Phil Gramm, the former U.S. senator who helped write the 1999 law that enabled the creation of financial giants such as Citigroup Inc. and Bank of America Corp., said his legislation didn’t make the system any riskier.
The Gramm-Leach-Bliley Act repealed the 1933 prohibition against federally insured depository institutions combining with securities firms and insurers. While his law allows deposit-taking banks to affiliate with securities firms through holding companies, depositors and taxpayers are protected because affiliates can’t take capital out of the banks, Gramm said in a telephone interview yesterday.
“I don’t see any evidence that allowing them to affiliate through holding companies had anything to do with the financial crisis nor has anybody ever presented any evidence to suggest that it did,” said Gramm, 70. Companies that failed such as Lehman Brothers Holdings Inc. “tended to be narrowly focused.”
Sanford “Sandy” Weill, who created Citigroup and pushed for the Gramm-Leach-Bliley Act, said yesterday on CNBC that he would now support dismantling financial holding companies.
“What we should probably do is go and split up investment banking from banking,” Weill, 79, said in the interview. “Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”
John Reed, who helped found Citigroup with Weill, and former Merrill Lynch & Co. CEO David Komansky have said they regretted fighting to overturn the Depression-era Glass-Steagall Act. Richard Parsons, speaking two days after ending his 16-year tenure on the board of Citigroup and one of its predecessors, said the repeal contributed to the financial crisis.
“To some extent what we saw in the 2007-2008 crash was the result of the throwing off of Glass-Steagall,” Parsons said in April at a Rockefeller Foundation event in Washington. “Have we gotten our arms around it yet? I don’t think so because the financial-services sector moves so fast.”
Thomas J. Bliley Jr., a former Republican congressman from Virginia and another co-author of Gramm-Leach-Bliley, said that the financial industry had been lobbying ever since the 1930s to overturn Glass-Steagall.
“All of a sudden in the late ’90s they all came together and agreed that we should get rid of it and of course we did,” said Bliley, 80, who now lives in Richmond, Virginia, and is a senior government affairs adviser for Steptoe & Johnson LLP. “I don’t know enough to really give you an answer” on whether it was a mistake.
Citigroup, created in a 1998 merger that required the overturn of Glass-Steagall, received a $45 billion taxpayer bailout in 2008. Gramm said that bailouts went to about 800 U.S. banks because of a global decline in the value of mortgage-backed debt and that depositors were never more at risk because of Citigroup’s affiliation with an investment bank.
“Under the law the depositor would not have been affected by a failure of their security affiliate because they weren’t allowed to co-mingle capital,” said Gramm, who said he was speaking on the phone from the Atlanta airport and was en route to Spain.
Gramm added that he didn’t think the government should provide bailouts to any affiliates of banks or any other non-banks, such as insurer American International Group Inc.
“It was a mistake not to let AIG fail too, but I wasn’t secretary of the Treasury,” Gramm said. “I don’t think we should have bailed out non-banks.”
Gramm, a Texas Republican who served in the Senate for 18 years, joined Zurich-based UBS AG’s investment bank in 2003 before retiring earlier this year. He is a visiting scholar at the American Enterprise Institute.
UBS received 6 billion Swiss francs from the Swiss government in October 2008 and was allowed to split off as much as $60 billion of its risky assets into a fund backed by the central bank. Gramm said UBS didn’t need the help.
“The Swiss government loaned UBS money,” he said. “Whether they should have done it or not, I don’t know. UBS would have survived without it.”
Former U.S. Senator Byron Dorgan, a North Dakota Democrat who warned in 1999 that repealing Glass-Steagall could lead to “massive taxpayer bailouts” in 10 years, said in a telephone interview that the so-called firewalls that exist between regulated banks and affiliates are like “tissue paper.”
“It’s just absurd for anybody now to make the case that having these entities under the same corporate umbrella doesn’t pose substantially greater risk,” said Dorgan, who retired from the Senate in 2011 and is a senior policy adviser at law firm Arent Fox LLP. “Phil is just wrong about this. He was wrong 13 years ago and he’s wrong now.”