Decline of the Glass–Steagall Act

Overview

The Glass–Steagall Act was a part of the 1933 Banking Act. It placed restrictions on activities that commercial banks and investment banks (or other securities firms) could do. It effectively separated those activities, so the two types of business could not mix, in order to protect consumer's money from speculative use. The Banking Act of 1935 clarified and otherwise amended Glass–Steagall. Over time, private firms and their regulators found novel ways to weaken the barriers envisioned in the legislation. Eventually, the protections became very weak. From its start, there were many economists, businessmen, and politicians who did not find the restrictions to be productive, and wished to do away with them altogether. It took about 66 years, but the legislation was eventually completely repealed. Subsequent financial crises have resulted in attempts to revive the legislation, and even make it stronger than originally envisioned.

Glass–Steagall developments from 1935 to 1991

Commercial banks withdrew from the depressed securities markets of the early 1930s even before the Glass–Steagall prohibitions on securities underwriting and dealing became effective. However, those prohibitions were controversial. A 1934 study of commercial bank affiliate underwriting of securities in the 1920s found such underwriting was not better than the underwriting by firms that were not affiliated with banks. That study disputed Glass–Steagall critics who suggested securities markets had been harmed by prohibiting commercial bank involvement. A 1942 study also found that commercial bank affiliate underwriting was not better (or worse) than nonbank affiliate underwriting, but concluded this meant it was a "myth" commercial bank securities affiliates had taken advantage of bank customers to sell "worthless securities."

Senator Glass's "repeal" effort

In 1935, Senator Glass attempted to repeal the Glass–Steagall prohibition on commercial banks underwriting corporate securities. Glass stated Glass–Steagall had unduly damaged securities markets by prohibiting commercial bank underwriting of corporate securities. The first Senate passed version of the Banking Act of 1935 included Glass's revision to Section 16 of the Glass–Steagall Act to permit bank underwriting of corporate securities subject to limitations and regulations. President Roosevelt opposed this revision to Section 16 and wrote Glass that "the old abuses would come back if underwriting were restored in any shape, manner, or form." In the conference committee that reconciled differences between the House and Senate passed versions of the Banking Act of 1935, Glass's language amending Section 16 was removed.

Comptroller Saxon's Glass–Steagall interpretations

President John F. Kennedy's appointee as Comptroller of the Currency, James J. Saxon, was the next public official to seriously challenge Glass–Steagall's prohibitions. As the regulator of national banks, Saxon was concerned with the competitive position of commercial banks. In 1950 commercial banks held 52% of the assets of US financial institutions. By 1960 that share had declined to 38%. Saxon wanted to expand the powers of national banks. In 1963, the Saxon-led Office of the Comptroller of the Currency (OCC) issued a regulation permitting national banks to offer retail customers "commingled accounts" holding common stocks and other securities. This amounted to permitting banks to offer mutual funds to retail customers. Saxon also issued rulings that national banks could underwrite municipal revenue bonds. Courts ruled that both of these actions violated Glass–Steagall. In rejecting bank sales of accounts that functioned like mutual funds, the Supreme Court explained in Investment Company Institute v. Camp that it would have given "deference" to the OCC's judgment if the OCC had explained how such sales could avoid the conflicts of interest and other "subtle hazards" Glass–Steagall sought to prevent and that could arise when a bank offered a securities product to its retail customers. Courts later applied this aspect of the Camp ruling to uphold interpretations of Glass–Steagall by federal banking regulators. As in the Camp case, these interpretations by bank regulators were routinely challenged by the mutual fund industry through the Investment Company Institute or the securities industry through the Securities Industry Association as they sought to prevent competition from commercial banks.

