Word: glassing
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Dates: during 1980-1989
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...banks cannot join in the rapidly growing and profitable business of underwriting and dealing in the newly created loan securities. That kind of service, along with virtually all securities activity, is reserved by the 1933 Glass-Steagall Act for investment houses only. Says George Salem, who follows the banking industry for the Manhattan-based investment firm of Donaldson, Lufkin & Jenrette: "Without loan selling and investment-banking products, the big banks will go the way of the dinosaur...
Changing the Glass-Steagall Act is the focus of the current power struggle between the country's financial giants. The battle is as much psychological as political. The legislation, which also created the Federal Deposit Insurance Corporation, was enacted to protect the public from irresponsible banks like those that invested depositors' savings in highly speculative securities prior to the Great Crash of 1929. As a result, the separation of commercial and investment-banking functions by Glass-Steagall still has tremendous populist appeal. But in official Washington, as Fed Chairman Volcker put it in Senate testimony last January, opposition to giving...
This week a significant chink may open in the Glass-Steagall wall. The Fed is expected to rule on the application of three major New York banks -- Citicorp, Bankers Trust and J.P. Morgan -- to begin securities underwriting. Their application depends on an interpretation of Glass-Steagall that would allow a modest amount of such activity within a bank holding company. The five Fed governors are believed to favor their bank petition. But those worthies were warned last February by Robert Downey, a partner in prestigious Goldman, Sachs, that such a decision could "change the financial world forever...
Securitization has already done that, largely in the investment houses' favor. Glass-Steagall has not proved to be much of a barrier for investment firms that wish to engage in banking activity, even if it has worked well the other way around. Over the past two decades, firms like Merrill Lynch (assets: $53 billion) and American Express (assets: $99 billion) have eaten deeply into traditional commercial-banking turf, first through near banking activities like interest-bearing money-market accounts, then through home-equity loans...
...similar advantage will take time, no matter what happens this week. In March the U.S. Senate passed a banking bill that if adopted by the House would place a one-year moratorium on any regulatory expansion of bank powers. Such legislation would be likely to void any relaxation of Glass-Steagall by the Federal Reserve Board this week. But major banks fully intend to test the limits of how far they can move toward investment services. Last month, for example, Chase Manhattan introduced a deposit account with a yield tied to the stock market's performance. That measure provoked...