The Most Vital Ingredient in Wall Street Reform Goes Missing

Last Fall, it was all about the wall: financial bigwigs like former Federal Reserve Chair Paul Volcker, former Citigroup co-CEO John Reed, Governor of the Bank of England, Mervyn King, all espoused reestablishing the legal barrier between the derivatives casino that masquerades today as Wall Street and commercial banks holding insured deposits.

It made good sense: the wall goes up in 1933, America becomes the premier financial center for 66 years.  The wall comes down in 1999, the financial system collapses exactly 9 years later with the precise characteristics of the massive Wall Street swindles that occurred in the late 1920s when there was also no wall.

But the wall has now gone missing in the current financial reform bill advanced out of the Senate Banking Committee by its Chairman, Senator Christopher Dodd.  Equally noteworthy, the historic 1933 legislation that built the essential wall between flim-flam securities salesmen and Aunt Tilly’s insured bank account, commonly known as the Glass-Steagall Act, has gone missing itself from the internet.  To underscore how extraordinary this is, if you put “Glass-Steagall Act” in the Google search box, it brings up 220,000 hits. And, yet, it is next to impossible to find the actual text of the legislation on the internet.

The Glass-Steagall Act (officially known as the Banking Act of 1933, Public Law 66-73, or H.R. 5661) is one of the most important pieces of financial legislation ever passed in this country.  In addition to walling off the predators of Wall Street, it is less commonly known that Glass-Steagall created the Federal Deposit Insurance Corporation (FDIC), the Federal Open Market Committee (FOMC) to implement the monetary policy of the Federal Reserve, and dramatically revised the Federal Reserve Act to prevent Wall Street perversions rooted out in the investigations conducted by the Senate Committee on Banking and Currency from 1932 to 1934.  Given its landmark status and current attention, one would expect it to be available in a flick of a keystroke on any search engine.

The for-profit on-line law repositories offer only what’s left of the Act in the U.S. Code after its bones were picked clean by the Gramm- Leach- Bliley Act (also known as the Financial Services Modernization Act of 1999).  Case law offers a few sentences dealing with the separation of securities firms and national banks.   Wikipedia has no link to the text of the legislation, clearly because its editors couldn’t find one.  The FDIC, created under the Act, says on its web site you can drop in to its Library in Washington, D.C. if you’d like to look at the legislation. Cornell Law’s massive on-line library has this to say when you click on the Law:

Unfortunately, public sources of the Statutes at Large leave a lot out. The Library of Congress has mounted volumes 1-18 (to 1874) as part of its American Memory collection. The Government Printing Office took responsibility for the Statutes in 1875, but has only made electronic versions available from 1995 onward (volumes 109 and up).

The National Archives offers a digital copy of the first and last page of the document.  (I sensed a tad of condescension in the suggestion that Americans can be placated with a title page and a signature page while the guts of our legislation are reserved for the lobbyists.) I sent an email to the National Archives asking for the full legislation.  The following response arrived a few days later from an archivist , Jane Fitzgerald:

“We have just received your email inquiry regarding digital images of
the rest of the Banking Act of 1933.  Unfortunately, the Banking Act of 1933 (Public Law 73-66 of June 16, 1933) consists of a total of 45 pages in length and we currently only have existing images of the first and signature pages.

“Black and white scans of the remaining pages may be ordered for $35.00 a page…”

To get a copy of public legislation from a publicly funded institution would cost $35.00 x 43 pages or $1505.00.  Welcome to the new reality of wealth, privilege and access in America. I responded with another email requesting that the full document be made immediately available to the public at no charge, noting that:

“The text of the Banking Act of 1933…will help shine the light forward for our current Congress.  That’s what historical documents are for: to guide us toward a future devoid of the horrific mistakes of the past.  Locking away this document and charging $35 a page insults the mandate of the National Archives.  In fact, it is abhorrent to a participatory democracy.”

Thus far, I have not heard back from the National Archives.  After four days of web searching, phone calls, and emails with no results, I had an epiphany.  I remembered where I had once accessed rare documents from the 1930s.  I located the full legislation on line with no charge involved for printing the document or downloading it.  I copied it from the site and will be happy to email the Act to anyone who sends me an email with the subject line, “Save Glass-Steagall From Extinction.” (I hesitate to give out the web location for fear the repository that has given the legislation a home will suffer a buyout by Wall Street shortly upon the news leaking out.  I say this only half jokingly.)

