The Financial Services Modernization Act of 1999 …Happy 11th Anniversary!
I’ve always been amused by the absurdity of political ’positions’. While Republicans will shun any notion of ’big government’ (and they should), the latest buzzphrase ’Too Big To Fail’ (also an upcoming major HBO movie!), can be traced back 30 years, but – more recently - to the Financial Services Modernization Act of 1999, co-sponsored by Sen. Phil Gramm (R, Texas) , Rep. Jim Leach (R, Iowa), and Rep. Thomas J. Bliley, Jr. (R, Virginia), aka, The Gramm-Leach-Bliley Act.. But don’t get me wrong. This Act was passed on Clinton’s watch.
Bill Clinton (supported NAFTA in ’94) and congressional Republicans, sealed an agreement on October 22, 1999 that led to the passage of the most sweeping banking deregulation bill in American history, lifting virtually all restraints on the activities of the giants who now dominate our financial system. The Financial Services Modernization Act did away with restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933, which restricted banks, brokerage firms and insurance companies from entering each other’s industries, and kept investment banking separate from commercial banking.
Back then the Wall Street Journal wrote, "With the stroke of the president's pen, investment firms like Merrill Lynch & Co. and banks like Bank of America Corp., are expected to be on the prowl for acquisitions." So now, after the meltdown, even Merrill and BofA have merged, if only to save Merrill from oblivion. How quaint…
One can argue whether Gramm-Leach-Bliley actually contributed to the recent crisis, but just imagine if banks were again small enough where bank management had some idea who (in their own town) was being granted a mortgage! (I don’t think my 82 year-old dad could remember that far back!) To make the point, Primerica, now the LARGEST financial services marketing firm in the world, was recently (April, 2010) spun off by Citibank in an IPO, after having been merged into Citigroup/Travelers back in 1998, when Primerica was already part of the Travelers Group (and Citibank merged with Travelers in ’98 a year BEFORE the FSMA Act actually passed in Congress! If I’m wrong, somebody correct me on this!) Primerica’s roots stem from A.L. Williams (of "buy term & invest the rest" fame). So yes, Primerica is a quiet giant, and with no TV ads. (You mean, just like Tupperware??)
So, what’s is the point? Since inception Primerica has operated as an MLM company, and was selling mortgages while a subsidiary of Citibank. That’s right, multi-level marketing of mortgages! Not that there’s anything wrong with Amway and Tupperware, but there’s a huge difference between six-figure financial instruments and laundry soap. So, how does one police the activities of 100,000 part-time pseudo mortgage brokers? Simple. You don’t. You try, but you really can’t. How do I know? I was sitting across the kitchen table in 2002 as my sister pondered the merits of a Primerica mortgage.
Now, back to our three friends on the Hill …Gramm-Leach-Bliley. The banking, insurance and brokerage industry - in 1997 and 1998 – spent over $300 million on lobbying efforts and political contributions. $58 million went to candidates on both sides of the aisle. (plus almost $90 million in "soft money" contributions). And then there was another $160 million spent direct lobbying of elected officials).
Phil Gramm himself collected more than $1.5 million in cash from the three industries during the five years leading up the passage of the Act. It amounted $496,610 from the insurance industry, $760,404 from the securities industry and $407,956 from banks. What a gig!! Where did I get these numbers? The Congressional Record. Just ask Google: "Phil Gramm, Senate Banking Committee". Nobel Prize-winning economist Paul Krugman has called Senator Phil Gramm "the father of the financial crisis" due to his sponsorship of the Act. Nobel Prize-winning economist Joseph Stiglitz has also argued that the Act helped to create the crisis.
This was surely one of the most heavily lobbied bits of legislation in history, but rest assured …with 1,200 lobbyists in Washington (yes, 2 for every Senator and Congressman) Big Pharma has already far eclipsed these numbers. Thank heaven! My anti-depressant will soon be covered by national healthcare!