From Wikipedia, the free encyclopedia
The Glass–Steagall Act was a part of the 1933 Banking Act.
It placed restrictions on activities that commercial banks and
investment banks (or other securities firms) could do. It effectively
separated those activities, so the two types of business could not mix,
in order to protect consumer's money from speculative use. The Banking Act of 1935 clarified and otherwise amended Glass–Steagall.
Over time, private firms and their regulators found novel ways to
weaken the barriers envisioned in the legislation. Eventually, the
protections became very weak.
From its start, there were many economists, businessmen, and
politicians who did not find the restrictions to be productive, and
wished to do away with them altogether. It took about 66 years, but the
legislation was eventually completely repealed. Subsequent financial
crises have resulted in attempts to revive the legislation, and even
make it stronger than originally envisioned.
Glass–Steagall developments from 1935 to 1991
Commercial
banks withdrew from the depressed securities markets of the early 1930s
even before the Glass–Steagall prohibitions on securities underwriting
and dealing became effective.
However, those prohibitions were controversial. A 1934 study of
commercial bank affiliate underwriting of securities in the 1920s found
such underwriting was not better than the underwriting by firms that
were not affiliated with banks. That study disputed Glass–Steagall
critics who suggested securities markets had been harmed by prohibiting
commercial bank involvement.
A 1942 study also found that commercial bank affiliate underwriting was
not better (or worse) than nonbank affiliate underwriting, but
concluded this meant it was a "myth" commercial bank securities
affiliates had taken advantage of bank customers to sell "worthless
securities."
Senator Glass's "repeal" effort
In 1935 Senator Glass
attempted to repeal the Glass–Steagall prohibition on commercial banks
underwriting corporate securities. Glass stated Glass–Steagall had
unduly damaged securities markets by prohibiting commercial bank
underwriting of corporate securities.
The first Senate passed version of the Banking Act of 1935 included
Glass's revision to Section 16 of the Glass–Steagall Act to permit bank
underwriting of corporate securities subject to limitations and
regulations.
President Roosevelt opposed this revision to Section 16 and wrote
Glass that "the old abuses would come back if underwriting were
restored in any shape, manner, or form." In the conference committee
that reconciled differences between the House and Senate passed
versions of the Banking Act of 1935, Glass's language amending Section
16 was removed.
Comptroller Saxon's Glass–Steagall interpretations
President John F. Kennedy's appointee as Comptroller of the Currency, James J. Saxon,
was the next public official to seriously challenge Glass–Steagall's
prohibitions. As the regulator of national banks, Saxon was concerned
with the competitive position of commercial banks. In 1950 commercial
banks held 52% of the assets of US financial institutions. By 1960 that
share had declined to 38%. Saxon wanted to expand the powers of national
banks.
In 1963, the Saxon-led Office of the Comptroller of the Currency
(OCC) issued a regulation permitting national banks to offer retail
customers "commingled accounts" holding common stocks and other
securities. This amounted to permitting banks to offer mutual funds to retail customers. Saxon also issued rulings that national banks could underwrite municipal revenue bonds. Courts ruled that both of these actions violated Glass–Steagall.
In rejecting bank sales of accounts that functioned like mutual funds, the Supreme Court explained in Investment Company Institute v. Camp
that it would have given "deference" to the OCC's judgment if the OCC
had explained how such sales could avoid the conflicts of interest and
other "subtle hazards" Glass–Steagall sought to prevent and that could
arise when a bank offered a securities product to its retail customers. Courts later applied this aspect of the Camp ruling to uphold interpretations of Glass–Steagall by federal banking regulators. As in the Camp case, these interpretations by bank regulators were routinely challenged by the mutual fund industry through the Investment Company Institute or the securities industry through the Securities Industry Association as they sought to prevent competition from commercial banks.
1966 to 1980 developments
Increasing competitive pressures for commercial banks
Regulation Q
limits on interest rates for time deposits at commercial banks,
authorized by the 1933 Banking Act, first became "effective" in 1966
when market interest rates exceeded those limits.
This produced the first of several "credit crunches" during the late
1960s and throughout the 1970s as depositors withdrew funds from banks
to reinvest at higher market interest rates.
When this "disintermediation" limited the ability of banks to meet the
borrowing requests of all their corporate customers, some commercial
banks helped their "best customers" establish programs to borrow
directly from the "capital markets" by issuing commercial paper.
Over time, commercial banks were increasingly left with lower credit
quality, or more speculative, corporate borrowers that could not borrow
directly from the "capital markets."
Eventually, even lower credit quality corporations and (indirectly through "securitization")
consumers were able to borrow from the capital markets as improvements
in communication and information technology allowed investors to
evaluate and invest in a broader range of borrowers. Banks began to finance residential mortgages through securitization in the late 1970s. During the 1980s banks and other lenders used securitizations to provide "capital markets" funding for a wide range of assets that previously had been financed by bank loans.
In losing "their preeminent status as expert intermediaries for the
collection, processing, and analysis of information relating to
extensions of credit", banks were increasingly "bypassed" as traditional
"depositors" invested in securities that replaced bank loans.
In 1977 Merrill Lynch introduced a "cash management account" that allowed brokerage customers to write checks on funds held in a money market account or drawn from a "line of credit" Merrill provided. The Securities and Exchange Commission (SEC) had ruled that money market funds
could "redeem" investor shares at a $1 stable "net asset value" despite
daily fluctuations in the value of the securities held by the funds.
This allowed money market funds to develop into "near money" as
"investors" wrote checks ("redemption orders") on these accounts much as
"depositors" wrote checks on traditional checking accounts provided by
commercial banks.
Also in the 1970s savings and loans, which were not restricted by Glass–Steagall other than Section 21, were permitted to offer "negotiable order of withdrawal accounts"
(NOW accounts). As with money market accounts, these accounts
functioned much like checking accounts in permitting a depositor to
order payments from a "savings account."
Helen Garten concluded that the "traditional regulation" of
commercial banks established by the 1933 Banking Act, including
Glass–Steagall, failed when nonbanking firms and the "capital markets"
were able to provide replacements for bank loans and deposits, thereby
reducing the profitability of commercial banking.
Richard Vietor agreed that traditional bank regulation was unable to
protect commercial banks from nonbank competition. However, he noted
that significant the economic and financial instability began in the
mid-1960s. This slowed economic growth and savings, which reduced demand
and supply of credit; it also induced financial innovations that
undermined commercial banks.
