Lehman’s Failure Marks The End Of A Banking Era

Aside from signaling the finish of a time for Lehman Brothers and Merrill Lynch, this weekend’s activity definitively drew a collection by the end of another historical era: the Age of Glass-Steagall. The Glass-Steagall Act is the Depression-era law that separated commercial and investment banking. It had been repealed in 1998 functionally, when Travelers (the mother or father company of Salomon Smith Barney) acquired Citicorp.

Glass-Steagall was one of the many necessary measures taken by Franklin Delano Roosevelt and the Democratic Congress to deal with the Great Depression. Speaking Crudely, in the 1920s commercial banking institutions (the types that took deposits, made construction loans, etc.) plunged into the bull market recklessly, making margin loans, underwriting new issues and investment private pools, and trading stocks.

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When the bubble popped in 1929, contact with Wall Street helped move down the commercial banks. In the absence of deposit insurance and other backstops, the total results were damaging. Wall Street’s failure helped destroy Main Street. The plan response was to erect a wall structure between investment bank and commercial banking.

It outlasted the Berlin Wall with a few decades. In the 1990s, as another bull market took hold, momentum built to overturn Glass-Steagall. Commercial banks were wanting to enter high-margin businesses like underwriting hot technology stocks. Brokerage companies saw commercial banking institutions, with their substantial customer bases, as great distribution stations for stocks, shared money, and other financial products that they created. Generally speaking, the investment banking institutions were the aggressors. In April 1998, Sandy Weill’s Travelers, which owned Salomon Smith Barney, merged with Citicorp. Year The following, Congress exceeded and President Clinton agreed upon the Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act.

This laws effectively removed the prohibition on commercial banking institutions owning investment banking institutions and vice versa. Since that time, both industries have come to a qualification jointly. And generally, the investment banks, which weren’t at the mercy of regulation by the Federal Reserve and didn’t have to stick to stodgy capital requirements, have been the alpha dogs.

In 2000, the investment bank company J.P. Morgan bought commercial bank or investment company Chase. Until the summertime of 2007, the debt-powered independent broker-dealers who minted money with stock brokering, proprietary trading, and advising on mergers and acquisitions looked established to leave boring commercial-banks in their dirt. But 2008 has been another story.