed responsible for the 1929 stock market crash

Under the Glass-Steagall Act (1933) , which separated commercial and investment banking, and also created the Federal Deposit Insurance Corporation, banks were prohibited from the underwriting of corporate debt and equity, one of the most profitable aspects of investment banking.

Prior to the repeal of the Glass-Steagall Act (1933) Securities firms and insurance companies had long lobbied for a repeal of this Act, many Congresses have attempted to rescind the regulations. Banking organisations have opposed a rollback, however, arguing it would enable large financial institutions to squeeze smaller banks out of business.

A Vote in congress on May 29th, 1998 during the term of the Clinton Administration rescinded this bill – the vote was so close at 214 to 213 – see more information here and here .

So in a way, ten years later!!   I do know that it is not that simple – but if we were relying on self regulation and the ethics and honesty of organisations to restrain themselves – we really were in La La land.

Today on Wall Street:-

Goldman Sachs   (NYSE:GS), has won a respite from investor panic by transforming itself into a bank holding company. The change in status allows it (and Morgan Stanley below) to take advantage of different accounting rules, gives them more access to federal funds and buys it time to stabilise their funding base by acquiring deposits.

Morgan Stanley (NYSE: MS), one of Wall Streets biggest investment banks, received regulatory approval from the Federal Reserve to become a bank holding company — making it a commercial bank and allowing it to receive deposits. Morgan Stanley will also now be regulated by the Fed instead of the Securities and Exchange Commission.

Also Morgan Stanley will sell up to 20 percent of the company to Mitsubishi UFJ Financial Group Inc (Mitsubishi, which has $1.1 trillion in deposits, will be able to add one member to Morgan Stanley’s board of directors) – the partnership would allow both banks to expand their global footprint and help Morgan Stanley transition to a commercial bank, John Mack, Morgan Stanley’s chairman and chief executive, said in a statement. The deal also provides further financial support to help Morgan Stanley shore up its capital base during the ongoing credit crisis

As these are now banks – they are now under the control of the Federal Reserve and not as previous the United States Securities and Exchange Commission.

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