Why Finance Jargon Is Actually Interesting and Should Matter to You

Exploring HeinOnline, Searching, Taxation and Economic Reform in America, U.S. Federal Legislative History
Shannon Sabo

Reading about or discussing banking laws, financial institutions, and accounting information probably defeats Ambien in the sleep-aid war for most people. However, what happens in and to the financial industry almost always affects things like the United States economy, the housing market, and our paychecks.

November 12 marked the 16th anniversary of the repeal of certain parts of the Glass-Steagall Act of 1933. Before your eyes glaze over, think about 2008 for a moment. What could repealing a portion of a 1933 Act in 1999 have to do with 2008, and why should we still care in 2015? Let's break it down.

The Glass-Steagall Act

The Glass-Steagall Act refers to four specific provisions of the U.S. Banking Act of 1933, but is often used to refer to this entire Act. It is named after its Congressional sponsors, Senator Carter Glass and Representative Henry B. Steagall, and its provisions separate commercial and investment banking.

Following a decade of prosperity, innovation, and invention, the stock market crashed in 1929 and plunged the United States into the Great Depression. The stock market crash was blamed on "improper banking activity" involving commercial banks' involvement in stock market activity. According to this article, commercial banks took on "too much risk with depositors' money."

The Glass-Steagall Act created a barrier between commercial and investment banks and forced banks to choose whether they would specialize in commercial or investment banking. The intention was to prevent the banks' use of deposits if an underwriting job failed. In 1956, the Bank Holding Company Act, which is viewed as an extension of the Glass-Steagall Act, created a wall between insurance and banking. This further separated financial activities.

Gramm-Leach-Bliley Act

As this article notes, from 1933-1999, very few large banks failed and there was little financial panic, implying the law was working as it was intended. However, due to pressure from the banking industry, Congress repealed the Glass-Steagall Act in November of 1999 when the Gramm-Leach-Bliley Act was passed. In addition to eliminating the previously established restrictions on affiliations between commercial and investment banks, the GLB Act gave banking institutions the ability to provide a broader range of services, including underwriting.

So why was this potentially not the best idea ever?

Most of us vividly recall the financial crisis of 2008, which some experts believe was a direct result of the 1999 Glass-Steagall repeal. Banks began to originate fraudulent and unregulated loans, then sold the loans to customers in the form of securities. According to this Wikipedia article, the crisis was triggered when the United States housing bubble burst. Prior to this burst, there were policies in place to encourage home ownership, which provided easier access to loans for borrowers. Bundled subprime mortgages were overvalued based on the incorrect theory that housing prices would continue to escalate.  Additionally, these lenders and banks did not have enough assets to back their financial commitments. This crisis led to evictions and foreclosures when borrowers could no longer afford mortgage payments due to poor, and sometimes fluctuating, interest rates. Prolonged unemployment increased, consumer wealth declined, and key businesses failed. Numerous big industries, including banks and automobile companies, needed government bailouts, funded by taxpayers, in order to survive and prevent another Great Depression. In effect, the same thing that led to the creation of the Glass-Steagall Act reoccurred when the Act was repealed.

Dodd-Frank Wall Street Reform and Consumer Protection Act

In response to the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010. This Act has numerous provisions intended to decrease risks in the U.S. financial system. Sound familiar? This Act has its proponents and detractors, but we can hope the financial industry will learn from mistakes that likely lead to a near-depression.

HeinOnline Resources

HeinOnline has an incredible wealth of material pertaining to these public laws, their legislative history, and the topic of financial crises and reform in general. Each Act discussed above is linked to a compiled legislative history. All of these legislative histories are found in Taxation and Economic Reform in America Parts I & II.

The full text of all public laws, including those discussed here, are available in the U.S. Statutes at Large:

Run a search across all collections for "Glass-Steagall Act" and you'll receive several thousand results, some of which are from this year, indicating the Act is still relevant today.

A search for "financial reform" AND "Dodd-Frank" also results in an extensive list of articles and government documents, including the Federal Register and Congressional hearings.

Research the general topic of the 2008 economic collapse using a proximity search, such as:

"economic collapse 2008"~5

Sort by the number of times cited by articles:

One particularly relevant item that discusses the securitization of home loans is this article by Kathryn Judge, published in the Stanford Law Review.

To further research this topic, investopedia.com has some incredibly informative and well-written content. For help searching in HeinOnline, visit our help page or contact our Support Team at (800) 277-6995, holsupport@wshein.com, or via live chat.