Political Risk and Analysis

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Deregulation: The Glass Steagall Act of 1933 and the Financial Modernization Act

By Jennifer Waldrop

July 30, 2012

BBA 4301-12G-1A12-S1, International Finance

Professor Leland

The Glass-Stegall Act was passed in 1933 by Congress due to the widespread conflicts of interest and outright fraud in the activities of financial firms that led up to the Great Crash. The Glass-Steagall Act split up conflicting areas of financial activities that forced financial firms to choose which one they would operate within, while divesting themselves of the others (Harding, 2012, p.1). This system worked well until the late 1990’s when savings banks, commercial banks, and insurance companies began noticing the profits that were being made by investment banks, brokerage firms, and mortgage brokers and decided they want some of that profit as well.

So then in November 1999, President Bill Clinton signed into law the Gramm-Leach Bliley Financial Services Modernization Act. While this new act repealed the key provisions of the Glass-Steagall Act, it provided a unified legal framework that standardizes financial convergence (Santomero, 2001, p. 2). This era of deregulation ultimately initiated developments that destabilized the global financial system by 2007. This is because it fostered a means for systematic “too big to fail” financial conglomerates to develop by fusing insurance and investment activities with commercial banks. It also extended subprime mortgage lending to poor and ethnic minorities and it unleashed speculative activities by legalizing the derivative market. (Lopes, 2010).

There have been several consequences and negative results from the Financial Services Modernization Act that were intensified with the advance of new technology into global financial systems and low interest rates. It encouraged financial institutions in search of revenue to expand their trade into a risky, unregulated secondary market (Lopes, 2010, p. 428). An example of this is that it...