Increasing competitive pressures for commercial banks

Regulation Q limits on interest rates for time deposits at commercial banks, authorized by the 1933 Banking Act, first became "effective" in 1966 when market interest rates exceeded those limits. This produced the first of several "credit crunches" during the late 1960s and throughout the 1970s as depositors withdrew funds from banks to reinvest at higher market interest rates. When this "disintermediation" limited the ability of banks to meet the borrowing requests of all their corporate customers, some commercial banks helped their "best customers" establish programs to borrow directly from the "capital markets" by issuing commercial paper. Over time, commercial banks were increasingly left with lower credit quality, or more speculative, corporate borrowers that could not borrow directly from the "capital markets." Eventually, even lower credit quality corporations and (indirectly through "securitization") consumers were able to borrow from the capital markets as improvements in communication and information technology allowed investors to evaluate and invest in a broader range of borrowers. Banks began to finance residential mortgages through securitization in the late 1970s. During the 1980s banks and other lenders used securitizations to provide "capital markets" funding for a wide range of assets that previously had been financed by bank loans. In losing "their preeminent status as expert intermediaries for the collection, processing, and analysis of information relating to extensions of credit", banks were increasingly "bypassed" as traditional "depositors" invested in securities that replaced bank loans. In 1977 Merrill Lynch introduced a "cash management account" that allowed brokerage customers to write checks on funds held in a money market account or drawn from a "line of credit" Merrill provided. The Securities and Exchange Commission (SEC) had ruled that money market funds could "redeem" investor shares at a $1 stable "net asset value" despite daily fluctuations in the value of the securities held by the funds. This allowed money market funds to develop into "near money" as "investors" wrote checks ("redemption orders") on these accounts much as "depositors" wrote checks on traditional checking accounts provided by commercial banks. Also in the 1970s savings and loans, which were not restricted by Glass–Steagall other than Section 21, were permitted to offer "negotiable order of withdrawal accounts" (NOW accounts). As with money market accounts, these accounts functioned much like checking accounts in permitting a depositor to order payments from a "savings account." Helen Garten concluded that the "traditional regulation" of commercial banks established by the 1933 Banking Act, including Glass–Steagall, failed when nonbanking firms and the "capital markets" were able to provide replacements for bank loans and deposits, thereby reducing the profitability of commercial banking. Richard Vietor agreed that traditional bank regulation was unable to protect commercial banks from nonbank competition. However, he noted that significant the economic and financial instability began in the mid-1960s. This slowed economic growth and savings, which reduced demand and supply of credit; it also induced financial innovations that undermined commercial banks. Hyman Minsky agreed financial instability had returned in 1966 and had only been constrained in the following 15 years through Federal Reserve Board engineered "credit crunches" to combat inflation followed by "lender of last resort" rescues of asset prices that produced new inflation. Minsky described ever worsening periods of inflation followed by unemployment as the cycle of rescues followed by credit crunches was repeated. Minsky, however, supported traditional banking regulation and advocated further controls of finance to "promote smaller and simpler organizations weighted more toward direct financing." Writing from a similar "neo-Keynesian perspective," Jan Kregel concluded that, after World War II, non-regulated financial companies, supported by regulatory actions, developed means to provide bank products ("liquidity and lending accommodation") more cheaply than commercial banks through the "capital markets." Kregel argued this led banking regulators to eliminate Glass–Steagall restrictions to permit banks to "duplicate these structures" using the capital markets "until there was virtually no difference in the activities of FDIC-insured commercial banks and investment banks." Comptroller Saxon had feared for the competitive viability of commercial banks in the early 1960s. The "capital markets" developments in the 1970s increased the vulnerability of commercial banks to nonbank competitors. As described below, this competition would increase in the 1980s.

Limited congressional and regulatory developments

In 1967, the Senate passed the first of several Senate passed bills that would have revised Glass–Steagall Section 16 to permit banks to underwrite municipal revenue bonds. In 1974 the OCC authorized national banks to provide "automatic investment services," which permitted bank customers to authorize regular withdrawals from a deposit account to purchase identified securities. In 1977 the Federal Reserve Board staff concluded Glass–Steagall permitted banks to privately place commercial paper. In 1978 Bankers Trust began making such placements. As described below, in 1978, the OCC authorized a national bank to privately place securities issued to sell residential mortgages in a securitization Commercial banks, however, were frustrated with the continuing restrictions imposed by Glass–Steagall and other banking laws. After many of Comptroller Saxon's decisions granting national banks greater powers had been challenged or overturned by courts, commercial banking firms had been able to expand their non-securities activities through the "one bank holding company." Because the Bank Holding Company Act only limited nonbanking activities of companies that owned two or more commercial banks, "one bank holding companies" could own interests in any type of company other than securities firms covered by Glass–Steagall Section 20. That "loophole" in the Bank Holding Company Act was closed by a 1970 amendment to apply the Act to any company that owned a commercial bank. Commercial banking firm's continuing desire for greater powers received support when Ronald Reagan became President and appointed banking regulators who shared an "attitude towards deregulation of the financial industry."

