Seeing banks through Glass

By Darrell Laurant

Published: April 13, 2008

What’s that you say, Senator Glass? I’m sorry, but you’re spinning so rapidly in your grave that I can’t quite make it out.

You told us so? Oh, now I understand.

High finance is an area about which I know next to nothing. The only stocks I own are buried somewhere in my 401K plan. My wife, a former consumer credit counselor, does our family finances — and that’s a good thing.

Still, I think it’s important to remind the folks who read our newspaper that it’s almost impossible to discuss the current problems on Wall Street and in the banking industry as a whole without mentioning Lynchburg native Carter Glass.

A lot of you may know that Glass co-sponsored the 1913 Glass-Owen Act establishing the Federal Reserve System, a pet project of President Woodrow Wilson. What you may not know is that the other sponsor, Sen. Robert Owen of Oklahoma, was also born in Lynchburg.

“My Dear Glass,” Wilson wrote at the time. “I hope and believe that the whole country appreciates the work you have done.”

But problems remained within the banking industry, especially after banks began to sell stock in companies to which they had loaned money.

“Commercial banks were accused of being too speculative in the pre-Depression era,” writes Reem Heakel on the “Investopedia” Website, “taking on huge risks in the hope of even bigger rewards.”

Conflict of interest ruled the day, until the economic karma of the Great Depression descended like an avenging blunt instrument.

Enter, again, Carter Glass. Drawing himself up to his full 5-foot-4 height, he railed against banking abuses and collaborated with fellow Democratic Senator Henry B. Steagall of Alabama on the Glass-Steagall Act.

Passed in 1935, Glass-Steagall was designed to prohibit banks from owning brokerage firms and vice versa, thus insulating bank depositors from the risks of another stock market implosion.

If people wanted to invest in the stock market, Glass argued, more power to them. But if they put their money in a bank, it was reasonable to assume that they didn’t want their bankers playing fast and loose with it.

Fast forward to 2008. Now, the problem isn’t stocks, but housing. Not only did many banks make questionable home loans to piggyback on the soaring housing market, but they then sold many of those mortgage loans to private securities companies and other non-banking entities.

How could this happen? Partly because in 1999, Congress repealed Glass-Steagall in favor of the much less restrictive Gramm-Leach-Bliley Act (the latter another Virginian) that allowed commercial and investment banks to consolidate. Almost immediately, according to Thomas Kostigen of MarketWatch, “financial giants swooped in.”

In 1997, when that issue was still being debated, the house organ of the Minneapolis Federal Reserve Bank published a remarkable mock interview with Glass (perhaps with the help of a medium) in which he warned again of giving banks too much free rein.

It’s a mess. But you can’t blame him.

Wrote Kostigen: “Glass-Steagall would have at least provided what the first of its names portends: transparency.