Hyman Minsky
agreed financial instability had returned in 1966 and had only been
constrained in the following 15 years through Federal Reserve Board
engineered "credit crunches" to combat inflation followed by "lender of last resort"
rescues of asset prices that produced new inflation. Minsky described
ever worsening periods of inflation followed by unemployment as the
cycle of rescues followed by credit crunches was repeated. Minsky, however, supported traditional banking regulation and advocated further controls of finance to "promote smaller and simpler organizations weighted more toward direct financing." Writing from a similar "neo-Keynesian perspective," Jan Kregel
concluded that, after World War II, non-regulated financial companies,
supported by regulatory actions, developed means to provide bank
products ("liquidity and lending accommodation") more cheaply than
commercial banks through the "capital markets."
Kregel argued this led banking regulators to eliminate Glass–Steagall
restrictions to permit banks to "duplicate these structures" using the
capital markets "until there was virtually no difference in the
activities of FDIC-insured commercial banks and investment banks."
Comptroller Saxon had feared for the competitive viability of commercial banks in the early 1960s.
The "capital markets" developments in the 1970s increased the
vulnerability of commercial banks to nonbank competitors. As described
below, this competition would increase in the 1980s.
Limited congressional and regulatory developments
In
1967 the Senate passed the first of several Senate passed bills that
would have revised Glass–Steagall Section 16 to permit banks to
underwrite municipal revenue bonds.
In 1974 the OCC authorized national banks to provide "automatic
investment services," which permitted bank customers to authorize
regular withdrawals from a deposit account to purchase identified
securities. In 1977 the Federal Reserve Board staff concluded Glass–Steagall permitted banks to privately place commercial paper. In 1978 Bankers Trust began making such placements.
As described below, in 1978, the OCC authorized a national bank to
privately place securities issued to sell residential mortgages in a securitization.
Commercial banks, however, were frustrated with the continuing restrictions imposed by Glass–Steagall and other banking laws.
After many of Comptroller Saxon's decisions granting national banks
greater powers had been challenged or overturned by courts, commercial
banking firms had been able to expand their non-securities activities
through the "one bank holding company." Because the Bank Holding Company Act
only limited nonbanking activities of companies that owned two or more
commercial banks, "one bank holding companies" could own interests in
any type of company other than securities firms covered by
Glass–Steagall Section 20. That "loophole" in the Bank Holding Company
Act was closed by a 1970 amendment to apply the Act to any company that
owned a commercial bank. Commercial banking firm's continuing desire for greater powers received support when Ronald Reagan became President and appointed banking regulators who shared an "attitude towards deregulation of the financial industry."
Reagan Administration developments
State non-member bank and nonbank bank "loopholes"
In 1982, under the chairmanship of William Isaac,
the FDIC issued a "policy statement" that state chartered non-Federal
Reserve member banks could establish subsidiaries to underwrite and deal
in securities. Also in 1982 the OCC, under Comptroller C. Todd Conover, approved the mutual fund company Dreyfus Corporation and the retailer Sears
establishing "nonbank bank" subsidiaries that were not covered by the
Bank Holding Company Act. The Federal Reserve Board, led by Chairman Paul Volcker, asked Congress to overrule both the FDIC's and the OCC's actions through new legislation.
The FDIC's action confirmed that Glass–Steagall did not restrict
affiliations between a state chartered non-Federal Reserve System member
bank and securities firms, even when the bank was FDIC insured. State laws differed in how they regulated affiliations between banks and securities firms. In the 1970s, foreign banks had taken advantage of this in establishing branches in states that permitted such affiliations.
Although the International Banking Act of 1978 brought newly
established foreign bank US branches under Glass–Steagall, foreign banks
with existing US branches were "grandfathered" and permitted to retain
their existing investments. Through this "loophole" Credit Suisse was able to own a controlling interest in First Boston, a leading US securities firm.
After the FDIC's action, commentators worried that large
commercial banks would leave the Federal Reserve System (after first
converting to a state charter if they were national banks) to free
themselves from Glass–Steagall affiliation restrictions, as large
commercial banks lobbied states to permit commercial bank investment
banking activities.
The OCC's action relied on a "loophole" in the Bank Holding
Company Act (BHCA) that meant a company only became a "bank holding
company" supervised by the Federal Reserve Board if it owned a "bank"
that made "commercial loans" (i.e., loans to businesses) and
provided "demand deposits" (i.e., checking accounts). A "nonbank bank"
could be established to provide checking accounts (but not commercial
loans) or commercial loans (but not checking accounts). The company
owning the nonbank bank would not be a bank holding company limited to
activities "closely related to banking." This permitted Sears, GE, and other commercial companies to own "nonbank banks."
Glass–Steagall's affiliation restrictions applied if the nonbank
bank was a national bank or otherwise a member of the Federal Reserve
System. The OCC's permission for Dreyfus to own a nationally chartered
"nonbank bank" was based on the OCC's conclusion that Dreyfus, as a
mutual fund company, earned only a small amount of its revenue through
underwriting and distributing shares in mutual funds. Two other
securities firms, J. & W. Seligman & Co. and Prudential-Bache,
established state chartered non-Federal Reserve System member banks to
avoid Glass–Steagall restrictions on affiliations between member banks
and securities firms.
Legislative response
Although
Paul Volcker and the Federal Reserve Board sought legislation
overruling the FDIC and OCC actions, they agreed bank affiliates should
have broader securities powers. They supported a bill sponsored by
Senate Banking Committee Chairman Jake Garn (R-UT) that would have
amended Glass–Steagall Section 20 to cover all FDIC insured banks and to
permit bank affiliates to underwrite and deal in mutual funds,
municipal revenue bonds, commercial paper, and mortgage-backed
securities. On September 13, 1984, the Senate passed the Garn bill in an 89-5 vote, but the Democratic controlled House did not act on the bill.
In 1987, however, the Senate (with a new Democratic Party
majority) joined with the House in passing the Competitive Equality
Banking Act of 1987 (CEBA). Although primarily dealing with the savings and loan crisis,
CEBA also established a moratorium to March 1, 1988, on banking
regulator actions to approve bank or affiliate securities activities,
applied the affiliation restrictions of Glass–Steagall Sections 20 and
32 to all FDIC insured banks during the moratorium, and eliminated the
"nonbank bank" loophole for new FDIC insured banks (whether they took
demand deposits or made commercial loans) except industrial loan
companies. Existing "nonbank banks", however, were "grandfathered" so
that they could continue to operate without becoming subject to BHCA
restrictions.