State non-member bank and nonbank bank "loopholes"

In 1982, under the chairmanship of William Isaac, the FDIC issued a "policy statement" that state chartered non-Federal Reserve member banks could establish subsidiaries to underwrite and deal in securities. Also in 1982 the OCC, under Comptroller C. Todd Conover, approved the mutual fund company Dreyfus Corporation and the retailer Sears establishing "nonbank bank" subsidiaries that were not covered by the Bank Holding Company Act. The Federal Reserve Board, led by Chairman Paul Volcker, asked Congress to overrule both the FDIC's and the OCC's actions through new legislation. The FDIC's action confirmed that Glass–Steagall did not restrict affiliations between a state chartered non-Federal Reserve System member bank and securities firms, even when the bank was FDIC insured. State laws differed in how they regulated affiliations between banks and securities firms. In the 1970s, foreign banks had taken advantage of this in establishing branches in states that permitted such affiliations. Although the International Banking Act of 1978 brought newly established foreign bank US branches under Glass–Steagall, foreign banks with existing US branches were "grandfathered" and permitted to retain their existing investments. Through this "loophole" Credit Suisse was able to own a controlling interest in First Boston, a leading US securities firm. After the FDIC's action, commentators worried that large commercial banks would leave the Federal Reserve System (after first converting to a state charter if they were national banks) to free themselves from Glass–Steagall affiliation restrictions, as large commercial banks lobbied states to permit commercial bank investment banking activities. The OCC's action relied on a "loophole" in the Bank Holding Company Act (BHCA) that meant a company only became a "bank holding company" supervised by the Federal Reserve Board if it owned a "bank" that made "commercial loans" (i.e., loans to businesses) and provided "demand deposits" (i.e., checking accounts). A "nonbank bank" could be established to provide checking accounts (but not commercial loans) or commercial loans (but not checking accounts). The company owning the nonbank bank would not be a bank holding company limited to activities "closely related to banking." This permitted Sears, GE, and other commercial companies to own "nonbank banks." Glass–Steagall's affiliation restrictions applied if the nonbank bank was a national bank or otherwise a member of the Federal Reserve System. The OCC's permission for Dreyfus to own a nationally chartered "nonbank bank" was based on the OCC's conclusion that Dreyfus, as a mutual fund company, earned only a small amount of its revenue through underwriting and distributing shares in mutual funds. Two other securities firms, J. & W. Seligman & Co. and Prudential-Bache, established state chartered non-Federal Reserve System member banks to avoid Glass–Steagall restrictions on affiliations between member banks and securities firms.

Legislative response

Although Paul Volcker and the Federal Reserve Board sought legislation overruling the FDIC and OCC actions, they agreed bank affiliates should have broader securities powers. They supported a bill sponsored by Senate Banking Committee Chairman Jake Garn (R-UT) that would have amended Glass–Steagall Section 20 to cover all FDIC insured banks and to permit bank affiliates to underwrite and deal in mutual funds, municipal revenue bonds, commercial paper, and mortgage-backed securities. On September 13, 1984, the Senate passed the Garn bill in an 89-5 vote, but the Democratic controlled House did not act on the bill.

In 1987, however, the Senate (with a new Democratic Party majority) joined with the House in passing the Competitive Equality Banking Act of 1987 (CEBA). Although primarily dealing with the savings and loan crisis, CEBA also established a moratorium to March 1, 1988, on banking regulator actions to approve bank or affiliate securities activities, applied the affiliation restrictions of Glass–Steagall Sections 20 and 32 to all FDIC insured banks during the moratorium, and eliminated the "nonbank bank" loophole for new FDIC insured banks (whether they took demand deposits or made commercial loans) except industrial loan companies. Existing "nonbank banks", however, were "grandfathered" so that they could continue to operate without becoming subject to BHCA restrictions. The CEBA was intended to provide time for Congress (rather than banking regulators) to review and resolve the Glass–Steagall issues of bank securities activities. Senator William Proxmire (D-WI), the new Chairman of the Senate Banking Committee, took up this topic in 1987.

