Seated among the witnesses opposite Proxmire was a man more representative of the new consensus in Washington, Donald T. Regan, secretary of the treasury. Regans orientation was a far cry from Proxmires stubborn fealty to the populist traditions of Wisconsin. Regans views had been shaped in the boardroom of Merrill Lynch, where the quality of Washington leadership was measured not in its service to ordinary Americans but in the sustenance lent to the value of stocks and bonds. Regan had definite ideas about financial regulation. As chairman of Merrill Lynch, he had spent years trying to find a way around restrictions placed on banking, securities, and insurance firms after the Great Crash. Now, as he would make clear to the largely sympathetic group of senators, he was dedicated to getting rid of those regulations altogether. First on his hit list was the McFadden Act, a 1927 law aimed at preserving community banking by restricting the ability of financial institutions to operate in more than one state. The law was all that stood in the way of national companies swallowing up independently owned banks across the country. Regan was even more disdainful of the Banking Act of 1933, better known as Glass-Steagall Act. The legislation had been enacted t break up the unethical collusion between banks and brokerage houses in the years preceding the Depression. Many depositors lost their life savings because commercial banks had invested money in stocks during the speculative frenzy leading up to the Great Crash. Some banks had engaged in a practice known as self-dealing--the loaning of money to hollow companies to make their books look attractive to investors. The bank was then repaid from the companys artificially inflated stock market capitalization. Glass-Steagall and other laws of this period remoed inherent conflicts of interest by prohibiting investment banks, which underwrite and promote stocks, to be housed under the same roof as commercial banks and insurance companies, which have a fiduciary duty to wisely invest their clients money. But Regan felt such restrictions had been outmoded by the new realities of international finance. Under his chairmanship, Merrill Lynch had struck a blow against Glass-Steagall in 1977 by creating cash management accounts, money market funds that allowed account holders to write checks against their securities portfolio. Forbes hailed cash management accounts as one of the great financial innovations of the century. Others viewed them for what they were a blatant attempt to circumvent Glass-Steagall. Walter Wriston, chairman of Citicorp, couldnt help but take a swipe at his Merrill Lynch counterpart as they sat on the dais together at a banking conference. The future of banking in this country is already here, he told the audience, and its Merrill Lynch. Regans only response was a broad grin. Commercial banks cried foul when the crash management accounts were offered, but the U.S. Supreme Court allowed them to remain. That victory was not enough for Regan. The plan he was about to outline for the senators would not just modify banking regulation to accommodate the emergence of new financial instruments but throw out regulations altogether. I have some very strong personal convictions about the need to reduce legal barriers that separate the activities of all financial institutions, he told the panel. He went on to endorse the elimination of all ceiling on interest rates and all controls on the types of loans provided by banks and other financial institutions. The Reagan administrations goal, he said was to allow all depository institutions to make the same type of loans in whatever amount they see fit. Regans blueprint would have enormous ramifications. Besides the huge changes it would bring to the contours of American commerce, it would lead to one financial crisis after another for the next quarter of a century, including the subprime mortgage crisis and the devastation in the financial sector that unfolded in the second half of 2008. But almost no one on the committee uttered a word of protest. The committees new chairman, Jake Garn, a former insurance salesman from Utah whose campaign coffers were flush with donations from banking interests, was positively giddy about the Regan administrations plan to free banking from government restrictions. I think most of you know the entire time I have been on this committee, I have felt that the federal government has interfered far too much in the financial community, he said. Although Regan and Garn insisted they were advocating for consumers, it fell to Proxmire to predict what sweeping banking deregulation really portended for the average American. With a dignity unaffected by the indifference etched in the faces of his colleagues, Proxmire explained that Americas vast numbers of independently owned financial institutions-14,000 banks, 6,000 savings and loans, and 12,000 credit unions--made the countrys financial system uniquely responsive to the needs of local communities. It preserved a semblance of democracy if the exercise of the nations financial power. Most small businesses in the towns and cities of our country can find a local bank or other lender who has lived in the community all his life, who owns his bank, who knows the principal borrowers in the community by their first name, knows their character as well as their balance sheet, knows their wife and their kids and their dads and their mother, and the whole family. The owner, in turn, isnt owned or controlled by a New York firm or a San Francisco firm, and doesnt expect to move along to another part of the country in a couple of months or a couple of years....And now we may be on the brink of changing that with changes in McFadden-Douglas, Citibank might move into Oshkosh or Beaver Dam, Wisconsin, and with their vastly superior capital and advertising, they might persuade the local institutions to sell out to them. In the short run, no one gets hurt. Local owners of the financial institutions may even enjoy a handsome profit on the deals. But the whole character of Oshkosh and Beaver Dam changes.
Posted on: Mon, 18 Nov 2013 19:11:27 +0000