Introduction to Finance

Gramm–Leach-Bliley Act of 1999 
As previously noted, after more than 60 years, 
the Glass-Steagall Act was repealed and replaced by the Gramm-Leach-Bliley Act of 1999, 
which allowed commercial banks to again participate in investment banking activities and 
insurance underwriting. As a result, United States banks were allowed to be “universal” banks 

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3.5 Regulation of the Banking System
59
according to policies similar to those in place in the United Kingdom and Germany. Many 
politicians, regulators, and others believed that deregulation of fi nancial institutions would 
lead to greater competition, with consumers benefi ting from more fi nancial product choices 
and lower costs. 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 
The 2007–08 fi nancial crisis and the 2008–09 Great Recession led politicians, regu-
lators, and others to call for major changes in the regulation of fi nancial institutions. The result 
was passage of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
, 
commonly referred to as the Dodd-Frank Act, which was designed “to promote the fi nancial 
stability of the United States by improving accountability and transparency in the fi nancial 
system.” Other components of the act included ending the “too big to fail” argument, ending 
bailouts of fi nancial institutions and other business organizations, and to provide consumer pro-
tection from abusive fi nancial services practices. In part due to the comprehensiveness of the 
legislation, much of the implementation and consequences of the act are still to be determined.
DISCUSSION QUESTION 2
Given recent bank legislation, do you believe banks are overregulated?
The Savings and Loan Crisis
During the last half of the 1980s and the fi rst half of the 1990s, well over 2,000 savings and 
loan associations were closed or merged into other organizations. Why did this happen? The 
bottom line is that S&Ls failed because of mismanagement and greed that led to fraudulent 
activities on the part of some of the institutions’ offi
cers.
The S&L business has historically been a diffi
cult one. S&Ls borrow in the short term 
by accepting the deposits of savers and paying interest on the savings. S&Ls, in turn, provide 
long-term mortgage loans to help fi nance homes. As long as short-term and long-term interest 
rates remain relatively the same, S&Ls are concerned primarily with illiquidity due to lending 
long term but borrowing short term. In situations when many depositors want their money 
back, S&Ls may be forced to liquidate their mortgage loans, even at unfavorable prices. When 
short-term interest rates rise as they did in the late 1980s, S&Ls may fi nd themselves paying 
higher interest rates to depositors than they are earning on their mortgage loans. Unfortu-
nately, S&L managements did not handle the illiquidity and rising short-term interest rate 
developments very well.
To make matters worse, S&L managements were ill prepared for the consequences of 
deregulation. Authorization in the early 1980s to invest funds in a wide range of higher-yielding 
investments permitted many savings and loan associations to run wild by supporting specu-
lative offi
ce buildings and other commercial ventures. This resulted not only in overbuilding 
at infl ated costs, but as the promoters were unable to honor the terms of their loan contracts 
many S&Ls became insolvent. Deregulation also permitted S&Ls to invest in “junk” bonds, 
which are low-quality, high-risk bonds issued by businesses. Many of the issuers defaulted on 
these bonds, resulting in even greater pressures on S&L operations.
ETHICAL
Mismanagement was a major reason for the collapse of much of the S&L industry. 
This problem was exacerbated by the fact that greed also led to fraudulent behavior on the part 
of some S&L offi
cers and managers. Depositors’ funds were used to pay exorbitant salaries, 
purchase expensive automobiles and yachts for personal use, and so forth. Top offi
cers bor-
rowed excessively from their own S&Ls and, in at least one instance, S&L presidents of two 
associations made loans to each other using depositors’ funds. 
There is no evidence to suggest that the S&L industry was run by unethical individuals 
prior to the 1980s. Apparently, deregulation provided the opportunity for unscrupulous indi-
viduals from outside the industry to pursue personal greed by becoming offi
cers and managers 
of S&Ls. Of course, the opportunity for greed associated with deregulation also resulted in 
some existing S&L offi
cers behaving unethically and even committing fraud. Individuals who 
acted illegally were prosecuted, some served prison terms, and reputations were lost. Failure 
to treat depositors and other constituents honestly and fairly resulted in lost confi dence and 
trust and surely contributed to the demise of many S&Ls.