November 12, 1999 A Day To Remember

Many people say that history repeats itself. Obviously real estate and the financial industry are not exempt from it. November 12, 1999 is the year that initiated the big financial crisis and almost put the whole world to a halt. I know many people will tell you that it started in September 2008 when Lehman Brothers publicly announced they were folding. However, the problems started way before that.

The fall of Lehman was the result of the event of November 12, 1999. This date is when President Clinton step up, possibly against his better judgment, and sign into law the brand-new Financial Services Modernization Act (also known as Gramm-Leach-Bliley), repealing Glass-Steagall of 1933. Then less than a decade later after the signing, this new act of 1999 would be directly responsible for bringing the entire world to the brink of financial ruin.

For those of you that do not remember, the Glass-Steagall Act of 1933, was the post–Wall Street crash legislation that prevented commercial banks from merging with investment banks, thus eliminating the opportunity for the "investment guys" to get their hands on limitless supplies of depositors’ money. Glass-Steagall was nothing less than a barrier, and it stayed in place for more than sixty years, but the major U.S. banks wanted it abolished. They’d tried but failed in 1988. It would take another four years for this Depression-era legislation to come once more under attack.

In early spring of 1998, however, a Wall Street detonator exploded, sending a sharp signal that the market was willing to go it alone despite the politicians. On April 6, 1998 Citicorp announced a merger with Travelers Insurance, a large corporation that owned and controlled the investment bank Smith Barney. The merger would create a vast conglomerate involved with banking, insurance, and securities, plainly in defiance of Glass-Steagall.

The $70 billion merger between Citicorp and Travelers went right ahead regardless. The result was a banking giant, the largest financial conglomerate in the world, and it was empowered to sell securities, take deposits, make loans, underwrite stocks, sell insurance, and operate an enormous variety of financial activities, all under the name "Citigroup". The deal was obviously illegal, but Citigroup had five years to get the law changed, and they had very deep pockets.

Then in November 1999, the necessary bills were passed 54–44 in the Senate and 343–86 in the House of Representatives. The investment industry said that this time it would be different. However, we know better and there were a reason for the 1933 law to be in place to begin with. I knew that Glass-Steagall had been put in place very deliberately to protect customer bank deposits and prevent any crises from becoming interconnected and forming a house of cards
or a row of dominoes. This old law that lasted for six decades had successfully kept the dominoes apart for more than half a century after his death. However, on November 12, 1999 this all changed. The rest of the story you know it by now.