Ten years ago to the day, the government reversed one of the key elements of the Depression-era banking laws, knocking down the firewall between commercial banks, which take deposits and make loans, and investment banks, which underwrite securities. The repeal of the Glass-Steagall Act of 1933 was seen at the time as a way to help American banks grow larger and better compete on the world stage.

“Today, Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” then-Treasury Secretary Lawrence H. Summers said at the time. “This historic legislation will better enable American companies to compete in the new economy.”

But 10 years later, the end of Glass-Steagall has been blamed by some for many of the problems that led to last fall’s financial crisis. While the majority of problems that occurred centered mostly on the pure-play investment banks like Lehman Brothers, the huge banks born out of the revocation of Glass-Steagall, especially Citigroup, and the insurance companies that were allowed to deal in securities, like the American International Group, would not have run into trouble had the law still been in place.

“Commercial banks played a crucial role as buyers and sellers of mortgage-backed securities, credit-default swaps and other explosive financial derivatives,” Demos, a nonpartisan public policy and research organization, wrote in a report discussing the problems it said were caused by the repeal of Glass-Steagall.

“Without the watering down and ultimate repeal of Glass-Steagall, the banks would have been barred from most of these activities,” Demos said. “The market and appetite for derivatives would then have been far smaller, and Washington might not have felt a need to rescue the institutional victims.”

But 10 years ago, the revocation of Glass-Steagall drew few critics. In the House, 155 Democrats and 207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it. Fifteen members did not vote.

One of the leading voices of dissent was Senator Byron L. Dorgan, Democrat of North Dakota. He warned that reversing Glass-Steagall and implementing the Republican-backed Gramm-Leach-Bliley Act was a mistake whose repercussions would be felt in the future.

“I think we will look back in 10 years’ time and say we should not have done this, but we did because we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010,” Mr. Dorgan said 10 years ago. “We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

Mr. Dorgan still feels the same way. “I thought reversing Glass-Steagall would set us up for dramatic failure and that is exactly what has happened,” the senator told DealBook on Thursday. “To fuse together the investment banking function with the F.D.I.C. banking function has proven to be a profound mistake.”

Senator Richard Shelby of Alabama, now the ranking Republican on the Senate Banking Committee, was the only Republican in the Senate to oppose the repeal of Glass-Steagall, his office noted on Thursday afternoon.

Mr. Shelby voted against the Gramm-Leach-Bliley Act because of his concern that repealing Glass-Steagall would threaten the safety and soundness of the banking system, his office said, adding that he did not believe that the changes that the act made on the regulatory side were sufficient to keep pace with changes made on the industry side.

Mr. Dorgan’s views about the repeal of Glass-Steagall were echoed by then-Senator Barack Obama in 2008 as he campaigned for president.

“By the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework,” Mr. Obama said in a speech on the economy at Cooper Union in New York in March 2008. “Instead of establishing a 21st century regulatory framework, we simply dismantled the old one,” thereby encouraging “a winner take all, anything goes environment that helped foster devastating dislocations in our economy.”

Today, President Obama seems to have softened his views a bit when it comes to Glass-Steagall. The administration’s proposal for overhauling financial regulatory system makes no mention of resurrecting the firewall between commercial banks and investment banks and still allows insurance companies to deal in securities. The change of heart may have something to do with the fact that one of his senior economic advisers is Mr. Summers.

There seems to be no real push to reinstate Glass-Steagall in either of the pending versions of the financial overhaul bill being considered by the House Financial Services Committee and the Senate Banking Committee.

But the Senate version of the bill introduced this week by Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, did go further than the House bill. Mr. Dodd’s bill called for the various banking regulators set up in the 1930s, which had separate jurisdictions based in part on the firewall divisions created by Glass-Steagall, to finally be merged into one new agency. The aim is that a single regulator would discourage regulator shopping by financial institutions and lead to better oversight of banks.

In a way, the merging of the various agencies finally strips away the last vestiges of Glass-Steagall. But many analysts believe that it is impossible to go back to the days when commercial and investment banking were completely separated. Instead, lawmakers hope that stricter oversight will help banks avoid the troubles that led to the financial crisis. We may need to wait another 10 years to find out if that is truly the case.

— Cyrus Sanati

Go to 1999 Article from The New York Times »

Go to Report from Demos (pdf) »

Go to 2008 Economic Speech from Barack Obama via The New York Times »

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