The CEBA was intended to provide time for Congress (rather than
banking regulators) to review and resolve the Glass–Steagall issues of
bank securities activities. Senator William Proxmire (D-WI), the new Chairman of the Senate Banking Committee, took up this topic in 1987.
International competitiveness debate
Wolfgang
Reinicke argues that Glass–Steagall "repeal" gained unexpected
Congressional support in 1987 because large banks successfully argued
that Glass–Steagall prevented US banks from competing internationally.
With the argument changed from preserving the profitability of large
commercial banks to preserving the "competitiveness" of US banks (and of
the US economy), Senator Proxmire reversed his earlier opposition to
Glass–Steagall reform.
Proxmire sponsored a bill that would have repealed Glass–Steagall
Sections 20 and 32 and replaced those prohibitions with a system for
regulating (and limiting the amount of) bank affiliate securities
activities. He declared Glass–Steagall a "protectionist dinosaur."
By 1985 commercial banks provided 26% of short term loans to
large businesses compared to 59% in 1974. While banks cited such
statistics to illustrate the "decline of commercial banking," Reinicke
argues the most influential factor in Congress favoring Glass–Steagall
"repeal" was the decline of US banks in international rankings. In 1960
six of the ten largest banks were US based, by 1980 only two US based
banks were in the top ten, and by 1989 none was in the top twenty five.
In the late 1980s the United Kingdom and Canada ended their historic separations of commercial and investment banking. Glass–Steagall critics scornfully noted only Japanese legislation imposed by Americans during the Occupation of Japan kept the United States from being alone in separating the two activities.
As noted above, even in the United States seventeen foreign banks
were free from this Glass–Steagall restriction because they had
established state chartered branches before the International Banking
Act of 1978 brought newly established foreign bank US branches under
Glass–Steagall.
Similarly, because major foreign countries did not separate investment
and commercial banking, US commercial banks could underwrite and deal in
securities through branches outside the United States. Paul Volcker
agreed that, "broadly speaking," it made no sense that US commercial
banks could underwrite securities in Europe but not in the United
States.
1987 status of Glass–Steagall debate
Throughout
the 1980s and 1990s scholars published studies arguing that commercial
bank affiliate underwriting during the 1920s was no worse, or was
better, than underwriting by securities firms not affiliated with banks
and that commercial banks were strengthened, not harmed, by securities
affiliates.
More generally, researchers attacked the idea that "integrated
financial services firms" had played a role in creating the Great
Depression or the collapse of the US banking system in the 1930s.
If it was "debatable" whether Glass–Steagall was justified in the
1930s, it was easier to argue that Glass–Steagall served no legitimate
purpose when the distinction between commercial and investment banking
activities had been blurred by "market developments" since the 1960s.
Along with the "nonbank bank" "loophole" from BHCA limitations,
in the 1980s the "unitary thrift" "loophole" became prominent as a means
for securities and commercial firms to provide banking (or "near
banking") products.
The Savings and Loan Holding Company Act (SLHCA) permitted any company
to own a single savings and loan. Only companies that owned two or more
savings and loan were limited to thrift related businesses. Already in 1973 First Chicago Bank had identified Sears as its real competitor. Citicorp CEO Walter Wriston reached the same conclusion later in the 1970s.
By 1982, using the "unitary thrift" and "nonbank bank" "loopholes,"
Sears had built the "Sears Financial Network", which combined "Super
NOW" accounts and mortgage loans through a large California-based
savings and loan, the Discover Card issued by a "nonbank bank" as a credit card, securities brokerage through Dean Witter Reynolds, home and auto insurance through Allstate, and real estate brokerage through Coldwell Banker. By 1984, however, Walter Wriston concluded "the bank of the future already exists, and it's called Merrill Lynch."
In 1986 when major bank holding companies threatened to stop operating
commercial banks in order to obtain the "competitive advantages" enjoyed
by Sears and Merrill Lynch, FDIC Chairman William Seidman warned that
could create "chaos."
In a 1987 "issue brief" the Congressional Research Service (CRS) summarized "some of" the major arguments
for preserving Glass–Steagall as:
- Conflicts of interest characterize the granting of credit
(lending) and the use of credit (investing) by the same entity, which
led to abuses that originally produced the Act.
- Depository institutions possess enormous financial power, by virtue
of their control of other people's money; its extent must be limited to
ensure soundness and competition in the market for funds, whether loans
or investments.
- Securities activities can be risky, leading to enormous losses. Such
losses could threaten the integrity of deposits. In turn, the
Government insures deposits and could be required to pay large sums if
depository institutions were to collapse as the result of securities
losses.
- Depository institutions are supposed to be managed to limit risk.
Their managers thus may not be conditioned to operate prudently in more
speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies a decade ago.
and against preserving Glass–Steagall as:
- Depository institutions now operate in "deregulated" financial
markets in which distinctions between loans, securities, and deposits
are not well drawn. They are losing market shares to securities firms
that are not so strictly regulated, and to foreign financial
institutions operating without much restriction from the Act.
- Conflicts of interest can be prevented by enforcing legislation
against them, and by separating the lending and credit functions through
forming distinctly separate subsidiaries of financial firms.
- The securities activities that depository institutions are seeking
are both low-risk by their very nature, and would reduce the total risk
of organizations offering them – by diversification.
- In much of the rest of the world, depository institutions operate
simultaneously and successfully in both banking and securities markets.
Lessons learned from their experience can be applied to our national
financial structure and regulation.
Reflecting the significance of the "international competitiveness"
argument, a separate CRS Report stated banks were "losing historical
market shares of their major activities to domestic and foreign
competitors that are less restricted."
Separately, the General Accounting Office
(GAO) submitted to a House subcommittee a report reviewing the benefits
and risks of "Glass–Steagall repeal." The report recommended a "phased
approach" using a "holding company organizational structure" if Congress
chose "repeal." Noting Glass–Steagall had "already been eroded and the
erosion is likely to continue in the future," the GAO explained "coming
to grips with the Glass–Steagall repeal question represents an
opportunity to systematically and rationally address changes in the
regulatory and legal structure that are needed to better address the
realities of the marketplace." The GAO warned that Congress's failure to
act was "potentially dangerous" in permitting a "continuation of the
uneven integration of commercial and investment banking activities."
