Glass-Steagall Act / the Sarbanes-Oxley Act / Dodd-Frank Act /

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(i) Glass-Steagall Act (1933)

Great Depression

At the time after the stock market crash (1929), during the Great Depression, most of the people agreed that the main cause for the event was the “improper banking activity” which was mainly seen as the bank involvement in the stock market investment. Banks were taking high risks in hope for rewards, they were “accused of being too speculative in the pre-Depression era” (HEAKAL, 2010, pg.1). They were not only investing their assets, but they were also buying issues in order to resale them to the public. Nearly five thousand banks failed in the U.S. during the Great Depression. As a result of that most people wouldn’t trust the U.S. financial structure anymore. In order to rebuild the economy and trust a dramatic change had to be made (NYTIMES, 2010).

Glass-Steagall Act of 1933

As a response to one of the biggest financial crisis at the time two members of the Congress, a former Treasury secretary named Carter Glass and Henry Steagall, who was a chairman of the House Banking and Currency Committee, joined forces in order to establish the Glass-Steagall Act (also known as Banking Act of 1933). The act forced a separation of commercial and investment banks where commercial banks were not allowed to underwrite the sales of stocks and bonds, while investment banks could not take in deposits from customers (GUARDIAN, 2010). The GSA also established the Federal Deposit Insurance Corporation (FDIC), which insured “bank deposits up to a given amount” (DUBOVOY, N.A., pg. 1). The act establishes the FDIC as a temporary government corporation giving it authority to regulate and supervise state non-member banks (FDIC, 2010).

The critics and the Gramm-Leach-Bliley Act of 1999

There were a lot of critics about the Glass-Steagall Act, experts stated that too many restrictions were not good for the industry. Some argued that the act was never necessary or it had become too outdated (LEGAL DICTIONARY, n.a.). The Congress responded to the criticisms establishing the Gramm-Leach-Bliley (GLB) Act of 1999, also known as the Financial Modernization Act of 1999, which “includes provisions to protect consumers’ personal financial information held by financial institutions” (FTC, n.a.). Financial institutions, which are “not only banks, securities firms, and insurance companies, but also companies providing many other types of financial products and services to consumers” (FTC, n.a.), are allowed to expand their services and offer financial services such as investments and insurance-related (INVESTOPEDIA, n.a.).

Sarbanes-Oxley Act (2002)

Financial scandals

Two of the biggest financial scandals in the U.S. in the last decade are considered to be Enron and WorldCom. Enron, which was a 15-year-old company at the time (2002), “grew from nowhere to be America's seventh largest company, employing 21,000 staff in more than 40 countries” (BBC, 2002, pg.1). In 2002 it was discovered that the company’s success was involved on a scam, the company was lying about its profit and debts were not being added in the financial statements. Most of the investors and creditors didn’t want to be involved with the company anymore, which in a few months later resulted in a forced bankruptcy and a criminal inquiry (BBC, 2002). WorldCom, the number 2 long-distance telephone and data-services telecom company provider at the time (2002), announced that they would have to revise their financial statements to the tune of $3.85 billion. The issue was that “the statement explained that in 2001 as well as the first quarter of 2002, WorldCom had taken line costs--mostly fees associated with its use of third-party network services and facilities--and wrongly booked them as capital expenditures” (CNET, 2002, pg.1).

The Sarbanes-Oxley Act

The Sarbanes-Oxley Act, also known as SOX, was mainly created to “protect shareholders and the general public from accounting errors and fraudulent practices in the...
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