International competitiveness debate

Wolfgang Reinicke argues that Glass–Steagall "repeal" gained unexpected Congressional support in 1987 because large banks successfully argued that Glass–Steagall prevented US banks from competing internationally. With the argument changed from preserving the profitability of large commercial banks to preserving the "competitiveness" of US banks (and of the US economy), Senator Proxmire reversed his earlier opposition to Glass–Steagall reform. Proxmire sponsored a bill that would have repealed Glass–Steagall Sections 20 and 32 and replaced those prohibitions with a system for regulating (and limiting the amount of) bank affiliate securities activities. He declared Glass–Steagall a "protectionist dinosaur." By 1985 commercial banks provided 26% of short term loans to large businesses compared to 59% in 1974. While banks cited such statistics to illustrate the "decline of commercial banking," Reinicke argues the most influential factor in Congress favoring Glass–Steagall "repeal" was the decline of US banks in international rankings. In 1960 six of the ten largest banks were US based, by 1980 only two US based banks were in the top ten, and by 1989 none was in the top twenty five. In the late 1980s the United Kingdom and Canada ended their historic separations of commercial and investment banking. Glass–Steagall critics scornfully noted only Japanese legislation imposed by Americans during the Occupation of Japan kept the United States from being alone in separating the two activities. As noted above, even in the United States seventeen foreign banks were free from this Glass–Steagall restriction because they had established state chartered branches before the International Banking Act of 1978 brought newly established foreign bank US branches under Glass–Steagall. Similarly, because major foreign countries did not separate investment and commercial banking, US commercial banks could underwrite and deal in securities through branches outside the United States. Paul Volcker agreed that, "broadly speaking," it made no sense that US commercial banks could underwrite securities in Europe but not in the United States.

1987 status of Glass–Steagall debate

Throughout the 1980s and 1990s, scholars published studies arguing that commercial bank affiliate underwriting during the 1920s was no worse, or was better, than underwriting by securities firms not affiliated with banks and that commercial banks were strengthened, not harmed, by securities affiliates. More generally, researchers attacked the idea that "integrated financial services firms" had played a role in creating the Great Depression or the collapse of the US banking system in the 1930s. If it was "debatable" whether Glass–Steagall was justified in the 1930s, it was easier to argue that Glass–Steagall served no legitimate purpose when the distinction between commercial and investment banking activities had been blurred by "market developments" since the 1960s. Along with the "nonbank bank" "loophole" from BHCA limitations, in the 1980s the "unitary thrift" "loophole" became prominent as a means for securities and commercial firms to provide banking (or "near banking") products. The Savings and Loan Holding Company Act (SLHCA) permitted any company to own a single savings and loan. Only companies that owned two or more savings and loan were limited to thrift related businesses. Already in 1973, First Chicago Bank had identified Sears as its real competitor. Citicorp CEO Walter Wriston reached the same conclusion later in the 1970s. By 1982, using the "unitary thrift" and "nonbank bank" "loopholes," Sears had built the "Sears Financial Network", which combined "Super NOW" accounts and mortgage loans through a large California-based savings and loan, the Discover Card issued by a "nonbank bank" as a credit card, securities brokerage through Dean Witter Reynolds, home and auto insurance through Allstate, and real estate brokerage through Coldwell Banker. By 1984, however, Walter Wriston concluded "the bank of the future already exists, and it's called Merrill Lynch." In 1986 when major bank holding companies threatened to stop operating commercial banks in order to obtain the "competitive advantages" enjoyed by Sears and Merrill Lynch, FDIC Chairman William Seidman warned that could create "chaos." In a 1987, "issue brief" the Congressional Research Service (CRS) summarized "some of" the major arguments for preserving Glass–Steagall as:

Conflicts of interest characterize the granting of credit (lending) and the use of credit (investing) by the same entity, which led to abuses that originally produced the Act. Depository institutions possess enormous financial power, by virtue of their control of other people's money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies a decade ago. and against preserving Glass–Steagall as:

Depository institutions now operate in "deregulated" financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation. Reflecting the significance of the "international competitiveness" argument, a separate CRS Report stated banks were "losing historical market shares of their major activities to domestic and foreign competitors that are less restricted." Separately, the General Accounting Office (GAO) submitted to a House subcommittee a report reviewing the benefits and risks of "Glass–Steagall repeal." The report recommended a "phased approach" using a "holding company organizational structure" if Congress chose "repeal." Noting Glass–Steagall had "already been eroded and the erosion is likely to continue in the future," the GAO explained "coming to grips with the Glass–Steagall repeal question represents an opportunity to systematically and rationally address changes in the regulatory and legal structure that are needed to better address the realities of the marketplace." The GAO warned that Congress's failure to act was "potentially dangerous" in permitting a "continuation of the uneven integration of commercial and investment banking activities." As Congress was considering the Proxmire Financial Modernization Act in 1988, the Commission of the European Communities proposed a "Second Banking Directive" that became effective at the beginning of 1993 and provided for the combination of commercial and investment banking throughout the European Economic Community. Whereas United States law sought to isolate banks from securities activities, the Second Directive represented the European Union's conclusion that securities activities diversified bank risk, strengthening the earnings and stability of banks. The Senate passed the Proxmire Financial Modernization Act of 1988 in a 94-2 vote. The House did not pass a similar bill, largely because of opposition from Representative John Dingell (D-MI), chairman of the House Commerce and Energy Committee.

Section 20 affiliates

In April 1987, the Federal Reserve Board had approved the bank holding companies Bankers Trust, Citicorp, and J.P. Morgan & Co. establishing subsidiaries ("Section 20 affiliates") to underwrite and deal in residential mortgage-backed securities, municipal revenue bonds, and commercial paper. Glass–Steagall's Section 20 prohibited a bank from affiliating with a firm "primarily engaged" in underwriting and dealing in securities. The Board decided this meant Section 20 permitted a bank affiliate to earn 5% of its revenue from underwriting and dealing in these types of securities that were not "bank-eligible securities," subject to various restrictions including "firewalls" to separate a commercial bank from its Section 20 affiliate. Three months later the Board added "asset-backed securities" backed by pools of credit card accounts or other "consumer finance assets" to the list of "bank-ineligible securities" a Section 20 affiliate could underwrite. Bank holding companies, not commercial banks directly, owned these Section 20 affiliates. In 1978 the Federal Reserve Board had authorized bank holding companies to establish securities affiliates that underwrote and dealt in government securities and other bank-eligible securities. Federal Reserve Board Chairman Paul Volcker supported Congress amending Glass–Steagall to permit such affiliates to underwrite and deal in a limited amount of bank-ineligible securities, but not corporate securities. In 1987, Volcker specifically noted (and approved the result) that this would mean only banks with large government securities activities would be able to have affiliates that would underwrite and deal in a significant volume of "bank-ineligible securities." A Section 20 affiliate with a large volume of government securities related revenue would be able to earn a significant amount of "bank-ineligible" revenue without having more than 5% of its overall revenue come from bank-ineligible activities. Volcker disagreed, however, that the Board had authority to permit this without an amendment to the Glass–Steagall Act. Citing that concern, Volcker and fellow Federal Reserve Board Governor Wayne Angell dissented from the Section 20 affiliate orders. Senator Proxmire criticized the Federal Reserve Board's Section 20 affiliate orders as defying Congressional control of Glass–Steagall. The Board's orders meant Glass–Steagall did not prevent commercial banks from affiliating with securities firms underwriting and dealing in "bank-ineligible securities," so long as the activity was "executed in a separate subsidiary and limited in amount." After the Proxmire Financial Modernization Act of 1988 failed to become law, Senator Proxmire and a group of fellow Democratic senior House Banking Committee members (including future Committee Ranking Member John LaFalce (D-NY) and future Committee Chairman Barney Frank (D-MA)) wrote the Federal Reserve Board recommending it expand the underwriting powers of Section 20 affiliates. Expressing sentiments that Representative James A. Leach (R-IA) repeated in 1996, Proxmire declared "Congress has failed to do the job" and "[n]ow it's time for the Fed to step in." Following Senator Proxmire's letter, in 1989 the Federal Reserve Board approved Section 20 affiliates underwriting corporate debt securities and increased from 5% to 10% the percentage of its revenue a Section 20 affiliate could earn from "bank-ineligible" activities. In 1990 the Board approved J.P. Morgan & Co. underwriting corporate stock. With the commercial (J.P. Morgan & Co.) and investment (Morgan Stanley) banking arms of the old "House of Morgan" both underwriting corporate bonds and stocks, Wolfgang Reinicke concluded the Federal Reserve Board order meant both firms now competed in "a single financial market offering both commercial and investment banking products," which "Glass–Steagall sought to rule out." Reinicke described this as "de facto repeal of Glass–Steagall." No Federal Reserve Board order was necessary for Morgan Stanley to enter that "single financial market." Glass–Steagall only prohibited investment banks from taking deposits, not from making commercial loans, and the prohibition on taking deposits had "been circumvented by the development of deposit equivalents", such as the money market fund. Glass–Steagall also did not prevent investment banks from affiliating with nonbank banks or savings and loans. Citing this competitive "inequality," before the Federal Reserve Board approved any Section 20 affiliates, four large bank holding companies that eventually received Section 20 affiliate approvals (Chase, J.P. Morgan, Citicorp, and Bankers Trust) had threatened to give up their banking charters if they were not given greater securities powers. Following the Federal Reserve Board's approvals of Section 20 affiliates a commentator concluded that the Glass–Steagall "wall" between commercial banking and "the securities and investment business" was "porous" for commercial banks and "nonexistent to investment bankers and other nonbank entities."