As Congress was considering the Proxmire Financial Modernization Act in 1988, the Commission of the European Communities proposed a "Second Banking Directive"
that became effective at the beginning of 1993 and provided for the
combination of commercial and investment banking throughout the European Economic Community. Whereas United States law sought to isolate banks from securities activities, the Second Directive represented the European Union's conclusion that securities activities diversified bank risk, strengthening the earnings and stability of banks.
The Senate passed the Proxmire Financial Modernization Act of
1988 in a 94-2 vote. The House did not pass a similar bill, largely
because of opposition from Representative John Dingell (D-MI), chairman of the House Commerce and Energy Committee.
Section 20 affiliates
In April 1987, the Federal Reserve Board had approved the bank holding companies Bankers Trust, Citicorp, and J.P. Morgan & Co. establishing subsidiaries ("Section 20 affiliates") to underwrite and deal in residential mortgage-backed securities, municipal revenue bonds, and commercial paper.
Glass–Steagall's Section 20 prohibited a bank from affiliating with a
firm "primarily engaged" in underwriting and dealing in securities. The
Board decided this meant Section 20 permitted a bank affiliate to earn
5% of its revenue from underwriting and dealing in these types of
securities that were not "bank-eligible securities," subject to various
restrictions including "firewalls" to separate a commercial bank from
its Section 20 affiliate.
Three months later the Board added "asset-backed securities" backed by
pools of credit card accounts or other "consumer finance assets" to the
list of "bank-ineligible securities" a Section 20 affiliate could
underwrite. Bank holding companies, not commercial banks directly, owned
these Section 20 affiliates.
In 1978 the Federal Reserve Board had authorized bank holding
companies to establish securities affiliates that underwrote and dealt
in government securities and other bank-eligible securities.
Federal Reserve Board Chairman Paul Volcker supported Congress amending
Glass–Steagall to permit such affiliates to underwrite and deal in a
limited amount of bank-ineligible securities, but not corporate
securities.
In 1987, Volcker specifically noted (and approved the result) that this
would mean only banks with large government securities activities would
be able to have affiliates that would underwrite and deal in a
significant volume of "bank-ineligible securities."
A Section 20 affiliate with a large volume of government securities
related revenue would be able to earn a significant amount of
"bank-ineligible" revenue without having more than 5% of its overall
revenue come from bank-ineligible activities.
Volcker disagreed, however, that the Board had authority to permit this
without an amendment to the Glass–Steagall Act. Citing that concern,
Volcker and fellow Federal Reserve Board Governor Wayne Angell dissented from the Section 20 affiliate orders.
Senator Proxmire criticized the Federal Reserve Board's Section
20 affiliate orders as defying Congressional control of Glass–Steagall.
The Board's orders meant Glass–Steagall did not prevent commercial banks
from affiliating with securities firms underwriting and dealing in
"bank-ineligible securities," so long as the activity was "executed in a
separate subsidiary and limited in amount."
After the Proxmire Financial Modernization Act of 1988 failed to
become law, Senator Proxmire and a group of fellow Democratic senior House Banking Committee members (including future Committee Ranking Member John LaFalce (D-NY) and future Committee Chairman Barney Frank (D-MA)) wrote the Federal Reserve Board recommending it expand the underwriting powers of Section 20 affiliates. Expressing sentiments that Representative James A. Leach (R-IA) repeated in 1996, Proxmire declared "Congress has failed to do the job" and "[n]ow it's time for the Fed to step in."
Following Senator Proxmire's letter, in 1989 the Federal Reserve
Board approved Section 20 affiliates underwriting corporate debt
securities and increased from 5% to 10% the percentage of its revenue a
Section 20 affiliate could earn from "bank-ineligible" activities. In
1990 the Board approved J.P. Morgan & Co. underwriting corporate stock. With the commercial (J.P. Morgan & Co.) and investment (Morgan Stanley)
banking arms of the old "House of Morgan" both underwriting corporate
bonds and stocks, Wolfgang Reinicke concluded the Federal Reserve Board
order meant both firms now competed in "a single financial market
offering both commercial and investment banking products," which
"Glass–Steagall sought to rule out." Reinicke described this as "de
facto repeal of Glass–Steagall."
No Federal Reserve Board order was necessary for Morgan Stanley
to enter that "single financial market." Glass–Steagall only prohibited
investment banks from taking deposits, not from making commercial loans,
and the prohibition on taking deposits had "been circumvented by the
development of deposit equivalents", such as the money market fund. Glass–Steagall also did not prevent investment banks from affiliating with nonbank banks or savings and loans.
Citing this competitive "inequality," before the Federal Reserve Board
approved any Section 20 affiliates, four large bank holding companies
that eventually received Section 20 affiliate approvals (Chase, J.P.
Morgan, Citicorp, and Bankers Trust) had threatened to give up their
banking charters if they were not given greater securities powers.
Following the Federal Reserve Board's approvals of Section 20
affiliates a commentator concluded that the Glass–Steagall "wall"
between commercial banking and "the securities and investment business"
was "porous" for commercial banks and "nonexistent to investment bankers
and other nonbank entities."
Greenspan-led Federal Reserve Board
Alan Greenspan
had replaced Paul Volcker as Chairman of the Federal Reserve Board when
Proxmire sent his 1988 letter recommending the Federal Reserve Board
expand the underwriting powers of Section 20 affiliates. Greenspan
testified to Congress in December 1987, that the Federal Reserve Board
supported Glass–Steagall repeal.
Although Paul Volcker "had changed his position" on Glass–Steagall
reform "considerably" during the 1980s, he was still "considered a
conservative among the board members." With Greenspan as Chairman, the
Federal Reserve Board "spoke with one voice" in joining the FDIC and OCC
in calling for Glass–Steagall repeal.
By 1987 Glass–Steagall "repeal" had come to mean repeal of
Sections 20 and 32. The Federal Reserve Board supported "repeal" of
Glass–Steagall "insofar as it prevents bank holding companies from being
affiliated with firms engaged in securities underwriting and dealing
activities."
The Board did not propose repeal of Glass Steagall Section 16 or 21.
Bank holding companies, through separately capitalized subsidiaries, not
commercial banks themselves directly, would exercise the new securities
powers.
Banks and bank holding companies had already gained important
regulatory approvals for securities activities before Paul Volcker
retired as Chairman of the Federal Reserve Board on August 11, 1987.
