The Glass Steagall Act

On June 16, 1933, President Roosevelt signed into law the widely debated Glass-Steagall Banking Act. Sponsored by Virginia’s U.S. Senator Carter Glass and Alabama’s U.S. Representative Henry Steagall, the Glass-Steagall Banking Act was one of the attempts to restore the American people’s confidence in the banking system. Congress knew the current banking system needed reform. They desired to restrict the use of bank credit for speculation and instead direct bank credit to more productive uses, such as agriculture, commerce, and industry.

The Sarbanes-Oxley Act of 2002 (SOX), also known as the Public Company Accounting Reform and Investor Protection Act and the Auditing Accountability and Responsibility Act, was signed into law on July 30, 2002, by President George W. Bush as a direct response to the corporate financial scandals of Enron, WorldCom, and Tyco International (Arens & Elders, 2006; King & Case, 2014;Rezaee & Crumbley, 2007). Fraudulent financial activities and substantial audit failures like those of Arthur Andersen and Ernst and Young had destroyed public trust and investor confidence in the accounting profession. The debilitating consequences of these perpetrators and their crimes summoned a massive effort by the government and the accounting profession to fight all forms of corruption through regulatory, legal, auditing, and accounting changes.

Before 1890, a few companies completely dominated major industries. Stockholders’ trusts eliminated competition and created monopolies, which in turn hurt American consumers and the economy as a whole. However, this all changed in 1890 when Congress passed the Sherman Anti-Trust Act. It was the first regulation of American businesses, outlawing monopolies and trusts, which created a way for the government to control the economy. Congress should have passed the Sherman Anti-Trust Act because it protects consumer rights, controls the economy, and eliminates monopolistic business practices.

A Colossal Failure of Common Sense was one of many books to be published in the aftermath of the Financial Crisis of 2007. After seeing the global economy stall in the face of massive losses in word financial markets, many Americans sought to better understand the crisis and its causes. This book, written from the perspective of a financial market insider, provides a glimpse into the world of global finance and also seeks to explain how the players in this world were involved in the crisis. In the words of the author Lawrence McDonald, “My objective in writing A Colossal Failure of Common Sense was twofold. First, to provide … a close-up, inside view of how markets really work…..And, second, to give… as crystal clear an explanation as possible about the real reasons why the legendary Lehman Brothers met with such a swift end”1. By writing about his personal experience at Lehman Brothers and recounting stories from within the famous investment banking firm, Mr. McDonald largely succeeds at his first goal. However, the elements of personal biography and the chronological order of the book make it difficult for the reader to fully appreciate all of the varied causes of the financial crash. I believe that the main value of reading this book is in understanding these causes, with Lehman Brothers acting as a microcosm of the greater financial universe. As such, in this review I have isolated elements from Mr. McDonald’s book which highlight how the crisis

Gov. Chafee and former Virginia Sen. Jim Webb had rather lackluster performances during the debate. Webb’s stand-out moments were his complaints of not being given enough time to answer, to which Cooper responded, “You agreed to these debate rules.” Gov. Chafee also faltered when Cooper asked about his 1999 vote to repeal Glass-Steagall, which Cooper explained to voters as the “Depression-era banking law repealed in 1999 that prevented commercial banks from engaging in investment banking and insurance activities.” Chafee said, “The Glass-Steagall was my very

Financial historians have disputed the rational for reforming the banking system in the US as a result of the 1920s banking crisis. Calomiris (2010) argue that there may have been political self-interest incentives as to why the Glass-Steagall Act was enacted. Firstly Steagall had bargaining power as Chairman of the banking committee in the House of Representatives. Second, the Pecora Hearings populist politicians including Henry Steagall advocated in favour of small banks contributing in making large bank disliked amongst the public. And finally deposit insurance was introduced as a temporary system allowing for easy approval in the Congress.

