Also known as the Gramm-Leach-Bliley Act (GLB), the Financial Services Modernization Act was passed 90 to 8 and signed into law by President Bill Clinton on November 12, 1999.
The Financial Services Modernization Act of 1999 eliminated restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933, which was one of the central pillars of Roosevelt’s New Deal.
Under the old law, banks, brokerages and insurance companies were effectively barred from entering each others’ industries, and investment banking and commercial banking were separated. Interesting source from Nov. 1, 1999.
Sen. Phil Gramm (R – Texas 1985-2002) is considered the “Father of the Credit Crisis” due to the specific language he co-authored into this Act which explicitly exempted security-based swap agreements (a derivative financial product based on another security’s value or performance) from regulation by the SEC Commission.
Basically, there was nobody to regulate the way financial banking and insurance institutions could use credit and leverage to sell things such as Credit Default Swaps on Derivatives for the purpose of Hedging against the failures of mortgage related investment products.
Simplified even further –
The GLB Act revisions made it possible for banks to create unregulated insurance products that essentially bet on the failure of their other financial programs. Unregulated meant that the banking / insurance conglomerates didn’t actually have to show proof of even a tiny percentage of the funds necessary to fulfill a claim placed on the products that they were insuring.
What were they insuring?
Mortgage related products called Collateralized Debt Obligations (CDO) that were sliced and diced until they could be re-sold as AAA credit rated safe investments.
Here are the three main killers from the GLB Act:
1. The definition of “security” in section 2(a)(1) does not include any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act [15 USCS § 78c note]).
2. The Commission is prohibited from registering, or requiring, recommending, or suggesting, the registration under this title of any security-based swap agreement[.] …
3. The Commission is prohibited from … promulgating, interpreting, or enforcing rules; or … issuing orders of general applicability; … as prophylactic measures against fraud, manipulation, or insider trading with respect to any security-based swap agreement[.]
If it sounds confusing, you’re not alone.
In all fairness to Mr. Gramm, the GLB Act is only part of the reason for our Credit Financial Crisis. Many economists and former Wall Street hustlers believe it has a lot to do with the stupidity and arrogance of the financial services industry in general.
Either way, the $300 million in political contributions by the financial services industry probably made it slightly difficult for anyone to make a clear judgement about the future consequenses de-regulation could have on our economy.
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