A lot of Googling of the phrase "Glass-Steagall" has been going on across the country, following the Democratic debate. We at Better Banking Law welcome this and see it as a tremendous potential benefit to American taxpayers going forward. Unfortunately, the press is often half informing readers on just what Glass-Steagall was and is. And I intentionally said “is” as well as “was” because, though that section of the Banking Act of 1933 (AKA Glass-Steagall) that separated investment banking from commercial banking was repealed by Congress in 1999, the other section, which created Federal Deposit Insurance for commercial banks is still very much intact. And of course FDIC insurance is what assures depositors that: (1) their money will be safe; and (2) their financial transactions will go through. This is why Congress voted to bailout the commercial banks in 2008, after such banks incurred tremendous losses from underwriting mortgage-backed securities.
Neil Irwin's recent New York Times article titled "What Is Glass-Steagall? The 82-Year-Old Banking Law That Stirred the Debate" failed to even once mention Federal Deposit Insurance (FDIC) in his comprehensive piece. It’s hard to believe that had Federally insured commercial banks not been allowed to underwrite such securities that it would ever have been necessary for US taxpayers to bail them out at all.
Assuming only investment bankers could have underwritten such securities, the losses incurred throughout the financial system would have been far less and it is inconceivable that Congress would have bailed such investment bankers out. After all, Lehman Brothers was permitted to go bankrupt in 2008 and hundreds of investment banks had gone bankrupt or forced into mergers over the years. A prime example a generation ago was when Drexel Burnham, the then leading underwriter of high yield bonds, went bankrupt and the financial system hardly shrugged.
The crux of what you need to know about Glass-Steagall can be found in our Legislation 101 series here.