Yesterday (Nov. 12) was the 10th anniversary of the signing ceremony for the Gramm Leach Bliley Act. Though hailed at the time as a great breakthrough in financial regulatory reform—headlines predicted the coming time of consumer plenty, big savings on mutual funds, insurance premiums and bank fees—it was never anything more than a scheme to allow CitiGroup, Goldman Sachs, and a few other already huge financial institutions to do whatever they wanted.

Given what happened after that (Enron, WorldCom, the housing bubble, then Bear Stearns, Lehman Bros., TARP and the rest), now's a good time to review.

Gramm Leach repealed the Glass Steagall Act of 1933, which heretofore had prohibited the combination of investment banks with stock brokerages, depository banks with insurance companies. The theory behind it, developed after the Crash of '29, was that these different kinds of financial institutions should be separated, lest (as the story now goes), trouble in one sector leads to a more general collapse.

That's accurate enough, far as it goes. But is misses the key reason for Glass Steagall: fraud. The problem in the 1920s (or, one of the problems, anyway), was that banks would lend money to their own investment arms, effectively using depositors' funds as leverage to speculate in oil, real estate, stocks, and bonds. They would also sometimes "insure" themselves through other subsidiaries or related entities. When these speculative investments went bad and one part of a bank's business became insolvent, the directors would hide the loss with secret loans-and, of course, withdraw their own money from the sick venture, replacing it with depositors' money. That was how "trouble in one sector" bled into the whole financial universe. It was always a scam the rich guys used to stay rich.

(If this sounds like business as usual, you've been paying attention).

So, Glass Steagall was designed to curb that kind of scam, and for 65 years or so, it worked, despite steady erosions by folks in the banking and insurance industries. The dam broke in 1998, when The Travelers Insurance Co. merged with CitiCorp to create CitiGroup, the world's largest bank, with $700 billion in assets.

At the time it was announced, the deal was illegal under Glass Steagall. And yet, no police SWAT teams stormed the corporate offices in Manhattan or Hartford. Co-CEO Sandy Weill—who got his start as a conglomerate builder in Baltimore, buying up a predatory lender called Commercial Credit in 1986—announced that the law would be changed.

And so it was, with a special assist from Texas Sen. Phil Gramm, Conn. Sen. Chris Dodd, and Robert Rubin, then Secretary of the Treasury under President Clinton. Rubin then left his post to become the third "co-CEO" of CitiGroup.

The rest-Citi's ongoing status as a continuing criminal enterprise; the bailout in which U.S. taxpayers forked over $306 billion to prevent it from "failing"-is history. The situation is now so well-understood by so many that Dodd, in his capacity as Senate Banking Chair, has introduced new regulations that would undo some (by no means all) of the damage wrought by Gramm Leach Bliley. And a house member, Representative Paul Kanjorski (D-PA), is ready to introduce a bill calling for the breakup of "too-big-to-fail" institutions.

Yesterday, Bloomberg covered the ground well, depicting the rush of banking lobbyists trying to persuade Kanjorski to back down. The story also hailed the anniversary of Gramm Leach, noting that the nation's 18 biggest banks have nearly tripled in size since its passage. Also, this:

So it would seem that times are changing, and perhaps for the better. But wait! Bloomberg also got Gramm himself on the phone. The old fraud is still true to form-and a lot of people agree with him too:


He says that like it'd be a bad thing.