The 1999 law that made 2008 possible

The Glass-Steagall Act was passed in June 1933, in the middle of the Great Depression. Its main effect was a single separation. Banks that held your deposits and wrote commercial loans could not also underwrite or trade stocks and other investment securities. A commercial bank and an investment bank had to be different companies, with different investors, different risk profiles, and different regulators. The logic was that people's deposits, money the government would soon insure under the FDIC, should not be at risk from bets on the stock market. If an investment bank collapsed, it should not take ordinary savers down with it.

The separation held for 66 years. Some of the largest institutions in American finance existed in their recognizable forms only because of Glass-Steagall. Morgan Stanley was originally spun out of J.P. Morgan in 1935 for exactly this reason. The 1933 law, together with the FDIC and the SEC, had made the American banking sector the most stable large banking system in the world for two generations.

The erosion

By the 1980s and 1990s, the banking industry was lobbying intensely to reduce or repeal the law. The argument was that the separation was obsolete in an era of globalized finance, and that European and Japanese universal banks, which combined commercial and investment banking, had structural advantages over their American competitors. Regulatory reinterpretations through the 1980s gradually allowed commercial banks to earn a few percent of revenue from investment banking activities. The Federal Reserve under Alan Greenspan raised that ceiling through the 1990s, and by 1996 the industry was arguing that the law should simply go away.

The tipping event was the announced 1998 merger of Citicorp, a commercial bank, with Travelers Group, which owned the investment bank Salomon Smith Barney. The combined entity, Citigroup, was technically illegal under Glass-Steagall. The Fed granted a two-year waiver while Congress decided what to do. Both parties' leaderships, the Clinton Treasury, and Greenspan agreed the law should go.

Gramm-Leach-Bliley

The Financial Services Modernization Act of 1999, more commonly called Gramm-Leach-Bliley after its sponsors, was signed by President Bill Clinton on November 12, 1999. It repealed the two provisions of Glass-Steagall that had enforced the commercial and investment bank separation. Commercial banks, investment banks, and insurance companies could now merge or affiliate freely. The Senate vote was 90 to 8. The House vote was 362 to 57. The law had bipartisan support and faced almost no organized opposition.

In the nine years that followed, most major American financial institutions became some version of a hybrid. Citigroup was the template. JPMorgan Chase acquired Bear Stearns and Washington Mutual in 2008. Bank of America acquired Merrill Lynch the same year. By late 2008, the five largest American banks by assets were all universal banks combining insured deposit taking with investment banking and trading. Several combined insurance on top.

2008

Whether Gramm-Leach-Bliley caused the 2008 financial crisis is the subject of a continuing disagreement. The simplest causal chain, repeal the wall, banks take more risk, banks blow up, is not quite right. The specific instruments that caused the 2008 losses, mostly mortgage-backed securities and collateralized debt obligations, were either investment banking products (which Glass-Steagall would not have restricted investment banks from holding) or were also held by pure investment banks like Lehman Brothers and Bear Stearns, which had not existed inside a commercial bank structure.

The case for repeal being causal is structural. Under Glass-Steagall, a blowup at Lehman would have been a self-contained event. A bankrupt investment bank, a few thousand losses, market dislocation, but no direct threat to depositor money. Under the post-1999 structure, the same blowups happened inside institutions that also held insured deposits. The Fed and Treasury were confronted with a choice: let the entire bank fail, losing depositors' money along with everything else, or rescue it. Every one of the largest institutions was rescued. The 2008 bailouts, TARP, the Fed's emergency lending facilities, the guarantee programs, were enormous partly because the institutions had become entangled in ways Glass-Steagall had prevented.

The partial restoration

The Dodd-Frank Act of 2010 did not restore Glass-Steagall. It contained something called the Volcker Rule, named for former Fed chair Paul Volcker, which limited commercial banks from doing proprietary trading with their own money and from owning more than small stakes in hedge funds or private equity funds. The spirit was similar to Glass-Steagall. Banks with insured deposits should not place speculative bets. But the scope was narrower, the enforcement weaker, and over the following decade the rule was gradually loosened.

As of 2026, the American banking sector looks similar to what it looked like immediately after Gramm-Leach-Bliley. The five largest universal banks are larger and more systemically important than they were in 2008. The Volcker Rule exists but has been modified enough that most of its original force has been reduced. The counterfactual of what 2008 would have looked like under a 1999 law that never passed is unanswerable, but the political calculus of bailouts would have been different. Paul Volcker himself, before his death in 2019, was one of the most persistent advocates for reinstating the separation.