The Glass-Steagall menagerie
Julie E. Houston • Bankrate.com
Sean Brodrick

Editor's note: In April 2006, FDIC deposit insurance coverage on retirement accounts held at banking institutions was raised from $100,000 to $250,000. Non-retirement account FDIC deposit insurance coverage remains at $100,000.

Congress recently repealed the Glass-Steagall Act of 1933 -- now banks, brokerages and insurance firms can merge into one-stop financial centers. The good news is things haven't been like this since the Great Depression. The bad news is that things haven't been like this since the Great Depression.

First, the good news

Now, your bank can start selling you insurance and mutual funds. "To the average consumer, this is a plus," says David John, senior policy analyst for the Heritage Foundation, in Washington, D.C. "Rather than running to a bunch of companies, these financial supermarkets would offer student loans, mortgages and insurance under one roof."

The convenience of one-stop shopping is a big selling point. In addition, banks, brokerages and insurance companies should be able to offer lower prices on their products.

"Also, if they get to know you, they can better move you into a product," John explains. For example, if the institution handles your mortgage, they can offer you homeowners insurance.

Now, the Depressing news

Not everyone loves the new law. One opponent is Charles Belida, a technical analyst for K.W. Brown Investments in Boca Raton, Fla. At 73 years old, Belida has experienced many of our nation's financial ups and downs -- including the Great Depression -- and he definitely doesn't want the mistakes of the past repeated.

"Congress, in its wisdom back in the '30s, said: 'let's separate these bastards,'" Belida explains. "I don't think the repeal of the Glass-Steagall Act is a good thing. You're joining up the major forces on Wall Street that led to those shenanigans in 1929.

"There was so much collusion and a lack of business morality. They exacerbated the problem when the crash came."

History lesson

Here's a brief history lesson: In 1929, the stock market crashed. When stocks went south, banks -- a major source of funds for Wall Street -- covered their ass-uh ... assets by dipping into their customers' accounts. But the economy fell into a financial black hole, the banks went belly up, and many average people lost their life savings.

In 1933, Congress implemented two important laws to protect the bank's customers; the Glass-Steagall Act and FDIC insurance.

The FDIC was set up to insure your bank deposits up to $100,000. Meanwhile, the Glass-Steagall Act separated banks and brokerage firms. This way, institutions that underwrite stock and lend companies money (banks) aren't the same ones trying to sell the stock (brokerages), Belida says.

Insurance companies weren't covered in the Glass-Steagall act -- there was another law keeping the banks out of their business. But that law was also shattered by Glass-Steagall's repeal.

The times they are a-changin'

Glass-Steagall reshaped America's financial landscape for 66 years. Then Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act of 1999. This new legislation has loopholes that could make public your private financial information.

"If you're providing information to one institution, it's going to be shared down the line," says David Root, a certified financial planner for D.B. Root and Co., in Pittsburgh.

Not only would your credit report be fair game, your entire banking history, credit card numbers and Social Security numbers could be traded and sold to any business that wants to get their hot little hands on it.

"Multiply the number of mailing lists and solicitation calls you get by 10," Root adds.

Root suggests that to protect yourself, ask your brokerage, insurance agent and banker who they are giving your information to. If you don't like their answers, write a letter and specifically ask that your private information not be shared or sold.

As these entities combine services, there are going to be more and more mergers. "The big guys are going to get bigger. They are just going to gobble everyone up," Root says.

One expert believes that will be a good thing. "The titans will come together, and it's going to be a different environment," says Brian Trumbore, editor of stocksandnews.com, in Summit, N.J. "It's going to end up being three to five giants [companies]. They will become too big to fail."

Famous last words

Don't tell Belida that. "I've heard the expression 'too big to fail' many times," he says. "There were many big companies in 1929 that were 'too big to fail.'

"That's a cop-out from people who don't know economic history. It rests on one bit of faith --  that the government will bail those big companies out.

"If there's an economic downturn -- a serious policy mistake by our government or a currency crisis -- the big companies get hurt more than the little ones, then the damage filters down."

On the bright side, Belida doesn't believe we could have another stock crash like we did in 1929 because of a host of economic stabilizers. But while these conglomerate titans may not fail in a financial crisis, stockholders will suffer, he warns.

Fees-fi-fo-fum!

What else lies ahead? While this consolidated financial world could decrease fees in the short-term, Trumbore warns that prices could eventually go up because there isn't going to be as much competition. Hang on to your wallet.

The experts are also concerned about these institutions controlling every aspect of your banking, trading and insurance business.

"Once they have you as their customer it's easy to raise rates because it will be harder for you to leave," Root says.

With the merging and implementing slowly taking effect in the marketplace, you could benefit ... or suffer. The experts suggest you still shop around for the best deals.

-- Posted: Feb. 7, 2000