In his 1998 book The Bankers: The Next Generation [Penguin], senior financial journalist Martin Mayer outlines with frightening clarity the ominous shape of 21st century American banking. Industry officials and government regulators alike, he says, foresee an emerging banking landscape dominated by no more than twenty nationwide institutions of mammoth proportion, the end product of a decade of merger mania, whose acquisitions will eliminate virtually all small and medium-sized banks of under $1 billion in assets. According to Mayer, corporate bankers visualize this as a benign model of profitable economic efficiency; consumers, however, are likely to view it with less equanimity. As one disillusioned customer of the new mega-banks observed not long ago, "The bigger they get, the smaller you become."
From the point of view of the banks, of course, there is a method to this apparent madness. Structural giantism will enable them to add to their already swelling coffers -- if, that is, the federal government cooperates by further deregulating their already loosely supervised activities and allowing them to move into other riskier, but more profitable, areas of business. Not satisfied with their socially useful savings role, the big banks want to provide expanded "financial services" -- a euphemism for brokerage and investment underwriting -- for their wealthy and corporate customers. This form of "banking," which is based on fees and commissions, is much easier and more lucrative than traditional deposit-and-loan banking. Up to now, however, it has been someone else's job: the investment banker, mutual-fund manager, or stockbroker.
Since 1933, commercial and savings banks (as opposed to investment banks, a separate species) have been technically barred by the Glass-Steagall Act from trading and selling stocks and bonds on the very reasonable assumption that unavoidable conflicts of interest would arise between a bankís underwriting (with depositorsí money) of corporate stock issuances, and the subsequent promotion and sale of that stock to the same bankís depositors or mortgagees, often with money loaned by the bank -- something that happened regularly in the 1920s and contributed to the 1930s economic collapse. In addition to hyping and possibly misrepresenting their in-house stocks, it was thought, banks might make questionable loans to their own securities affiliates, or forget to mention to customers that their stock and mutual-fund offerings were not insured by the FDIC. The populist authors of Glass-Steagall, who maintained a healthy skepticism of capitalist motives and practices, also felt that no one group of financial institutions should be allowed to obtain too much concentrated power, on the grounds that absolute economic power corrupts just as readily as absolute political power.
Our present Congress, which has promises to keep to campaign contributors and lobby groups, such as the American Bankers Association, feels differently. Absent, therefore, a breakdown in ongoing negotiations between House and Senate conferees considering fundamental changes in the nation's existing financial laws, Glass-Steagall is probably doomed. Its pending repeal, and that of the Bank Holding Company Act of 1956, which restricts bank/non-bank mergers, will enable commercial banks (which arrange loans and handle deposits) to legally combine with investment banks (which raise investment capital through stock offerings), as well as with brokerage houses and insurance companies, avoiding certain long-standing federal financial regulations in the process. The result will be to establish the new mega-banking chains as virtually unregulated conglomerates, whose mistakes will nevertheless be partially covered by government deposit insurance.
In point of fact, Glass-Steagall, the last major remaining regulatory pillar of the New Deal banking era still standing, has already been appreciably weakened, a process that began in the laissez-faire 1980s. As of 1997, Martin Mayer points out, only 17 percent of the total assets of American banks were still in the form of insured deposits; the rest was investment money held for rich individuals or corporations -- money that should, under law, have gone to brokerage houses, mutual funds, or insurance companies. No wonder banks spend so little time cultivating small savers.
The deliberate undermining of Glass-Steagall is an object-lesson in how American government presently works for special interests. Taking advantage of the vagueness of certain sections of the law, commercial bankers eager to reap the rewards of investment banking and brokerage (7 to 8 percent higher returns on equity) began in the late 1980s to ferret out statutory loopholes. They were aided in their efforts by a friendly Federal Reserve Board and a cooperative Securities and Exchange Commission, which, as regulatory interpreters of Glass-Steagall, agreed to a gradual loosening of restrictions on capital underwriting and stock promotions. By 1992, 90 percent of commercial banks were offering mutual funds, and several of the largest were underwriting securities, thereby violating the spirit of the law with a wink and a nod from government regulators.
Thus emboldened, corporate bankers took the next logical step, again with the tacit approval of erstwhile regulatory authorities. In a clear legal violation that went unchallenged and unpunished, three giant business mergers in early 1998 flouted the Glass-Steagall and Bank Holding Company acts by joining together institutions involved in commercial banking, investment banking, stock brokerage, and insurance. These consolidations -- Citicorp with Travelers Group, NationsBank with Bank America, and Banc One with First Chicago -- were carried out in the obvious expectation that Congress would do its deregulatory duty by trashing Glass-Steagall. To date, that has not happened, so we have the edifying spectacle of major banks thumbing their noses at federal law, while Washington looks the other way.
Once formalized, the repeal of Glass-Steagall and associated legislation will mark the effective end of regulated banking in America, a noble experiment that worked successfully from the 1930s through the 1970s, until undercut piecemeal fashion by three pernicious acts of Congress: the Monetary Control Act of 1980, the Garn-St. Germain Depository Institutions Act of 1982, and the Riegle-Neal Interstate Banking and Branching Act of 1994. The 1980 and 1982 laws, which deregulated most aspects of the industry, created the free-for-all conditions for the horrific savings-and-loan crisis of the 1980s; the 1994 act, which legalized nationwide branch banking as of June 1, 1997, paved the way for accelerated merger mania on a massive scale. Worst of all, the new, unstable financial regime these statutes created has revived the specter of bank failure, which the preventative legislation of the New Deal era had largely exorcised.
Statistics tell the story. In the years before regulation, annual bank collapses routinely numbered in the high hundreds, reaching into the thousands during the early part of the Great Depression (1929-33). Over the period 1945 to 1973, under a regulated system, that dropped remarkably to less than four a year. With the return of deregulation, however, bank failures are on the rise once more, exceeding a hundred a year in the decade 1984-94. This does not yet constitute a crisis, but the handwriting is clearly on the wall. If war, as Clemenceau famously said, is too important a matter to be left to the generals, then banking is too crucial a component of a modern economy to be left entirely to the bankers.
Wayne O'Leary is a writer in Orono, Maine.