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DEREGULATION REDUX 

As Congress began fashioning legislation, the banks were close at hand. In ,
the financial sector spent  million lobbying at the federal level, and individuals
and political action committees (PACs) in the sector donated  million to federal
election campaigns in the  election cycle. From  through , federal lob-
bying by the financial sector reached . billion; campaign donations from individ-
uals and PACs topped  billion. 
In November , Congress passed and President Clinton signed the Gramm-
Leach-Bliley Act (GLBA), which lifted most of the remaining Glass-Steagall-era re-
strictions. The new law embodied many of the measures Treasury had previously
advocated. The New York Times reported that Citigroup CEO Sandy Weill hung in

his office “a hunk of wood—at least  feet wide—etched with his portrait and the
words ‘The Shatterer of Glass-Steagall.’” 
Now, as long as bank holding companies satisfied certain safety and soundness
conditions, they could underwrite and sell banking, securities, and insurance prod-
ucts and services. Their securities affiliates were no longer bound by the Fed’s 
limit—their primary regulator, the SEC, set their only boundaries. Supporters of the
legislation argued that the new holding companies would be more profitable (due to
economies of scale and scope), safer (through a broader diversification of risks),
more useful to consumers (thanks to the convenience of one-stop shopping for finan-
cial services), and more competitive with large foreign banks, which already offered
loans, securities, and insurance products. The legislation’s opponents warned that al-
lowing banks to combine with securities firms would promote excessive speculation
and could trigger a crisis like the crash of . John Reed, former co-CEO of Citi-
group, acknowledged to the FCIC that, in hindsight, “the compartmentalization that
was created by Glass-Steagall would be a positive factor,” making less likely a “cata-
strophic failure” of the financial system. 
To win the securities industry’s support, the new law left in place two exceptions
that let securities firms own thrifts and industrial loan companies, a type of deposi-
tory institution with stricter limits on its activities. Through them, securities firms
could access FDIC-insured deposits without supervision by the Fed. Some securities
firms immediately expanded their industrial loan company and thrift subsidiaries.
Merrill’s industrial loan company grew from less than  billion in assets in  to
 billion in , and to  billion in . Lehman’s thrift grew from  million
in  to  billion in , and its assets rose as high as  billion in . 
For institutions regulated by the Fed, the new law also established a hybrid regula-
tory structure known colloquially as “Fed-Lite.” The Fed supervised financial holding
companies as a whole, looking only for risks that cut across the various subsidiaries
owned by the holding company. To avoid duplicating other regulators’ work, the Fed
was required to rely “to the fullest extent possible” on examinations and reports of
those agencies regarding subsidiaries of the holding company, including banks, secu-
rities firms, and insurance companies. The expressed intent of Fed-Lite was to elimi-

nate excessive or duplicative regulation. However, Fed Chairman Ben Bernanke
told the FCIC that Fed-Lite “made it difficult for any single regulator to reliably see
the whole picture of activities and risks of large, complex banking institutions.” 