Lehman’s Failure Marks THE FINISH Of A Banking Era

Lehman’s Failure Marks THE FINISH Of A Banking Era

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 It had been functionally repealed in 1998, when Travelers (the mother or father company of Salomon Smith Barney) obtained Citicorp.

Glass-Steagall was one of the many necessary measures used 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 debris, made construction loans, etc.) recklessly plunged into the bull market, making margin loans, underwriting new issues and investment pools, and stock trading.

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When the bubble popped in 1929, contact with Wall Street helped pull down the commercial banking institutions. In the lack of deposit insurance and other backstops, the results were devastating. Wall Street’s failure helped destroy Main Street. The plan response was to erect a wall between investment banking and commercial banking.

It outlasted the Berlin Wall with a few years. In the 1990s, as another bull market took hold, momentum created to overturn Glass-Steagall. Commercial banks were wanting to get into high-margin businesses like underwriting hot tech stocks. Brokerage firms saw commercial banking institutions, with their substantial customer bases, as great distribution channels for stocks, mutual money, and other financial loans that they created. Speaking Generally, the investment banks were the aggressors. In April 1998, Sandy Weill’s Travelers, which owned Salomon Smith Barney, merged with Citicorp. The following year, Congress exceeded and President Clinton authorized the Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act.

This law effectively erased the prohibition on commercial banking institutions owning investment banking institutions and vice versa. Since that time, the two industries have come collectively to a degree. 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 banking company J.P. Morgan bought commercial bank or investment company Chase. Until the summer of 2007, the debt-powered independent broker-dealers who minted money with stock brokering, proprietary trading, and advising on mergers and acquisitions appeared arranged to leave boring commercial-banks in their dust. But 2008 has been another whole tale.