With the signing of the Gramm-Leach-Bliley Act in November 1999, Congress repealed the Glass-Steagall Act of 1933. Most people will point to this as a great moment for financial innovation and competitive markets. While I agree with the majority of those arguments and the global marketplace made it inevitable, I think it’s important to reflect upon the negatives that have come along.

Here’s a great summary of the timeline associated with The Long Demise of Glass-Steagall. Historians will debate the root causes of The Great Depression long after we have a Greater Depression and I won’t do that now. But here’s a snippet lifted from a good article on the subject…

Reasons for the Act - Commercial Speculation
Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in hopes of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.

When I reflect on all that has happened in recent months with CDO’s and subprime lending, reading through the history of the Great Depression has been scary. It’s almost as if the ghosts of Glass-Steagall are coming to haunt us. Last week, the Fed gave an exemption to Citigroup and Bank of America that has been largely ignored by the media and it attacks some of the most legitimate protections enacted 74 years ago.

At the banks’ requests, the Fed is “temporarily” and indefinitely waiving regulations that effectively limit a bank’s funding exposure to an affiliate to 10% of the bank’s capital. Citigroup and Bank of America are now able to lend up to $25 billion apiece under this exemption and according to Charlie Peabody, analyst at Portales Partners, “that represents about 30% of Citibank’s total regulatory capital, which is no small exemption.”

The Fed is walking a very fine line here and I am sure they know it. They claim this was done in the public interest to allow the biggies to bring liquidity to the their brokerage operations as quickly and efficiently as possible. However, there is another public interest and it was created with the Glass-Steagall Act - it’s called FDIC. If you ask the average American why they have confidence that their money is safe in the banking system - the number one reason will be FDIC. When we put the depositors’ trust at stake by bending rules like this, I can only imagine what the ghosts of Carter Glass and Henry Steagall must be thinking.

I keep pointing out the severity of the Fed’s actions and this exemption for Citigroup and Bank of America is just another example. Whatever the Fed is preparing for….my fear is rising.