The Glass walls came tumbling down, and stocks soon followed.

In 1999, Congress, with its passage of the Gramm-Leach-Bliley Act (GLBA), effectively repealed the Glass-Steagall Act, which had been in effect since 1933. This repeal allows banks to freely engage in both commercial banking and investment banking under one roof, a seeming conflict of interest. In addition, the GLBA repealed parts of the Bank Holding Company Act, allowing banks to also offer insurance. In short, banks are now bigger.

Until the GLBA, banks had regularly circumvented the restrictions of the Glass-Steagall Act by sharing office space with securities firms, creating the illusion to consumers that the bank insured securities transactions. The securities firm would benefit from the bank's steady flow of customers, and the bank would receive a portion of the firm's commission. The customer often never knew it was conducting business with separate entities. The GLBA effectively made this practice legal.

History would indicate that the industry should know better. The extremely high number (9,000) of bank failures from 1929 to 1932 effected the legislation enacted as the Glass-Steagall Act. Backers of the Act believed the conflict of interest between the commercial and investment activities of the banks caused the disastrous collapse of the industry in the early 1930s. More than 700,000 people lost their homes, property, and life savings between 1930 and 1932, as the bank failures wiped out $7 billion in depositors' money.1 The Act, which separated the banking and stock exchange activities, rescued the collapsed system for awhile, but the demarcations became cloudy again in later decades as restrictions gradually relaxed. Seeking more profitable outlets for their capital, banks complained that their foreign counterparts suffered no comparable limitations on their financial operations.2

The banking industry took advantage of the GLBA to subscribe to the "bigger is better" mentality. Mergers abounded, and large banks bought out other types of financial institutions. A good example resulting from this merger movement is Citigroup, the $70 billion merger of a major insurance company (Travelers) and the largest American-based bank holding company (Citicorp). The merger, which actually occurred before the GLBA passed (since regulators were already tacitly allowing the loosening of Glass-Steagall restrictions), exemplifies the kind of agglomerated financial institution which the financial community desired and for which it pushed Congress to repeal the Glass-Steagall Act. After the merger, Citigroup's business included insurance, lending, banking, investing, and asset management. Citigroup expected to reap a profit upwards of $700 million. Stockholders, however, saw no such gain. Before the merger, Citicorp stock was up to $182, and Travelers was $73. After the merger, however, Citicorp dropped to $84 and Travelers to $37.3