Aside from the Board's authorizations for Section 20 affiliates and for
bank private placements of commercial paper, by 1987 federal banking
regulators had authorized banks or their affiliates to (1) sponsor closed end investment companies, (2) sponsor mutual funds sold to customers in individual retirement accounts, (3) provide customers full service brokerage (i.e., advice and brokerage), and (4) sell bank assets through "securitizations."
In 1982 E. Gerald Corrigan,
president of the Federal Reserve Bank of Minneapolis and a close
Volcker colleague, published an influential essay titled "Are banks
special?" in which he argued banks should be subject to special
restrictions on affiliations because they enjoy special benefits (e.g.,
deposit insurance and Federal Reserve Bank loan facilities) and have
special responsibilities (e.g., operating the payment system and
influencing the money supply). The essay rejected the argument that it
is "futile and unnecessary" to distinguish among the various types of
companies in the "financial services industry."
While Paul Volcker's January 1984, testimony to Congress repeated
that banks are "special" in performing "a unique and critical role in
the financial system and the economy," he still testified in support of
bank affiliates underwriting securities other than corporate bonds.
In its 1986 Annual Report the Volcker led Federal Reserve Board
recommended that Congress permit bank holding companies to underwrite
municipal revenue bonds, mortgage-backed securities, commercial paper,
and mutual funds and that Congress "undertake hearings or other studies
in the area of corporate underwriting."
As described above, in the 1930s Glass–Steagall advocates had alleged
that bank affiliate underwriting of corporate bonds created "conflicts
of interest."
In early 1987 E. Gerald Corrigan, then president of the Federal Reserve Bank of New York,
recommended a legislative "overhaul" to permit "financial holding
companies" that would "in time" provide banking, securities, and
insurance services (as authorized by the GLBA 12 years later).
In 1990 Corrigan testified to Congress that he rejected the "status
quo" and recommended allowing banks into the "securities business"
through financial service holding companies.
In 1991 Paul Volcker testified to Congress in support of the Bush
Administration proposal to repeal Glass–Steagall Sections 20 and 32.
Volcker rejected the Bush Administration proposal to permit
affiliations between banks and commercial firms (i.e., non-financial
firms) and added that legislation to allow banks greater insurance
powers "could be put off until a later date."
1991 Congressional action and "firewalls"
Paul Volcker gave his 1991 testimony as Congress considered repealing Glass–Steagall sections 20 and 32 as part of a broader Bush Administration proposal to reform financial regulation.
In reaction to "market developments" and regulatory and judicial
decisions that had "homogenized" commercial and investment banking,
Representative Edward J. Markey (D-MA) had written a 1990 article arguing "Congress must amend Glass–Steagall." As chairman of a subcommittee of the House Commerce and Energy Committee,
Markey had joined with Committee Chairman Dingell in opposing the 1988
Proxmire Financial Modernization Act. In 1990, however, Markey stated
Glass–Steagall had "lost much of its effectiveness" through market,
regulatory, and judicial developments that were "tantamount to an
ill-coordinated, incremental repeal" of Glass–Steagall. To correct this
"disharmony" Markey proposed replacing Glass–Steagall's "prohibitions"
with "regulation."
After the House Banking Committee
approved a bill repealing Glass–Steagall Sections 20 and 32,
Representative Dingell again stopped House action. He reached agreement
with Banking Committee Chairman Henry B. Gonzalez
(D-TX) to insert into the bill "firewalls" that banks claimed would
prevent real competition between banks and securities firms.
The banking industry strongly opposed the bill in that form, and the
House rejected it. The House debate revealed that Congress might agree
on repealing Sections 20 and 32 while being divided on how bank
affiliations with securities firms should be regulated.
1980s and 1990s bank product developments
Throughout
the 1980s and 1990s, as Congress considered whether to "repeal"
Glass–Steagall, commercial banks and their affiliates engaged in
activities that commentators later linked to the financial crisis of 2007–2008.
Securitization, CDOs, and "subprime" credit
In 1978 Bank of America issued the first residential mortgage-backed security that securitized residential mortgages not guaranteed by a government-sponsored enterprise ("private label RMBS"). Also in 1978, the OCC approved a national bank, such as Bank of America, issuing pass-through certificates representing interests in residential mortgages and distributing such mortgage-backed securities to investors in a private placement. In 1987 the OCC ruled that Security Pacific Bank
could "sell" assets through "securitizations" that transferred "cash
flows" from those assets to investors and also distribute in a registered public offering the residential mortgage-backed securities issued in the securitization.
This permitted commercial banks to acquire assets for "sale" through
securitizations under what later became termed the "originate to
distribute" model of banking.
The OCC ruled that a national bank's power to sell its assets
meant a national bank could sell a pool of assets in a securitization,
and even distribute the securities that represented the sale, as part of
the "business of banking."
This meant national banks could underwrite and distribute securities
representing such sales, even though Glass–Steagall would generally
prohibit a national bank underwriting or distributing non-governmental
securities (i.e., non-"bank-eligible" securities). The federal courts upheld the OCC's approval of Security Pacific's securitization activities, with the Supreme Court refusing in 1990 to review a 1989 Second Circuit
decision sustaining the OCC's action. In arguing that the GLBA's
"repeal" of Glass–Steagall played no role in the financial crisis of
2007–2008, Melanie Fein notes courts had confirmed by 1990 the power of
banks to securitize their assets under Glass–Steagall.
The Second Circuit stated banks had been securitizing their
assets for "ten years" before the OCC's 1987 approval of Security
Pacific's securitization. As noted above, the OCC had approved such activity in 1978.
Jan Kregel argues that the OCC's interpretation of the "incidental
powers" of national banks "ultimately eviscerated Glass–Steagall."
Continental Illinois Bank is often credited with issuing the first collateralized debt obligation (CDO) when, in 1987, it issued securities representing interests in a pool of "leveraged loans."
By the late 1980s Citibank had become a major provider of "subprime" mortgages and credit cards. Arthur Wilmarth argued that the ability to securitize such credits encouraged banks to extend more "subprime" credit.
Wilmarth reported that during the 1990s credit card loans increased at a
faster pace for lower-income households than higher-income households
and that subprime mortgage loan volume quadrupled from 1993–99, before
the GLBA became effective in 2000.
In 1995 Wilmarth noted that commercial bank mortgage lenders differed
from nonbank lenders in retaining "a significant portion of their
mortgage loans" rather than securitizing the entire exposure.