What’s in this legislation that’s worthy of vanquishing it from the annals of history?   Each section reveals how Congress had to police with new laws a Wall Street functioning as organized crime on steroids.  And it leads a direct path of inquiry to the 12,000 pages holed up in the National Archives where the Senate Committee on Banking and Currency took two years of testimony under oath from 1932 to 1934 from the captains of illicit finance, received 1375 completed questionnaires from stock exchange members, subpoenaed cancelled checks from members of the financial press who had been bribed by Wall Street players, and obtained “preferred lists” where public office holders were routinely bribed with hot stock offerings.

In other words, it highlights the type of in-depth investigation our current Congress has not done as it stumbles around in the dark writing reform legislation with no evidentiary support for what it needs to reform.

Wall Street honchos who want the Federal Reserve to remain as their coddling regulator  particularly fear public attention to Section 20 of the Glass-Steagall Act.   This is a verbatim quote from that hard-to-locate original legislation:

“After one year from the date of the enactment of this Act, no member bank shall be affiliated in any manner described in section 2(b) hereof with any corporation, association, business trust, or other similar organization engaged principally in the issue, flotation, underwriting, public sale, or distribution at wholesale or retail or through syndicate participation of stocks, bonds, debentures, notes, or other securities.” [Italic emphasis added.]

This pesky passage might now renew questions as to whether the Federal Reserve Board broke the law in 1998 when it approved the merger of a massive securities firm (Travelers/Salomon Smith Barney) with a member bank holding insured deposits (Citibank). That institution is now a welfare ward of the taxpayer.  Salomon was an investment bank engaged in underwriting all the kinds of securities forbidden by Glass-Steagall to become affiliated with a member bank; Smith Barney was a brokerage firm engaged in the public sale of the securities not allowed under Glass-Steagall to be affiliated with a member bank.  The Fed blew off these serious matters with the following statement in its letter approving the merger:

“…Travelers controls several domestic subsidiaries that cannot be affiliated with a Bank under Section 20 of the Glass-Steagall Act (12 U.S.C.  377).  These companies engage in securities underwriting and dealing activities, distributing shares of open-end mutual funds, and controlling open-end mutual funds.  Travelers has committed to conform the activities of these companies to the requirements of the Glass-Steagall Act and the Board’s orders and interpretations there under, including the limitations on the amount of revenue derived from securities underwriting and dealing activities, on consummation of the proposed transaction in accordance with the requirements of this order.”

The Federal Reserve approved the merger on September 23, 1998.  Glass-Steagall was not repealed until November 12, 1999.  In between, Smith Barney’s army of stockbrokers did not stop selling securities to the public and the firm’s proprietary mutual funds continued to be distributed to the public.

If the Federal Reserve brazenly and knowingly ignored the law in acquiescence to a serial misfeasor,  why should Americans trust it to have any role whatsoever in bank regulation and, especially not appropriate, a Consumer Financial Protection Agency housed under the Fed as envisioned by Senator Dodd’s proposed legislation.

Last November, Senator Dodd called the Fed an “abysmal failure” in terms of its regulation of banks and consumer protection.  His draft bill at that time correctly stripped the Fed of banking and consumer oversight.  Today, Senator Dodd’s bill elevates the “abysmal failure” Fed to trusted guardian of the largest and most dangerous banks in the country alongside  oversight of a consumer protection agency.  Senator Dodd had his facts impeccably correct in November. Who or what changed Senator Dodd’s mind in the ensuing four months?

Once the Travelers/Citicorp merger created Citigroup, other Wall Street firms had to buy insured depositor banks in order to compete against the massive pools of money housed under the Citi umbrella as it was allowed to gobble up bank after bank.  The Fed set this doomsday machine in motion and the taxpayers are now footing the crushing bill to shore up zombie securities firms on top of staggering investment losses, job losses, foreclosures and growing homelessness.  Consumers were promised one-stop shopping at these behemoths; they ended up in the role of busboys at the predator’s ball.

In 1998 when the barbarians were charging the wall, 425 individuals testified in person or in writing to the Federal Reserve on the application by Travelers and Citicorp to merge to create Citigroup.  A small number correctly predicted this financial calamity would result.  That same small number wasn’t getting cash from Citicorp or Travelers.  The majority of politicians and nonprofits who testified in favor of the proposal were recipients of largesse from one or the other of the corporations.

