A Brief History of Banking Regulations

In response to this Pulitzer prize winning WSJ series, What’s Wrong? The Deregulators, regular TBP reader Fred C Dobbs gives us the historical overview of how Banks first became regulated post-Depression, and then radically deregulated.

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The conflict between the fed government intervening in the banking business vs. the fed government staying out of the banking business actually was fought out first when Andrew Jackson (the founder of the Democrat Party) was elected president in 1830. He terminated the fed government sponsored US Bank, and resolved the conflict.

The fed government basically stayed out of the banking business until the ’30s, when FDR took office, and the fed government intervened deeply into the ‘banking business,’ which was defined by the IRS, FDIC, Comptroller of the Currency, SEC (if public-owned), and State Bank Supervisors etc. By defining what the ‘business of banking’s was the statutes, regulations, and enforcement personnel administering these laws, bankers were boxed into doing business as defined by state and federal governments.

It stayed this way until rules and interpretations were eroded gradually. The first step, was allowing ‘one-bank’ holding comings, allowing one company to hold a bank and another company, such as an insurance company, which would produce greater profits as a whole, for the holding company, than either company could produce independently. The breakthrough was made by Bank of America in the mid-60s. All of the too big to fail banks today are held by holding companies.

The next break through was termination of the rule against solvent bank mergers. From the ’30s until 1969, two healthy banks could not merge; mergers were permitted through regulatory forbearance when one healthy bank absorbed a unhealthy bank. All of the too big to fail banks are the result of numerous mergers between healthy banks.

The definition of banking was enlarged to allow banks to issue credit cards along the way. The Bank of America created Visa and Wells Fargo created Mastercard.

Finally, the doors blew open when the Fed under Carter gave Merrill Lynch authority to acquire a ‘captive bank’ as part of its introduction of the Cash Management Account. Merrill’s bank grew in about 18 months to one of the nation’s 5 largest banks.

So, by the time Reagan took office in 1981, the generational memory of those who had fought over the beneficial effect of governments, fed and state, in the ’30s, and developed a system in which the government acted as cops, giving tickets for speeding etc., that worked, was missing. [If you were 20 in l931, you were 70, and retired by 1981, and no one listened to anything you said.]

The rest is history. The ignoramuses that now controlled the US, the smug governing elite, without any experience, study or generational memory, disregarded human nature that tells us that people will not repay debts they incur if they don’t have the income or resources to repay. And, that in making residential real estate loans on the security of the residence, borrowers will not throw good money after bad to pay the mortgage on an underwater security, but will stay until evicted in an effort to recapture the money they invested in buying the property.

The banking industry has, year in and year out, the most powerful lobby in DC, as their results indicate, and, in an effort to boost their compensation to the same as executives of industrial companies that actually make things (such as DuPont, Exxon, etc.) they just took advantage of the ignorant and stupid regulators, congressional staffers, and politicians who had no generational memory and were not interested in getting the input of those regulators and bankers who had been active from the ’30s. The episode merely illustrates one of the defects of our government system. We elect people like Zoe Lofgren, a Welfare Mother, to Congress and ask them to cast intelligent votes on subjects they know nothing about, through study or experience, but, because they have been elected (by Democrat Party inside selection, e.g. Pelosi), they foolishly assume they now know something about subjects they never knew before and are competent to make reasoned decisions on these subjects, when they were incompetent before.

No wonder they don’t read the legislation they vote on, they wouldn’t understand it if they did. The Media does it’s best to create an illusion that the politicians in DC know what they are doing when they don’t. The US badly needs someone to show the kind and type of leadership it needs to get rid of the box it finds itself in, but Obama is not the leader, the polls show. Sad. But, in the meantime, Obama should take the too big to fail banks to the woodshed, and force them to sell off their non-bank subsidiaries, take their losses, and reveal their true condition, restore confidence in the banking system and the US. In other words, show Obama can get one thing done, rather than nothing.

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Great stuff Fred, Thanks . .  .