Wilmarth also shared the bank regulator concern that commercial banks
sold their "best assets" in securitizations and retained their riskiest
assets.
ABCP conduits and SIVs
In
the early 1980s commercial banks established asset backed commercial
paper conduits (ABCP conduits) to finance corporate customer
receivables. The ABCP conduit purchased receivables from the bank
customer and issued asset-backed commercial paper
to finance that purchase. The bank "advising" the ABCP conduit provided
loan commitments and "credit enhancements" that supported repayment of
the commercial paper. Because the ABCP conduit was owned by a third
party unrelated to the bank, it was not an affiliate of the bank.
Through ABCP conduits banks could earn "fee income" and meet
"customers' needs for credit" without "the need to maintain the amount
of capital that would be required if loans were extended directly" to
those customers.
By the late 1980s Citibank had established ABCP conduits to buy securities. Such conduits became known as structured investment vehicles (SIVs). The SIV's "arbitrage"
opportunity was to earn the difference between the interest earned on
the securities it purchased and the interest it paid on the ABCP and
other securities it issued to fund those purchases.
OTC derivatives, including credit default swaps
In the early 1980s commercial banks began entering into interest rate and currency exchange "swaps" with customers. This "over-the-counter derivatives" market grew dramatically throughout the 1980s and 1990s.
In 1996 the OCC issued "guidelines" for national bank use of "credit default swaps" and other "credit derivatives."
Banks entered into "credit default swaps" to protect against defaults
on loans. Banks later entered into such swaps to protect against
defaults on securities. Banks acted both as "dealers" in providing such
protection (or speculative "exposure") to customers and as "hedgers" or
"speculators" to cover (or create) their own exposures to such risks.
Commercial banks became the largest dealers in swaps and other
over-the-counter derivatives. Banking regulators ruled that swaps
(including credit default swaps) were part of the "business of banking,"
not "securities" under the Glass–Steagall Act.
Commercial banks entered into swaps that replicated part or all
of the economics of actual securities. Regulators eventually ruled banks
could even buy and sell equity securities to "hedge" this activity.
Jan Kregel argues the OCC's approval of bank derivatives activities
under bank "incidental powers" constituted a "complete reversal of the
original intention of preventing banks from dealing in securities on
their own account."
Glass–Steagall developments from 1995 to Gramm–Leach–Bliley Act
Leach and Rubin support for Glass–Steagall "repeal"; need to address "market realities"
On January 4, 1995, the new Chairman of the House Banking Committee, Representative James A. Leach (R-IA), introduced a bill to repeal Glass–Steagall Sections 20 and 32. After being confirmed as Treasury Secretary, Robert Rubin announced on February 28, 1995, that the Clinton Administration supported such Glass–Steagall repeal. Repeating themes from the 1980s, Leach stated Glass–Steagall was "out of synch with reality" and Rubin argued "it is now time for the laws to reflect changes in the world's financial system."
Leach and Rubin expressed a widely shared view that Glass–Steagall was "obsolete" or "outdated." As described above, Senator Proxmire and Representative Markey
(despite their long-time support for Glass–Steagall) had earlier
expressed the same conclusion. With his reputation for being
"conservative" on expanded bank activities,
former Federal Reserve Board Chairman Paul Volcker remained an
influential commentator on legislative proposals to permit such
activities.
Volcker continued to testify to Congress in opposition to permitting
banks to affiliate with commercial companies and in favor of repealing
Glass–Steagall Sections 20 and 32 as part of "rationalizing" bank
involvement in securities markets.
Supporting the Leach and Rubin arguments, Volcker testified that
Congressional inaction had forced banking regulators and the courts to
play "catch-up" with market developments by "sometimes stretching
established interpretations of law beyond recognition."
In 1997 Volcker testified this meant the "Glass–Steagall separation of
commercial and investment banking is now almost gone" and that this
"accommodation and adaptation has been necessary and desirable."
He stated, however, that the "ad hoc approach" had created "uneven
results" that created "almost endless squabbling in the courts" and an
"increasingly advantageous position competitively" for "some sectors of
the financial service industry and particular institutions." Similar to the GAO in 1988 and Representative Markey in 1990. Volcker asked that Congress "provide clear and decisive leadership that
reflects not parochial pleadings but the national interest."
Reflecting the regulatory developments Volcker noted, the
commercial and investment banking industries largely reversed their
traditional Glass–Steagall positions. Throughout the 1990s (and
particularly in 1996), commercial banking firms became content with the
regulatory situation Volcker described. They feared "financial
modernization" legislation might bring an unwelcome change.
Securities firms came to view Glass–Steagall more as a barrier to
expanding their own commercial banking activities than as protection
from commercial bank competition. The securities industry became an
advocate for "financial modernization" that would open a "two-way
street" for securities firms to enter commercial banking.
Status of arguments from 1980s
While
the need to create a legal framework for existing bank securities
activities became a dominant theme for the "financial modernization"
legislation supported by Leach, Rubin, Volcker, and others, after the
GLBA repealed Glass–Steagall Sections 20 and 32 in 1999, commentators
identified four main arguments for repeal: (1) increased economies of
scale and scope, (2) reduced risk through diversification of activities,
(3) greater convenience and lower cost for consumers, and (4) improved
ability of U.S. financial firms to compete with foreign firms.
By 1995, however, some of these concerns (which had been identified by the Congressional Research Service in 1987)
seemed less important. As Japanese banks declined and U.S.-based banks
were more profitable, "international competitiveness" did not seem to be
a pressing issue.
International rankings of banks by size also seemed less important
when, as Alan Greenspan later noted, "Federal Reserve research had been
unable to find economies of scale in banking beyond a modest size."
Still, advocates of "financial modernization" continued to point to the
combination of commercial and investment banking in nearly all other
countries as an argument for "modernization", including Glass–Steagall
"repeal."
Similarly, the failure of the Sears Financial Network
and other nonbank "financial supermarkets" that had seemed to threaten
commercial banks in the 1980s undermined the argument that financial
conglomerates would be more efficient than "specialized" financial
firms.
Critics questioned the "diversification benefits" of combining
commercial and investment banking activities. Some questioned whether
the higher variability of returns in investment banking would stabilize
commercial banking firms through "negative correlation" (i.e., cyclical
downturns in commercial and investment banking occurring at different
times) or instead increase the probability of the overall banking firm
failing.
