[5] President Roosevelt opposed this revision to Section 16 and wrote Glass that "the old abuses would come back if underwriting were restored in any shape, manner, or form."
In the conference committee that reconciled differences between the House and Senate passed versions of the Banking Act of 1935, Glass's language amending Section 16 was removed.
[7] In 1963, the Saxon-led Office of the Comptroller of the Currency (OCC) issued a regulation permitting national banks to offer retail customers "commingled accounts" holding common stocks and other securities.
[11] In rejecting bank sales of accounts that functioned like mutual funds, the Supreme Court explained in Investment Company Institute v. Camp that it would have given "deference" to the OCC's judgment if the OCC had explained how such sales could avoid the conflicts of interest and other "subtle hazards" Glass–Steagall sought to prevent and that could arise when a bank offered a securities product to its retail customers.
"[41] In 1982, under the chairmanship of William Isaac, the FDIC issued a "policy statement" that state chartered non-Federal Reserve member banks could establish subsidiaries to underwrite and deal in securities.
[49] Although Paul Volcker and the Federal Reserve Board sought legislation overruling the FDIC and OCC actions, they agreed bank affiliates should have broader securities powers.
[54] Proxmire sponsored a bill that would have repealed Glass–Steagall Sections 20 and 32 and replaced those prohibitions with a system for regulating (and limiting the amount of) bank affiliate securities activities.
[60] More generally, researchers attacked the idea that "integrated financial services firms" had played a role in creating the Great Depression or the collapse of the US banking system in the 1930s.
[61] If it was "debatable" whether Glass–Steagall was justified in the 1930s, it was easier to argue that Glass–Steagall served no legitimate purpose when the distinction between commercial and investment banking activities had been blurred by "market developments" since the 1960s.
[66] By 1982, using the "unitary thrift" and "nonbank bank" "loopholes," Sears had built the "Sears Financial Network", which combined "Super NOW" accounts and mortgage loans through a large California-based savings and loan, the Discover Card issued by a "nonbank bank" as a credit card, securities brokerage through Dean Witter Reynolds, home and auto insurance through Allstate, and real estate brokerage through Coldwell Banker.
The GAO warned that Congress's failure to act was "potentially dangerous" in permitting a "continuation of the uneven integration of commercial and investment banking activities.
[76] In April 1987, the Federal Reserve Board had approved the bank holding companies Bankers Trust, Citicorp, and J.P. Morgan & Co. establishing subsidiaries ("Section 20 affiliates") to underwrite and deal in residential mortgage-backed securities, municipal revenue bonds, and commercial paper.
[85] Expressing sentiments that Representative James A. Leach (R-IA) repeated in 1996,[86] Proxmire declared "Congress has failed to do the job" and "[n]ow it's time for the Fed to step in.
The Federal Reserve Board supported "repeal" of Glass–Steagall "insofar as it prevents bank holding companies from being affiliated with firms engaged in securities underwriting and dealing activities.
[105] In 1990 Corrigan testified to Congress that he rejected the "status quo" and recommended allowing banks into the "securities business" through financial service holding companies.
"[108] Paul Volcker gave his 1991 testimony as Congress considered repealing Glass–Steagall sections 20 and 32 as part of a broader Bush Administration proposal to reform financial regulation.
[109] In reaction to "market developments" and regulatory and judicial decisions that had "homogenized" commercial and investment banking, Representative Edward J. Markey (D-MA) had written a 1990 article arguing "Congress must amend Glass–Steagall.
In arguing that the GLBA's "repeal" of Glass–Steagall played no role in the financial crisis of 2007–2008, Melanie Fein notes courts had confirmed by 1990 the power of banks to securitize their assets under Glass–Steagall.
[135] Repeating themes from the 1980s, Leach stated Glass–Steagall was "out of synch with reality"[136] and Rubin argued "it is now time for the laws to reflect changes in the world's financial system.
[139] Supporting the Leach and Rubin arguments, Volcker testified that Congressional inaction had forced banking regulators and the courts to play "catch-up" with market developments by "sometimes stretching established interpretations of law beyond recognition.
"[141] Similar to the GAO in 1988[72] and Representative Markey in 1990[111] Volcker asked that Congress "provide clear and decisive leadership that reflects not parochial pleadings but the national interest.
[143] While the need to create a legal framework for existing bank securities activities became a dominant theme for the "financial modernization" legislation supported by Leach, Rubin, Volcker, and others, after the GLBA repealed Glass–Steagall Sections 20 and 32 in 1999, commentators identified four main arguments for repeal: (1) increased economies of scale and scope, (2) reduced risk through diversification of activities, (3) greater convenience and lower cost for consumers, and (4) improved ability of U.S. financial firms to compete with foreign firms.
[157] Throughout the 1990s, scholars continued to produce empirical studies concluding that commercial bank affiliate underwriting before Glass–Steagall had not demonstrated the "conflicts of interest" and other defects claimed by Glass–Steagall proponents.
"[159] Although he rejected this scholarship, Martin Mayer wrote in 1997 that since the late 1980s it had been "clear" that continuing the Glass–Steagall prohibitions was only "permitting a handful of large investment houses and hedge funds to charge monopoly rents for their services without protecting corporate America, investors, or the banks.
[169] Similar to Senator Proxmire in 1988,[87] Representative Leach responded to the House's inaction on his Glass–Steagall "repeal" bill by writing the Federal Reserve Board in June 1996 encouraging it to increase the limit on Section 20 affiliate bank-ineligible revenue.
[170] The SIA's prediction proved accurate two years later when the Federal Reserve Board applied the 25% bank-ineligible revenue test in approving Salomon Smith Barney (SSB) becoming an affiliate of Citibank through the merger of Travelers and Citicorp to form the Citigroup bank holding company.
[180] Representative Leach, House Banking Committee Ranking Member Henry Gonzalez (D-TX), and former Federal Reserve Board Chairman Paul Volcker opposed such commercial affiliations.
[184] The House Republican leadership withdrew the bill in response to the banking industry opposition, but vowed to bring it back when Congress returned from recess.
[189] The bill was blocked from Senate consideration by the Committee's two dissenting members (Phil Gramm (R-TX) and Richard Shelby (R-AL)), who argued it expanded the Community Reinvestment Act (CRA).
Four Democratic senators (Byron Dorgan (D-ND), Russell Feingold (D-WI), Barbara Mikulski (D-MD), and Paul Wellstone (D-MN)) stated they opposed the bill for its repeal of Sections 20 and 32.