“There were two pieces of legislation that facilitated our migration toward too big to fail… Interstate Banking and Branching Efficiency Act of 1994, which permitted banks to grow across state lines, and the Gramm-Leach-Bliley Act, which eliminated the separation of commercial and investment banking. Since 1990, the largest twenty institutions grew from controlling about 35% of industry assets to controlling 70% of assets today.”
-Kansas City Federal Reserve president Thomas Hoenig. in an August 6 speech before the Kansas Bankers Association.
There is a fascinating discussion of John Dugan, one of the earliest architects of the “too big to fail” concept, in the January 2010 issue of The Nation. Nothing in the article will surprise regular readers of this blog; however, the extent of the wrongheaded belief system and policy initiatives still has the power to shock.
Dugan’s main work came about in 1989, when Congress ordered the Treasury to conduct a study on FDIC deposit insurance. Dugan ballooned the project into a 750-page manifesto, titled Modernizing the Financial System: Recommendations for Safer, More Competitive Banks (1991).
The title is misleading: There were many policy ideas pushed in the tome, but in terms of the current economic collapse, there were three of significance:
• Allowing banks to expand into multiple states without incurring additional regulatory oversight;
• Allowing relatively safe commercial banks to merge with riskier investment banks and insurance companies (Repeal of Glass Steagall);
• Allowing commercial firms (General Electric, Sears) to purchase banks.
There is no small irony in that a hard core GOP ideologue wrote the blueprint for Democrat Bill Clinton’s deregulation. “It was the first real recipe for too big to fail” said banking scholar Arthur Wilmarth Jr., professor at George Washington University Law School.
Dugan next became head of the Office of the Comptroller of the Currency (OCC), Dugan played a leading role in dismantling the existing system of consumer protection.
Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program, and Harvard University Law School professor, lambasted the OCC: “For years, the OCC has had the power and the responsibility to protect both banks and consumers, and it has consistently thrown the consumer under the bus.”
The rest of the article details the usual revolving door story: Dugan leaves government, goes to work as an industry lawyer, helping banks circumvent the very regs he helped to create. In 2005, he is appointed as head of the OCC (it expires in August 2010).
For those people who believe that more deregulation is the way to regulate financial institutions, I advise you to closely study Mr. Dugans life work . . .
Sheila Bair vs. John Dugan (June 14th, 2009)
A Master of Disaster
The Nation, January 4, 2010