Others questioned whether any theoretical benefits in holding a passive
"investment portfolio" combining commercial and investment banking
would be lost in managing the actual combination of such activities.
Critics also argued that specialized, highly competitive commercial and
investment banking firms were more efficient in competitive global
markets.
Starting in the late 1980s, John H. Boyd, a staff member of the Federal Reserve Bank of Minneapolis, consistently questioned the value of size and product diversification in banking. In 1999, as Congress was considering legislation that became the GLBA,
he published an essay arguing that the "moral hazard" created by deposit insurance, too big to fail
(TBTF) considerations, and other governmental support for banking
should be resolved before commercial banking firms could be given
"universal banking" powers.
Although Boyd's 1999 essay was directed at "universal banking" that
permitted commercial banks to own equity interests in non-financial
firms (i.e., "commercial firms"), the essay was interpreted more broadly
to mean that "expanding bank powers, by, for example, allowing nonbank
firms to affiliate with banks, prior to undertaking reforms limiting
TBTF-like coverage for uninsured bank creditors is putting the 'cart
before the horse.'"
Despite these arguments, advocates of "financial modernization"
predicted consumers and businesses would enjoy cost savings and greater
convenience in receiving financial services from integrated "financial
services firms."
After the GLBA repealed Sections 20 and 32, commentators also
noted the importance of scholarly attacks on the historic justifications
for Glass–Steagall as supporting repeal efforts.
Throughout the 1990s, scholars continued to produce empirical studies
concluding that commercial bank affiliate underwriting before
Glass–Steagall had not demonstrated the "conflicts of interest" and
other defects claimed by Glass–Steagall proponents. By the late 1990s a "remarkably broad academic consensus" existed that Glass–Steagall had been "thoroughly discredited."
Although he rejected this scholarship, Martin Mayer
wrote in 1997 that since the late 1980s it had been "clear" that
continuing the Glass–Steagall prohibitions was only "permitting a
handful of large investment houses and hedge funds to charge monopoly
rents for their services without protecting corporate America,
investors, or the banks." Hyman Minsky,
who disputed the benefits of "universal banking," wrote in 1995
testimony prepared for Congress that "repeal of the Glass–Steagall Act,
in itself, would neither benefit nor harm the economy of the United
States to any significant extent."
In 1974 Mayer had quoted Minsky as stating a 1971 presidential
commission (the "Hunt Commission") was repeating the errors of history
when it proposed relaxing Glass–Steagall and other legislation from the
1930s.
With banking commentators such as Mayer and Minsky no longer
opposing Glass–Steagall repeal, consumer and community development
advocates became the most prominent critics of repeal and of financial
"modernization" in general. Helen Garten argued that bank regulation
became dominated by "consumer" issues, which produced "a largely
unregulated, sophisticated wholesale market and a highly regulated,
retail consumer market." In the 1980s Representative Fernand St. Germain
(D-RI), as chairman of the House Banking Committee, sought to tie any
Glass–Steagall reform to requirements for free or reduced cost banking
services for the elderly and poor. Democratic Representatives and Senators made similar appeals in the 1990s.
During Congressional hearings to consider the various Leach bills to
repeal Sections 20 and 32, consumer and community development advocates
warned against the concentration of "economic power" that would result
from permitting "financial conglomerates" and argued that any repeal of
Sections 20 and 32 should mandate greater consumer protections,
particularly free or low cost consumer services, and greater community
reinvestment requirements.
Failed 1995 Leach bill; expansion of Section 20 affiliate activities; merger of Travelers and Citicorp
By
1995 the ability of banks to sell insurance was more controversial than
Glass–Steagall "repeal." Representative Leach tried to avoid conflict
with the insurance industry by producing a limited "modernization" bill
that repealed Glass–Steagall Sections 20 and 32, but did not change the
regulation of bank insurance activities.
Leach's efforts to separate insurance from securities powers failed
when the insurance agent lobby insisted any banking law reform include
limits on bank sales of insurance.
Similar to Senator Proxmire in 1988,
Representative Leach responded to the House's inaction on his
Glass–Steagall "repeal" bill by writing the Federal Reserve Board in
June 1996 encouraging it to increase the limit on Section 20 affiliate
bank-ineligible revenue. When the Federal Reserve Board increased the limit to 25% in December 1996, the Board noted the Securities Industry Association (SIA) had complained this would mean even the largest Wall Street securities firms could affiliate with commercial banks.
The SIA's prediction proved accurate two years later when the
Federal Reserve Board applied the 25% bank-ineligible revenue test in
approving Salomon Smith Barney (SSB) becoming an affiliate of Citibank through the merger of Travelers and Citicorp to form the Citigroup
bank holding company. The Board noted that, although SSB was one of the
largest US securities firms, less than 25% of its revenue was
"bank-ineligible."
Citigroup could only continue to own the Travelers insurance
underwriting business for two (or, with Board approval, five) years
unless the Bank Holding Company Act was amended (as it was through the
GLBA) to permit affiliations between banks and underwriters of property,
casualty, and life insurance. Citigroup's ownership of SSB, however,
was permitted without any law change under the Federal Reserve Board's
existing Section 20 affiliate rules.
In 2003, Charles Geisst, a Glass–Steagall supporter, told Frontline the Federal Reserve Board's Section 20 orders meant the Federal Reserve "got rid of the Glass–Steagall Act." Former Federal Reserve Board Vice-Chairman Alan Blinder
agreed the 1996 action increasing "bank-ineligible" revenue limits was
"tacit repeal" of Glass–Steagall, but argued "that the market had
practically repealed Glass–Steagall, anyway."
Shortly after approving the merger of Citicorp and Travelers, the
Federal Reserve Board announced its intention to eliminate the 28
"firewalls" that required separation of Section 20 affiliates from their
affiliated bank and to replace them with "operating standards" based on
8 of the firewalls. The change permitted banks to lend to fund
purchases of, and otherwise provide credit support to, securities
underwritten by their Section 20 affiliates.
This left Federal Reserve Act Sections 23A (which originated in the
1933 Banking Act and regulated extensions of credit between a bank and
any nonbank affiliate) and 23B (which required all transactions between a
bank and its nonbank affiliates to be on "arms-length" market terms) as
the primary restrictions on banks providing credit to Section 20
affiliates or to securities underwritten by those affiliates.