Even before FDR had taken his oath of office, the Glass-Steagall bill had been in the works. Representative Henry Steagall had proposed deposit insurance as a means of saving failed banks. This was not a new idea. Several states had initiated deposit insurance schemes in the 1920s, when bank failures were on the rise. During the depression, however, states lacked the capital resources to rescue their own state-chartered banks, to say nothing of the many smaller banks. Steagall realized that opposition to a federally insured deposit system would come from the large banks, which would resent parting with revenue for the sake of their weaker competitors. By the spring of 1933, however, even the major banks were willing to support this idea, rather

The 1933 Securities Act governs the assurance of securities by organizations. When pertaining to securities it is talking about notes, stocks, bonds, debentures, warrants, subscriptions, voting trust certificates, rights to oil, and limited partnerships (Jennings, 2012). With so much destruction regarding securities in the communities, the Security Act of 1933 was the first document established to get a control of securities.

Federal Reserve. Member banks would have to report on all investment transactions and loans and stay within set compliance standards. Current non-member Banks needed to be deemed in sound financial condition in order to join the FDIC. The weaker banks were either taken over or shut down. FDIC membership now became mandatory for any bank belonging to the Federal Reserve. Banks were now subject to deeper scrutiny and stronger compliance and needed to adhere to adhere to a higher standard. The end result was that by mid-1934 bank failures had declined drastically and banks by the thousands had reopened after joining the FDIC

The beginning of the crisis is marked as the downfall of Bear Stearns Financial. The company, with a triple A rating, was sidelined with problems of lack of cash flow, and a piling up of unpaid debts on housing mortgages. Bear Stearns invested heavily in these mortgages, because they were lucrative so long as the loans were being paid off. Foreclosures did not begin to pile up until after the 2005-2006 years of mass investment in the housing boom had already seeped into every corner of the United States. The first feeling of a tremble in the market caused Bear Stearn's stock to plummet, and the

In 1999 the United States Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act which finished off the repealing process of the Glass-Steagall Act of 1933 (Moffett, Stonehill, & Eiteman, 2012, p. 114). The Glass-Steagall Act had imposed barriers within the United States financial sector, where commercial banking entities were separate from investment banks. This meant that commercial banks were able to operate in higher risk activities that were traditionally reserved for the investment institutes. Commercial banks were now able to directly offer their customers a wider array of loans, including creative mortgage arrangements.

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman 's bankruptcy filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as WorldCom and Enron. Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. The consequences for the world economy were extreme. Lehman’s ' fall contributed to a loss of confidence in other banks, a worldwide financial crisis and a deep recession in many countries. Lehman 's collapse roiled global financial markets for weeks, given the size of the company and its status as a major player in the U.S. and internationally. Many questioned the U.S. government 's decision to let Lehman fail, as compared to its tacit support for Bear Stearns, which was acquired by JPMorgan Chase & Co. (JPM) in March 2008. Lehman 's bankruptcy led to more than $46 billion of its market value being wiped out. Its collapse also served as the catalyst for the purchase of Merrill Lynch by Bank of America in an emergency deal that was also announced on September 15.

During the recent financial crisis, in the autumn of 2008, the Lehman Brothers bank collapsed. It was the biggest bankruptcy in history

On September 10, 2008, Lehman Brothers announced the lowest decline as the shares dropped to 45%. It left the market value at $5.4 billion after the Korea Development Bank rejected to make an investment deal that could rescue Lehman. The company would seek capital from other investors in order to recover their financial situation. These efforts faltered and the situation grew more severe, even after the US government had already saved the Bear Stearns and Fannie Mae and Freddie Mac. Though it is less likely that the US government will keep Lehman's bailout, there should be a resolution from the Federal Reserve System to bolster Lehman’s finance so as to prevent the US economic declination.

In 1994, Richard S. Fuld took control of Lehman Brothers as its Chief Executive Officer (CEO). Under Fuld’s aggressive leadership, the company flourished and became one of the largest investment banks in the United States. （Crossley-Holland 2009) reported that in 1994, each Lehman Brothers stock was averaging at $4 and by 2007 it catapulted to $82 creating a 20 fold increase. From 1994, Lehman Brothers gradually adopted an aggressive growth business strategy by expanding into highly complex and risky products such as Credit Default Swaps (CDS) and Mortgage-Backed Securities (MBS). By 2007, Lehman Brothers was the biggest underwriter of mortgage-backed securities of the U.S. real estate market.