After two decades of industry lobbying, White House and congressional negotiators agreed Friday to tear down Depression-era financial walls in favor of a free-wheeling market for bank deposits, insurance, stocks and bonds.
The historic agreement marks an era of deregulation and free market triumph, when the despair and financial panic that confronted Franklin Roosevelt in the 1930s long since has been replaced by the confident prosperity of Bill Clinton’s 1990s.
The accord by elected leaders to repeal the landmark Glass-Steagall Act of 1933 follows more than a decade of steady chipping away at the legal barriers by financial regulators and the courts.
It comes amid the political ascendancy of a Baby Boom generation that already largely has shifted its financial future away from the safety and uninspiring returns of bank deposits and embraced the riskier but more promising world of the soaring stock market. The whole issue so far has elicited little more than a shrug from a voting public now comfortable with planning for its retirement through 401(k) accounts and investing via on-line brokerages.
The agreement, reached just before 3 a.m. in a small conference room at a Capitol office building, paves the way for an acceleration of the ongoing transformation of banks, stock brokerages and insurance companies into WalMart-like, one-stop financial superstores.
The final compromise still must be passed by the House and Senate and be signed into law by the president. But both houses of Congress already have demonstrated strong support for the regulatory overhaul when they passed earlier competing versions.
If adopted, the legislation would make it easier for banks, stock brokerages and insurance companies to combine and sell each other’s products. A key provision is that it would enable banks to underwrite insurance, an activity from which they are currently banned.
Advocates of the measure say that all-purpose financial institutions will be able to squeeze out substantial savings and pass them on to customers through lower fees, particularly for those with the money and inclination to take advantage of bulk discounts for buying multiple services such as bank accounts, stock-trading and insurance coverage from a single institution.
The freer regulatory environment also should allow financial institutions more leeway to develop innovative services and improve the ability of U.S. institutions to compete in the global financial economy, according to proponents.
The legislation “will bring lower costs, more choices and better protections for consumers,” Clinton said in a statement.
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Critics contend the shift will lead to a further concentration of financial power in mammoth institutions, erode consumer privacy and place federally insured bank deposits at risk when other financial ventures collapse.
In the end, there were few differences among negotiators over those far-reaching economic ramifications, although some Democrats and the White House expressed concern that consumer privacy protections were too weak.
The main sticking point was a clash between the devoutly conservative Senate Banking Committee chairman, Sen. Phil Gramm (R-Texas), and Democrats in Congress and the White House over an existing law intended to assure that banks serve minority and low-income communities.
The provision, the 1977 Community Reinvestment Act, is near-sacred to inner city community activists who form a crucial piece in the core constituency of the Democratic Party. Gramm and some other conservatives view it as a burdensome intrusion into the business of banking, although banking industry representatives view it as paling in significance beside the larger legislative package.
The breakthrough came after a late afternoon meeting that House Banking Committee Chairman Jim Leach (R-Iowa) called to warn industry lobbyists that the entire package could collapse, according to a lobbyist who was present. Leach told them the only way to save the legislation was to step up efforts to persuade Gramm to compromise, the lobbyist said.
Ultimately, the negotiators agreed to retain legal requirements that banks show satisfactory performance on their reinvestment responsibilities before they can expand into new businesses or merge with other institutions. But any agreements they reach with community groups as part of their compliance would have to be publicly disclosed and small banks would be checked less frequently if they had demonstrated satisfactory performance on the obligations.
The agreement won plaudits even from as fervent a liberal as the Rev. Jesse Jackson, president of the Rainbow/PUSH Coalition in Chicago.
“The financial modernization bill, fully implemented and enforced, can heal the breach between the surplus and the deficit cultures and begin to `green line’ red-lined America,” Jackson said in a statement.
Gramm said that the legislation “grants major regulatory relief to every small bank in America.”
Although Congress repeatedly has considered legislation to repeal the Depression-era banking laws since 1979, this was the first year a deregulatory measure was passed by both the House and Senate.
Replacing the financial regulatory structure involved a long struggle to achieve a politically viable balance among the many competing interests. It pitted large banks against small banks; insurance companies, stock brokerages and banks against each other; consumer advocates against business; and a myriad of jealous regulatory agencies against their bureaucratic rivals.
The financial community showed unbridled enthusiasm for the final result.
“I haven’t spoken to a bank that is not extremely pleased with what’s in this bill,” said Annie Hall, head of the political action committee for Chicago-based Bank One Corp.
But the legislation was criticized by some consumer and privacy advocates.
Consumer advocates pointed to studies by the Federal Reserve and the U.S. Public Interest Group suggesting that larger banks charge customers higher fees.
“This bill is a sweetheart deal for the financial institutions,” said Frank Torres, legislative counsel for the Consumers Union. “They’ve been wanting this bill for 12 years. They’ve got it. It will allow them to merge, consolidate, make a lot of money.”
Consumer advocates noted that the measure includes no requirement of “lifeline banking” whereby low-income customers would be guaranteed basic banking services without paying high fees or maintaining large balances.
The measure would repeal the Glass-Steagall Act, which required banks to refrain from stock and bond underwriting activities and stick to traditional lending. It also removes restrictions on underwriting insurance contained in a later law, the 1956 Bank Holding Company Act.
But those restrictions have been overtaken by developments in the market and by regulatory actions.