Sections 23A and B remained the primary restrictions on commercial
banks extending credit to securities affiliates, or to securities
underwritten by such affiliates, after the GLBA repealed Glass–Steagall
Sections 20 and 32.
1997-98 legislative developments: commercial affiliations and Community Reinvestment Act
In
1997 Representative Leach again sponsored a bill to repeal
Glass–Steagall Sections 20 and 32. At first the main controversy was
whether to permit limited affiliations between commercial firms and
commercial banks.
Securities firms (and other financial services firms) complained that
unless they could retain their affiliations with commercial firms (which
the Bank Holding Company Act forbid for a commercial bank), they would
not be able to compete equally with commercial banks.
The Clinton Administration proposed that Congress either permit a small
"basket" of commercial revenue for bank holding companies or that it
retain the "unitary thrift loophole" that permitted a commercial firm to
own a single savings and loan.
Representative Leach, House Banking Committee Ranking Member Henry
Gonzalez (D-TX), and former Federal Reserve Board Chairman Paul Volcker
opposed such commercial affiliations.
Meanwhile, in 1997 Congressional Quarterly reported Senate Banking Committee Chairman Al D'Amato
(R-NY) rejected Treasury Department pressure to produce a financial
modernization bill because banking firms (such as Citicorp) were
satisfied with the competitive advantages they had received from
regulatory actions and were not really interested in legislative
reforms. Reflecting the process Paul Volcker had described, as financial reform legislation was considered throughout 1997 and early 1998, Congressional Quarterly reported how different interests groups blocked legislation and sought regulatory advantages.
The "compromise bill" the House Republican leadership sought to
bring to a vote in March 1998, was opposed by the commercial banking
industry as favoring the securities and insurance industries.
The House Republican leadership withdrew the bill in response to the
banking industry opposition, but vowed to bring it back when Congress
returned from recess.
Commentators describe the April 6, 1998, merger announcement between
Travelers and Citicorp as the catalyst for the House passing that bill
by a single vote (214-213) on May 13, 1998.
Citicorp, which had opposed the bill in March, changed its position to
support the bill along with the few other large commercial banking firms
that had supported it in March for improving their ability to compete
with "foreign banks."
The Clinton Administration issued a veto threat for the House
passed bill, in part because the bill would eliminate "the longstanding
right of unitary thrift holding companies to engage in any lawful
business," but primarily because the bill required national banks to
conduct expanded activities through holding company subsidiaries rather
than the bank "operating subsidiaries" authorized by the OCC in 1996.
On September 11, 1998, the Senate Banking Committee approved a
bipartisan bill with unanimous Democratic member support that, like the
House-passed bill, would have repealed Glass–Steagall Sections 20 and
32. The bill was blocked from Senate consideration by the Committee's two dissenting members (Phil Gramm (R-TX) and Richard Shelby (R-AL)), who argued it expanded the Community Reinvestment Act (CRA). Four Democratic senators (Byron Dorgan
(D-ND), Russell Feingold (D-WI), Barbara Mikulski (D-MD), and Paul
Wellstone (D-MN)) stated they opposed the bill for its repeal of
Sections 20 and 32.
1999 Gramm–Leach–Bliley Act
In
1999 the main issues confronting the new Leach bill to repeal Sections
20 and 32 were (1) whether bank subsidiaries ("operating subsidiaries")
or only nonbank owned affiliates could exercise new securities and other
powers and (2) how the CRA would apply to the new "financial holding
companies" that would have such expanded powers. The Clinton Administration agreed with Representative Leach in supporting "the continued separation of banking and commerce."
The Senate Banking Committee approved in a straight party line
11-9 vote a bill (S. 900) sponsored by Senator Gramm that would have
repealed Glass–Steagall Sections 20 and 32 and that did not contain the
CRA provisions in the Committee's 1998 bill. The nine dissenting
Democratic Senators, along with Senate Minority Leader Thomas Daschle
(D-SD), proposed as an alternative (S. 753) the text of the 1998
Committee bill with its CRA provisions and the repeal of Sections 20 and
32, modified to provide greater permission for "operating subsidiaries"
as requested by the Treasury Department. Through a partisan 54-44 vote on May 6, 1999 (with Senator Fritz Hollings
(D-SC) providing the only Democratic Senator vote in support), the
Senate passed S. 900. The day before, Senate Republicans defeated (in a
54-43 vote) a Democratic sponsored amendment to S. 900 that would have
substituted the text of S. 753 (also providing for the repeal of
Glass–Steagall Sections 20 and 32).
On July 1, 1999, the House of Representatives passed (in a
bipartisan 343-86 vote) a bill (H.R. 10) that repealed Sections 20 and
32. The Clinton Administration issued a statement supporting H.R. 10
because (unlike the Senate passed S. 900) it accepted the bill's CRA and
operating subsidiary provisions.
On October 13, 1999, the Federal Reserve and Treasury Department
agreed that direct subsidiaries of national banks ("financial
subsidiaries") could conduct securities activities, but that bank
holding companies would need to engage in merchant banking, insurance,
and real estate development activities through holding company, not
bank, subsidiaries.
On October 22, 1999, Senator Gramm and the Clinton Administration
agreed a bank holding company could only become a "financial holding
company" (and thereby enjoy the new authority to affiliate with
insurance and securities firms) if all its bank subsidiaries had at
least a "satisfactory" CRA rating.
After these compromises, a joint Senate and House Conference
Committee reported out a final version of S. 900 that was passed on
November 4, 1999, by the House in a vote of 362-57 and by the Senate in a
vote of 90-8. President Clinton signed the bill into law on November
12, 1999, as the Gramm–Leach–Bliley Financial Modernization Act of 1999
(GLBA).
The GLBA repealed Sections 20 and 32 of the Glass–Steagall Act, not Sections 16 and 21.
The GLBA also amended Section 16 to permit "well capitalized"
commercial banks to underwrite municipal revenue bonds (i.e.,
non-general obligation bonds), as first approved by the Senate in 1967.
Otherwise, Sections 16 and 21 remained in effect regulating the direct
securities activities of banks and prohibiting securities firms from
taking deposits.
After March 11, 2000, bank holding companies could expand their
securities and insurance activities by becoming "financial holding
companies."
Aftermath of repeal
Please see the main article, Glass–Steagall: Aftermath of repeal, which has sections for the following:
The above article also contains information on proposed reenactment,
or alternative proposals that will have the same effect or a partial
reinstatement effect.
