Today, the United States finds itself in the middle of a financial abyss, with Bear Stearns, Lehman Brothers, Merrill Lynch and Washington Mutual all high-profile casualties.How did we get here?

The repeal of the Glass-Steagall Act may be the proverbial lightning bolt that created the current state of our economy. In its absence, monstrous financial companies have arisen, offering banking, securities and insurance services, making regulation extremely difficult. These monstrosities have wreaked havoc on the economy.

With generations-old financial institutions vanishing, credit stagnating and families losing their homes, the case for regulation has grown exponentially over the years.

Now is clearly the time to re-instate the Glass-Steagall Act or to craft new legislation eradicating one-stop shops.

Let's look back in history.

During the 19th and early 20th centuries, bankers and brokers were too often indistinguishable. After the stock market crash of 1929 and the following Great Depression, Congress examined the intermingling of the commercial and investment banking industries that had occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions' securities activities.

The 1933 passage of Glass-Steagall erected a formidable barrier to the mixing of these activities.

The underlying thought was that each sector should make the best decisions without being influenced by the needs of the other sectors. Prior to the act, banks were investing their own assets in securities, with consequent risk to commercial and savings deposits. The objective was to reduce market concentration and protect investors, consumers and local institutions. Glass-Steagall separated the banking, insurance and securities industries by splitting up commercial and investment banks, banning interstate banking, and prohibiting banks from owning insurance companies.

During the past several decades of booming economic growth, our government decided we no longer needed many of the restraints that were put in place as safeguards against the inherent conflicts that existed before and during the Great Depression. It now seems clear that was a tragic mistake.

The 1999 repeal of Glass-Steagall created the poster child for deregulation.

With bipartisan support, then-President Bill Clinton promoted its repeal and signed the Gramm-Leach-Bliley Act passed by the Republican-led Congress. The banking industry had been seeking the repeal of Glass-Steagall since the 1980s. The industry believed that individuals usually put more money into investments when the economy is doing well, but they put most of their money into savings accounts when the economy turns bad.

With Gramm-Leach-Bliley in place, commercial and investment banks were now allowed to consolidate, which gave way to questions of financial integrity by allowing the banking, brokerage and insurance divisions of a company to work together.

The immediate driving force behind the repeal of Glass-Steagall was the 1998 merger of Citicorp and Travelers Group, which created the world's largest financial services company. The two companies merged by using a loophole that allowed for temporary exemptions to the act. The merger effectively further loosened Glass-Steagall's restrictions, and led the government to repeal it altogether.

The modern push for deregulation that began in the late 1970s and 1980s has gone past reasonable and acceptable boundaries. By the late 1990s, in the frenzy of the dot-com bubble, we somehow deluded ourselves into thinking that we no longer needed regulatory protection in the financial sector. Within the new economy, we also deluded ourselves into ignoring basic principles of finance. We allowed the interests of banks, insurance companies and investors to merge.

The resulting concentration of wealth fueled a level of greed that has seemingly overcome good business sense. With no regulatory restraint, financial companies went on a binge in the past few years until the housing bubble burst. As hundreds of billions in mortgage-related investments went south, investment banks have repackaged themselves as commercial banks. With channels of credit constricted, the public has lost confidence in the markets, and has paid dearly in 2008.


With the election of a new president who campaigned on a platform of stronger regulation, the U.S. economic system may undergo a level of restructuring not seen since the 1930s.

Now is the time to question and challenge almost all of the major assumptions of the last several decades. Partnerships between commercial banks and securities firms enabled thoughtless lending. Simply enforcing legislation against the lending and credit functions of distinctly separate subsidiaries of the same financial firm does not work.

There are many reasons for why Glass-Steagall should never have been repealed. But simply keeping the different entities separate and diagnosing the damage and abuse would have been a lot easier with Glass-Steagall in place. Financial institutions need to be scrutinized by objective third parties. Legitimate questions are raised when an agenda is not shared by banks and securities analysts.

Through the separation of entities created by Glass-Steagall, there would be an elevated level of transparency, with the functions and miscues of banks, insurance companies and brokerages easily identified. If Glass-Steagall's protections had been in place, today's financial turmoil might have been staved off or avoided.

The government has a responsibility not only to protect the public through a regulatory framework but also to rectify past follies. Like Dr. Frankenstein, the government must learn from its misbegotten creation. The government needs to address the repeal of Glass-Steagall, which produced the boundless financial anomalies that currently exist. If you work at the parts, the whole will be a success; thus, the re-instatement of Glass-Steagall or something very similar would deconstruct the financial behemoths, leaving easily managed entities.

Lou Grumet is the executive director of the 29,000-member New York State Society of CPAs.

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