Greenspan-led Federal Reserve Board

Alan Greenspan had replaced Paul Volcker as Chairman of the Federal Reserve Board when Proxmire sent his 1988 letter recommending the Federal Reserve Board expand the underwriting powers of Section 20 affiliates. Greenspan testified to Congress in December 1987, that the Federal Reserve Board supported Glass–Steagall repeal. Although Paul Volcker "had changed his position" on Glass–Steagall reform "considerably" during the 1980s, he was still "considered a conservative among the board members." With Greenspan as Chairman, the Federal Reserve Board "spoke with one voice" in joining the FDIC and OCC in calling for Glass–Steagall repeal. By 1987, Glass–Steagall "repeal" had come to mean repeal of Sections 20 and 32. The Federal Reserve Board supported "repeal" of Glass–Steagall "insofar as it prevents bank holding companies from being affiliated with firms engaged in securities underwriting and dealing activities." The Board did not propose repeal of Glass Steagall Section 16 or 21. Bank holding companies, through separately capitalized subsidiaries, not commercial banks themselves directly, would exercise the new securities powers. Banks and bank holding companies had already gained important regulatory approvals for securities activities before Paul Volcker retired as Chairman of the Federal Reserve Board on August 11, 1987. Aside from the Board's authorizations for Section 20 affiliates and for bank private placements of commercial paper, by 1987 federal banking regulators had authorized banks or their affiliates to (1) sponsor closed end investment companies, (2) sponsor mutual funds sold to customers in individual retirement accounts, (3) provide customers full service brokerage (i.e., advice and brokerage), and (4) sell bank assets through "securitizations." In 1982, E. Gerald Corrigan, president of the Federal Reserve Bank of Minneapolis and a close Volcker colleague, published an influential essay titled "Are banks special?" in which he argued banks should be subject to special restrictions on affiliations because they enjoy special benefits (e.g., deposit insurance and Federal Reserve Bank loan facilities) and have special responsibilities (e.g., operating the payment system and influencing the money supply). The essay rejected the argument that it is "futile and unnecessary" to distinguish among the various types of companies in the "financial services industry." While Paul Volcker's January 1984, testimony to Congress repeated that banks are "special" in performing "a unique and critical role in the financial system and the economy," he still testified in support of bank affiliates underwriting securities other than corporate bonds. In its 1986 Annual Report the Volcker led Federal Reserve Board recommended that Congress permit bank holding companies to underwrite municipal revenue bonds, mortgage-backed securities, commercial paper, and mutual funds and that Congress "undertake hearings or other studies in the area of corporate underwriting." As described above, in the 1930s Glass–Steagall advocates had alleged that bank affiliate underwriting of corporate bonds created "conflicts of interest." In early 1987, E. Gerald Corrigan, then president of the Federal Reserve Bank of New York, recommended a legislative "overhaul" to permit "financial holding companies" that would "in time" provide banking, securities, and insurance services (as authorized by the GLBA 12 years later). In 1990 Corrigan testified to Congress that he rejected the "status quo" and recommended allowing banks into the "securities business" through financial service holding companies. In 1991, Paul Volcker testified to Congress in support of the Bush Administration proposal to repeal Glass–Steagall Sections 20 and 32. Volcker rejected the Bush Administration proposal to permit affiliations between banks and commercial firms (i.e., non-financial firms) and added that legislation to allow banks greater insurance powers "could be put off until a later date."