Why was the Federal Reserve Board conducting hearings on a proposal that was patently illegal under existing law?  To mute public outrage over the brazenness of that detail alone, the press was fed the following story line:  don’t focus on the bold violations of law under the Glass-Steagall Act, focus instead on the Bank Holding Company Act which allows a two-year window for Travelers to divest its insurance subsidiaries;  an eventuality that Citigroup correctly bet would be moot if it could get its Washington insiders like Treasury Secretary Robert Rubin to muscle through repeal of Glass-Steagall before the two-year deadline arrived.)

The Federal Reserve may have also felt empowered by the stunning editorial in the New York Times on April 8, 1998, putting white hats on the pirates and dubbing financial concentration and repeal of investor protection law a good thing that “could actually protect naïve investors.”  The New York Times had not only sipped the Citigroup Kool Aid and found it pleasing, it was adding new flavors of its own to the packaging:

“Congress dithers, so John Reed of Citicorp and Sanford Weill of Travelers Group grandly propose to modernize financial markets on their own. They have announced a $70 billion merger — the biggest in history — that would create the largest financial services company in the world, worth more than $140 billion… In one stroke, Mr. Reed and Mr. Weill will have temporarily demolished the increasingly unnecessary walls built during the Depression to separate commercial banks from investment banks and insurance companies.”

“Increasingly unnecessary walls?”  Citibank had a history of money laundering for dictators.  Salomon Smith Barney was the successor firm responsible for rigging the two-year Treasury note auction and “yield burning,” another illegal maneuver involving Treasury securities and municipal bonds.   Those walls were all that stood between one criminal culture with insured deposits merging with more creative criminals.  Fused together, they took their widow and orphans’ passbooks and conjured up rigged research, subprime mortgage securitizations, credit default swaps, auction rate securities, Dr. Evil trades, and Enron off-balance-sheet debt bombs.

The New York Times continues:

“Some consumer advocates oppose the merger because, they fear, financial behemoths inevitably threaten ordinary consumers. But one-stop financial shopping could actually protect naive investors. Under current laws such investors can be pulled in contradictory directions by bankers offering retirement accounts, insurance agents offering annuities and securities dealers offering mutual funds. An institution that sells all these products can steer customers toward the product that best serves their needs…A collapse in the company’s securities and insurance operations could drag down its commercial bank. But that will happen only if Federal regulators fall sound asleep.”

Did the Federal Reserve fall sound asleep?  Or was it compromised to begin with?  As for steering customers toward the product that best serves their needs, for the last eight decades Wall Street has incentivized through its broker commission structure its goal of selling what it needs to dump on the public irrespective of what best serves the public’s needs.  The only hope of changing that reality is a regulator with teeth and a mighty wall that separates speculation and risk taking from savings earmarked for safety.

The similarity of the dynamics of the 1929 crash and the 2008 crash is reflected in this passage from the Senate Committee on Banking and Currency in 1934, Report No. 1455:

“The Banking Act of 1933, enacted on June 16, 1933, was promulgated to effect a complete severance of the commercial and investment banking functions and to eradicate many of the abuses disclosed at the hearings before the Senate subcommittee…The hearings disclosed, on the part of many bankers, a woeful lack of regard for the public interest and a proper conception of fiduciary responsibility.  Personages upon whom the public relied for the guardianship of funds did not regard their position as impregnated with trust, but rather as a means for personal gain.  These custodians of funds gambled and speculated for their own account in the stock of the banking institutions which they dominated; participated in speculative transactions in the capital stock of their banking institutions that directly conflicted with the interest of these institutions which they were paid to serve; participated in and were the beneficiaries of pool operations;… availed themselves, as directors of private corporations, of inside information to aid them in transactions in the securities of these corporations; caused to be paid by the banking institutions to themselves excessive compensation; had voted to themselves participations in management funds and substantial pensions; and resorted to devious means to avoid the payment of their just Government taxes…Far from having a detrimental, subservice effect upon the banking institutions of the country, the investigation performed the wholesome function of exposing the ills and evils of banking conditions and the perpetrators of these wrongs, with a view to the elimination of both the undesirable practices and personalities.”

Senator Dodd, members of Congress, you know what you have to do.  Put back the wall, then on to real Senate investigations under oath.

PAM MARTENS worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article.  She writes on public interest issues from New Hampshire.  She can be reached at



Pam Martens has been a contributing writer at CounterPunch since 2006. Martens writes regularly on finance at