WASHINGTON - It took decades for "financial modernization" to become law in the Gramm-Leach-Bliley Act of 1999, and it could be many more years before its promise is realized.
"What everybody expected didn't take place," said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. "At the time, we thought we would see a combination of banking and insurance or investment banking become the standard for the day. It turned out to be far less revolutionary than everyone thought it would be."
The act's legacy so far has been a host of political, regulatory, and legal skirmishes over less-heralded or complex issues that were never completely resolved, experts said. Those include real estate brokerage powers, consumer privacy protections, broker-dealer rules, and disclosures related to community reinvestment.
"It has turned out to be far less significant than people expected that it might be. It has been pretty much a dead letter," said John D. Hawke Jr., who until last month was comptroller of the currency and was heavily involved in the Gramm-Leach-Bliley debate.
When then-President Clinton signed the legislation five years ago this past Friday, he hailed the arrival of a new era.
Gramm-Leach-Bliley, which eliminated the Glass-Steagall Act that had separated securities and banking, was intended to promote one-stop shopping for financial services. Consumers would get a wider variety of products from financial firms, including more high-tech offerings, at lower prices, and the diversified companies the act authorized would be more profitable and less risky.
Glass-Steagall "worked pretty well for the industrial economy … but the world is very different," Mr. Clinton said at the time. "What we are doing is modernizing the financial services industry, tearing down these antiquated walls and granting banks significant new authority. ... This is a very good day for the United States."
But the big mergers among banks, securities firms, and insurance companies that many anticipated have not happened.
Even Citigroup Inc. - the poster child for financial modernization - decided in 2002 to get out of the insurance underwriting business. Citigroup's formation, the 1998 merger of Citicorp and Travelers Group, was a key reason Gramm-Leach-Bliley passed. Congress was catching up with a market that had already found a loophole allowing banks to merge with insurance firms.
The lawmakers, lobbyists, and chief executives who had worked on the bill for years did not foresee the economic downturn that would follow, or 9/11 and the corporate scandals that ushered in a slew of regulations. The economy, and the allegations of bank analyst conflicts of interest that led to a $1.4 billion settlement with state and federal regulators, dulled commercial banks' interest in the venture capital sector.
"There have been so many interferences with developments I believe otherwise would have occurred," said Richard Fischer, a partner at Morrison & Foerster LLP. "Five years ago, what happened right after the Gramm-Leach-Bliley Act? We had the dot-com collapse and we had the 9/11 collapse. They certainly impeded development."
Federal Reserve Board Governor Mark Olson said in a speech Friday that financial companies were way ahead of policymakers in the late 1990s and that Gramm-Leach-Bliley was a catch-up exercise for the regulatory apparatus.
It made federal law "consistent with what had already taken place in the marketplace," he said. "So it did not move the industry forward in terms of the types of things it could do."
Still, Mr. Olson said, the industry has not taken advantage of one of the act's chief attributes - the flexibility it gave regulators to grant new powers in the future.
"I've been disappointed to an extent at the lack of new-product requests that have come to the Fed for approval," he said. "There have been a few, and I keep checking to see if we are in any way an impediment in that process. I don't suspect that we are."
Others say politics has gotten in the way.
Under the act, the Treasury Department and the Fed may declare new activities as "financial in nature," incidental to financial services, or complementary to them.
That was supposed to take decisions about innovations out of the political realm of Congress - but the lawmakers clearly have had trouble letting the power go, observers said. The first real test of the provision was whether banks could offer real estate brokerage.
Bankers initially thought it was a slam dunk. More than half of the states already allow banks to offer real estate brokerage, and many real estate brokerage houses offer banking services. But the National Association of Realtors' fierce battle against a Fed-Treasury proposal to let banks offer brokerage has caused many lawmakers to back a bill banning finalization of any such rule.
Many said the ultimate resolution to the fight will be crucial to the long-term success of Gramm-Leach-Bliley.
"If the Realtors succeed, I think they will have done real damage to Gramm-Leach-Bliley," said Bert Ely, an independent consultant in Alexandria, Va. "What Congress will have said to the Fed and Treasury is: 'We were just kidding when we authorized you guys to determine what was financial in nature. Anybody who doesn't like what you do can come running to us, and we will take care of the problem.' If the banks win on this - which I think they will - it will give meaning to that delegation of power. That is why this issue is so important."
The industry has also had to contend with new requirements that were supposed to be the tradeoff for added powers.
"One thing it did do was to bring in broad new privacy provisions," Mr. Hawke said. "I don't think anyone expected that to be part of the package. Those provisions were done in a hurry, without a lot of deliberation. People are coming to recognize" the effects of the privacy provisions.
Indeed, along with the real estate brokerage issue, privacy remains one of the most controversial aspects of Gramm-Leach-Bliley, many analysts say. The bill required financial services companies to provide consumers with clear and conspicuous notice of their privacy policies and give them a chance to "opt out" of information sharing with third parties. But it also included a provision that allowed state legislatures to enact stricter requirements.
Many said the privacy protections have been problematic on both sides: Consumers say the provisions have not gone far enough, and banks have to deal with standards that differ from one state to the next.
Last year California enacted a bill that barred companies from sharing confidential consumer data with third parties with customer permission. It also added an "opt-out" standard for data sharing by separately regulated affiliates.
The financial services industry says the California law went too far, and has challenged it in court; an appeal is still pending. Meanwhile, consumers have said the banks' notices are hard to understand.
"The financial services firms feel like they didn't get the uniformity they need, but on the other hand, the disclosures and information being provided to consumers about protections are still falling short," said Sheila Bair, a former Treasury assistant secretary for financial institutions in this administration.
Also left unresolved are rules that would determine which broker-dealer activities may be performed by banks and which must be conducted by affiliates regulated by the Securities and Exchange Commission. The SEC has tried for five years to finalize rules.
On Nov. 2 the SEC said it would not be able to do so until next year because its latest proposal had been roundly criticized by bankers, their regulators, and lawmakers. The proposal, issued June 12, sought to define the extent to which banks may directly engage in trust, fiduciary, and custodial activities. Bankers charged that the rule went beyond the intent of Gramm-Leach-Bliley, and would force them to make major changes to traditional bank activities, such as preventing them from recruiting custodial clients and paying certain bonuses to employees.
Banks and consumer groups also have complained that the Community Reinvestment Act "sunshine" disclosures mandated by Gramm-Leach-Bliley have done nothing but add paperwork.
So with all these issues still up in the air five years on, has Gramm-Leach-Bliley been more or less a failure?
Many contacted for this story said it has not. Edward Yingling, executive vice president for the American Bankers Association, said that the bill has sets banks up well for the long run because of the removal of statutory barriers to innovation and consolidation. And sooner or later privacy issues would have confronted the banking industry, he said.
"It's well worth it, particularly looked at from the long-term point of view," Mr. Yingling said. "Before Gramm-Leach-Bliley, the banking industry was in a position that it could not adjust to a rapidly moving marketplace and therefore was in danger of falling further and further behind. Now, under the language of Gramm-Leach-Bliley, banking institutions are authorized to do whatever they need to do to be able to compete in terms of offering products and services."
Others said a reevaluation of the act could come sooner than many think.
"We are going to start to see" more mergers and industry combinations, Mr. Fischer said. "It takes time. You will see very significant players making those moves. ... In 2005 and 2006 you are going to start to see that happen."
