A Remembrance of Things Passed

The last time Congress took up major financial regulatory legislation they got it completely wrong. The result created a virtual certainty that within ten years we would face a combined economic and financial crisis the likes of which we had not experienced since the Great Depression.

It was 1999, and Senator Phil Gramm (R-TX) — now a vice chairman of the global banking giant UBS — had ascended to the chairmanship of the Senate Banking Committee in the Republican-controlled Congress. It was Gramm who became the point man for the financial industry and chief sponsor of the deregulation plan known as Gramm-Leach-Bliley, the so-called Financial Services Modernization Act. Today, of course, there are many who point to the passing of that bill, and the following year’s Commodity Futures Modernization Act, as having played a key role in eliminating many of the regulatory controls over a financial industry that was then allowed to run amok.

Unfortunately, at the time there were not many in Congress who didn’t buy the line being peddled by the big bankers and investment firms and their lobbyists: that “modernization” was needed to encourage the financial “innovations” that would enhance the “competitiveness” of America’s superior “free markets”. That’s why, they argued, we needed to dismantle many of the core regulatory standards and provisions that had been put in place in the wake of the 1929 Crash and subsequent Depression-era banking crisis — including, for example, the 1933 Glass-Steagall Act which prohibited bank holding companies from owning other financial firms and separated commercial banks from securities firms and investment banks.

One of a handful of Senators who opposed Gramm-Leach-Bliley and the whole blind march toward financial deregulation was Senator Byron Dorgan (D-ND). On May 6, 1999, as Senator Gramm brought his deregulation plan to the Senate floor, Dorgan sought time to speak. Given what we’ve gone through in the last three years especially, with the disastrous excesses of the financial sector and the utter failure of regulators and policymakers previously to rein them in, only a fool wouldn’t listen to those whose warnings at the time have since proven so correct.

So with the help of C-SPAN’s new digital video library we offer the following clips from the Senate remarks by Byron Dorgan on May 6, 1999.

Clip 1 (0:52)

Gramm appears annoyed that Dorgan seeks time to speak.

Clip 2 (4:08)

Calling the legislation “a terrible idea” Dorgan details the recent 1998 wave of bank mergers, including that of Citibank with insurance giant Travelers, and the ongoing concentration of bank assets in fewer and bigger banks.

Clip 3 (8:13)

In this, the longest running clip, Dorgan discusses the 1998 meltdown and subsequent Fed-led bank bailout of the unregulated hedge fund Long Term Capital Management; Glass-Steagall and the lessons of the 1920s; the dangerous growth (mild by today’s standards) of unregulated derivatives; and the problem of having banks that are “too-big-to-fail”.

Clip 4 (1:34)

Dorgan recalls what happened in the late 1970s and early 1980s after the Savings and Loans were deregulated and hundreds of billions in S&L bailouts.

Clip 5 (1:55)

The legislation then under consideration, Dorgan says, would “raise the likelihood of future massive taxpayer bailouts.”

Clip 6 (1:11)

“The horses are out of the barn”

Clip 7 (0:32)

Dorgan describes the dangers of allowing banks to engage in proprietary trading in derivatives, and predicts that someday we will ask why we didn’t understand the consequences.

Clip 8 (0:59)

Saying he knows that Gramm’s deregulation plan — the Financial Services Modernization Act of 1999 — is going to pass, Dorgan warns “you are begging for trouble.”

Later that same night the Senate passed Gramm’s bill by a near party line vote of 55 to 44. Dorgan was pleasantly surprised at the time that all but one Democratic Senator voted with him. But the fix was in, as it were. Inside the Clinton administration, those who had been resisting the push for financial deregulation, such as Clinton’s first Labor Secretary Robert Reich and former Council of Economic Advisors chairman Joseph Stiglitz, were now gone. On July 1st the House passed its version, which had been sponsored by Republicans Jim Leach of Iowa and Thomas J. Bliley, Jr. of Virginia.

The next day Lawrence Summers — now director of the National Economic Council in the Obama administration — became Secretary of the Treasury. Summers had replaced his mentor Robert Rubin, previously CEO of Goldman Sachs, who left Treasury to join the Board of Directors of Citigroup. Rubin, along with Summers and Federal Reserve chairman Alan Greenspan, had been busy serving the deregulation ‘Kool-Aid’ for several years, under the guise that “modernization” would bring “innovation” and greater “competitiveness.” As recently as last month Rubin was still saying “virtually nobody” saw the financial meltdown coming.

Because the House and Senate-passed versions of the 1999 Gramm-Leach-Bliley bill differed, it was sent to a conference committee to come up with a single version. In an effort to get more Democratic votes in Congress, the administration pushed some modifications that ostensibly were designed to strengthen some anti-redlining provisions under the Community Reinvestment Act, thereby making loans more available in lower-income communities. And they passed around the ‘Kool-Aid’ on that. It is clear now, of course, that the bill simply made it easier for banks and other financial institutions to pursue predatory lending practices.

The final version was taken up and passed on November 4, 1999. The Senate vote was 90 to 8. Among those currently in the Senate only Democrats Byron Dorgan (ND), Barbara Boxer (CA), Russ Feingold (WI), Tom Harkin (IA), Barbara Mikulski (MD) and Republican Richard Shelby (AL) voted against it. The House vote was 362 to 57, with Bernie Sanders of Vermont, now a Senator, among those voting “Nay”.

During the debate prior to Senate passage, Dorgan reiterated many of the objections and warnings he had raised earlier that year. Ten years later, his warnings having gone unheeded while also having been proved so accurate, Senator Dorgan published a book Reckless: How Debt, Deregulation and Dark Money Nearly Bankrupted America (And How We Can Fix It!)

Unfortunately, Senator Dorgan has announced he will retire from the Senate at the end of this year. So has Senator Ted Kaufman (D-DE) and current Banking Committee chairman Chris Dodd (D-CT). With the myriad problems that must be directly and effectively addressed in a new financial reform plan, these three Senators are among those that stand to play key roles in crafting the specifics of that plan. They and their colleagues need to put in place the toughest possible rules and a framework to get the financial system to do what it’s supposed to do — invest in the growth of the economy for the benefit of all Americans. Dorgan, Dodd and Kaufman should “not go gentle into that good night”. This time it’s crucial that they get this right.