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Gramm-Leach-Bliley at heart of nation’s financial woes

I enjoy reading Kevin Hennosy’s columns in Rough Notes magazine (“Public Policy Analysis & Opinion”). It gives much appreciated insight to some of the regulatory currents given the pressures for more federal insurance oversight.

Political pundits and the ubiquitous talking heads are quick to point out where the current Wall Street/Credit Crisis began. Usually (per them), it begins with the mortgage issue. I suggest that some of the roots go deeper back to 1999 when President Clinton signed the Gramm-Leach-Bliley Act (GLBA) into law. As you know, Congress reacted to the U.S. Supreme Court’s Barnet and Valik decisions not by eradicating the 1916 Banking Law loophole (places under 5,000) but by passing GLBA to set forth the ground rules by which banks could sell insurance and vice-versa.

Of course, GLBA did much more than that. It broke down the Depression-Era law forcibly separating banks, insurance, and securities. Those firewalls were set in place to protect the pillars of American finance from a collapse that would bring much more havoc to the total economy than in any one sector. Unhappily, the United States is paying a steep price because it let insurance get into banking, banking into insurance and everyone into securities.

The result was to encourage risky profit-making ventures such as subprime mortgages without regard to the interconnected nature of the market. Bigger became better but concentrations of economic power, like old trees, tend to bring a lot of forest down when they fall. With everyone involved—banks, insurers, investment bankers, mortgage brokers and mortgage re-sellers—the intertwined nature of business brought almost everyone to the edge of the abyss.

At the time, GLBA was hailed as opening the door to a new era in financial services. Unfortunately, the door opened into a house of cards.

—Vince Phillips
Phillips Associates
Mechanicsburg, Pennsylvania