The lines between commercial banking and investment banking have moved from blurry to nearly invisible. The Glass-Steagall Act (GSA), instituted in 1933 to separate the coexistence of commercial and investment banking, was repealed in 1999 leading to the creation of universal banks like Citigroup (NYSE:C) and Bank of America (NYSE:BAC). The credit crisis and bad debt weighing down the economy has further accelerated the consolidation of financial institutions into a select few. Investors should be aware of how past legislation is having an impact on today's market. (For a refresher course, see What Was The Glass Steagall Act?)

Universal Banks
The Gramm-Leach-Bliley Act of 1999, which repealed the GSA, rekindled competition among banks. It meant banks could once again offer investments, investment banking, commercial banking and insurance all under one roof. Bank of America and Citigroup were two of the main beneficiaries of this rule change. Merger & acquisition revenue that had been the domain of Wall Street elites like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) after GSA, opened up to the one-stop shop banks.

Does Bigger Equal Better?
The appeal of a one-stop shop for a company seeking M&A advice is to also have the ability to secure financing for liquidity or future deals. One danger for regular people who just want to make deposits and have a checking account is that these banks are in the position to leverage customer assets against risky investments like the Collateralized Debt Obligations (CDO). Between 2000 and 2007 Bank of America stock climbed 87%, but Citigroup, born of the merger of Citicorp bank and insurer the Travelers Group in April of 1998, saw it's stock price drop nearly 10% during the same period. The larger Citigroup struggled during the period and is struggling again today to convince investors that the combination of insurance, retail banking and investment banking could be managed successfully.

Citiesque
Bank of America is looking a lot like Citigroup after the announcement of its planned combination with Merrill Lynch (NYSE:MER). Merrill's 16,000+ financial advisors and its $1.6 trillion in client assets will give Bank of America a huge pool of assets from its new investment management business. Bank of America will also benefit from Merrill's strength in global debt underwriting, equity sales and M&A business.

Final Thoughts
Legislation seems to swing both ways. After times of crisis measures are taken to protect investors then after a cooling off period legislation is often reversed in the name of competition. Either way, Stegall is gone; universal banks are here, and the future question is whether or not they can thrive in a post-subprime, credit-constrained environment.

Related Articles
  1. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  2. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  3. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  4. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  5. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  6. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  7. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  8. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  9. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center