By Greg Slabodkin
When former Rep. John LaFalce retired from Congress at the end of 2002, tributes for the Western New York congressman poured in from the financial services industry. One banking association honored him with an editorial titled “The LaFalce Legacy: Three Decades of Leadership for Banks,” calling him a “good friend of the banking industry.”
LaFalce was the driving force behind landmark bank deregulation that tore down the walls between commercial and investment banks. As an architect of the 1999 Gramm-Leach-Bliley Act (GLBA) that repealed the Glass-Steagall Act of 1933, LaFalce helped create “too big to fail” megabanks that nearly brought down the U.S. financial system in 2008 with the worst economic crisis since the Great Depression.
“If the recent financial crisis has taught a single lesson, it is that the problem of too-big-to-fail firms must be solved,” Federal Reserve Chairman Ben Bernanke told a September 2010 hearing of the Financial Crisis Inquiry Commission.
Yet, in 1999, GLBA was hailed as forward-looking legislation that brought flexibility and change to the banking industry. LaFalce, then the ranking Democrat on the House Financial Services Committee, argued: “The act does not freeze-frame the financial services industry into its current structure and function, but removes obstacles to, and indeed promotes, its continued evolution.”
At the time, the Associated Press noted LaFalce’s “leading role”’ in first introducing his own bipartisan bill and then helping to draft the final legislation that President Clinton signed into law in 1999 as the Financial Services Modernization Act. For his leadership in killing Glass-Steagall and ushering in a new era of giant U.S. banking conglomerates, LaFalce was given an award by the Financial Services Roundtable, which represents the largest banks.
Today, however, the Financial Services Modernization Act is widely criticized as the statute that repealed the safeguards of the Depression-era Glass-Steagall Act and precipitated the 2008 global economic crisis. In a July 26 editorial, the New York Times wrote: “Having seen the results of this sweeping deregulation, we now think we were wrong to have supported it.”
Former Citigroup CEO Sanford Weill, whose firm benefited from the repeal of the Glass-Steagall Act, shocked Wall Street recently by arguing that the largest banks should be broken up.
The time has come to re-enact Glass-Steagall and break up the megabanks. It’s also time for LaFalce to take responsibility for his role in creating the financial services behemoths that took this country to the brink of economic collapse. If Citigroup’s former CEO and the New York Times can own up to their mistakes, so should LaFalce.
Greg Slabodkin of Kenmore has worked for the financial services industry.