Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0011
Arthur E. Wilmarth Jr.
{"title":"Déjà Vu","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0011","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0011","url":null,"abstract":"Like the credit boom of the 1920s, the toxic credit bubble of the 2000s precipitated a devastating global financial crisis. The desire to earn quick profits from originating and securitizing subprime loans corrupted the risk management practices of large financial conglomerates and the credit review practices of credit ratings agencies that assigned investment ratings to mortgage-related securities. By the end of 2006, U.S. credit markets resembled an inverted pyramid of risk, in which multiple layers of financial bets depended on the performance of high-risk subprime loans held in securitized pools. When housing prices began to fall and subprime loans began to default in large numbers in 2007, the leveraged bets on top of that pyramid of risk blew up and inflicted devastating losses on financial institutions and investors in the U.S. and Europe. Officials on both sides of the Atlantic were slow to recognize and respond to the severity of the crisis. The Federal Reserve Board and the Treasury Department missed multiple warning signs that should have caused them to increase their oversight of major U.S. banks and other large financial institutions during 2007 and early 2008.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"140 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123776357","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0004
Arthur E. Wilmarth Jr.
{"title":"Foreign Affairs","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0004","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0004","url":null,"abstract":"A speculative and unstable credit boom occurred in overseas markets during the 1920s, as universal banks and private investment banks competed aggressively to sell more than $12 billion of foreign bonds to U.S. investors. The resulting surge in overseas lending left many governments and private sector borrowers in Central and Eastern Europe and Latin America in a dangerously exposed position when U.S. investors lost their appetite for foreign bonds at the end of the 1920s. Universal banks and investment banks sold many unsound foreign bonds to unsophisticated and trusting American investors. The massive sales of risky domestic and foreign securities by universal banks and investment banks had highly adverse effects on the U.S. economy, foreign economies, and investors when the domestic and overseas financing booms abruptly ended following the stock market crash in late 1929.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115061894","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0013
Arthur E. Wilmarth Jr.
{"title":"Unfinished Business","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0013","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0013","url":null,"abstract":"In 2009, the U.S. and other G20 nations agreed on reforms designed to improve the regulation of systemically important financial institutions and markets. However, those reforms did not change the fundamental structure of the financial system, which continues to be dominated by universal banks and large shadow banks. Those giant institutions are too big, too complex, and too opaque to be effectively managed by their executives or adequately disciplined by market participants and regulators. In addition, government officials have failed to hold top executives accountable for widespread misconduct at financial giants during and after the financial crisis. The extensive networks linking capital markets, universal banks, and shadow banks create a strong probability that serious problems arising in one financial sector will spill over into other sectors and trigger a systemic crisis. Consequently, governments face enormous pressures to rescue universal banks and large shadow banks whenever a financial disruption occurs. There are serious doubts whether many governments and central banks will possess the necessary resources in the future to provide comprehensive bailouts similar to those arranged during the last crisis. Accordingly, the next systemic financial crisis might not be contained and could potentially lead to a second Great Depression.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"144 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114322017","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0012
Arthur E. Wilmarth Jr.
{"title":"Bailouts Without End","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0012","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0012","url":null,"abstract":"The Fed’s rescue of Bear Stearns and the Treasury Department’s nationalization of Fannie Mae and Freddie Mac in 2008 provoked widespread criticism. Consequently, the Fed and Treasury were very reluctant to approve further bailouts, and they allowed Lehman Brothers to fail in September 2008. Lehman’s collapse triggered a global panic and a meltdown of financial markets around the world. The Fed and Treasury quickly arranged a bailout of AIG, and Congress approved a $700 billion financial rescue bill. Treasury established the Troubled Asset Relief Program, which injected capital into large universal banks, while the Fed provided trillions of dollars of emergency loans and the FDIC established new guarantee programs for bank debts and deposits. In February 2009, federal regulators pledged to provide any further capital that the nineteen largest U.S. banks needed to survive, thereby cementing the “too big to fail” status of U.S. megabanks. The U.K. and other European nations arranged similar bailouts for their universal banks. Meanwhile, thousands of small banks and small businesses failed, millions of people lost their jobs, and millions of families lost their homes during the Great Recession.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"64 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133914441","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0006
Arthur E. Wilmarth Jr.
{"title":"Nemesis","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0006","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0006","url":null,"abstract":"Banking crises occurred on both sides of the Atlantic during the Great Depression. Troubled universal banks were at the center of each crisis. The first U.S. banking crisis in late 1930 was caused by the failures of two large financial conglomerates. In May 1931, the collapse of Austria’s biggest universal bank triggered a series of crises that swept through Europe. Austria, Germany, Belgium, and Italy took extraordinary measures to rescue their largest universal banks. In the U.S., the Reconstruction Finance Corporation provided loans that prevented the failures of two large universal banks in 1932. However, the RFC allowed the two biggest banks in Detroit to fail in February 1933, thereby precipitating a nationwide banking panic. In contrast, Great Britain and Canada did not experience systemic banking crises despite serious economic downturns. The separation between commercial banks and securities markets in those two nations prevented financial contagion that could have undermined their entire financial systems.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127641791","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0005
Arthur E. Wilmarth Jr.
{"title":"Crash","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0005","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0005","url":null,"abstract":"The Great Crash on Wall Street in October 1929 undermined the U.S. economy and led to the Great Depression. National City Bank, Chase National Bank, and other U.S. universal banks eagerly promoted the stock market bubble of the late 1920s. The reputations of those institutions and their leaders plummeted during the Great Crash and its aftermath. Their inability to prevent the stock market’s collapse severely eroded their credibility with the public. The financial and psychological trauma of the Great Crash led to a steep drop in household consumption, which triggered sharp downturns in industrial production and investments in new business facilities and equipment. The U.S. economy fell into a severe recession by the fall of 1930. That recession exposed the speculative risks that universal banks had assumed during the boom years of the 1920s.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"228 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115820906","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0002
Arthur E. Wilmarth Jr.
{"title":"Origins","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0002","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0002","url":null,"abstract":"Chapter 1 describes the rise of universal banks in the U.S. during the late nineteenth and early twentieth centuries. Large commercial banks in New York and Chicago entered the securities business in the late nineteenth century by forming alliances with leading investment banks. In 1902, the federal regulator of national banks (the Comptroller of the Currency) told national banks that they could not underwrite or trade in securities except for government bonds. Large national banks evaded that prohibition by establishing securities affiliates. Securities affiliates of national banks survived challenges from the Justice Department, Congress, and the Comptroller of the Currency between 1911 and 1920. Universal banks and their securities affiliates prospered during the 1920s with the enthusiastic support of the Harding and Coolidge administrations. The survival and growth of universal banks during the early twentieth century demonstrated their ability to overcome political and regulatory obstacles.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"82 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130388159","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0014
Arthur E. Wilmarth Jr.
{"title":"Conclusion","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0014","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0014","url":null,"abstract":"A new Glass-Steagall Act would break up universal banks and end the conflicts of interest that prevent universal banks from acting as objective lenders and impartial investment advisers. It would produce a more stable and resilient financial system by reestablishing structural buffers to prevent contagion between the banking system and other financial sectors. It would improve market discipline by preventing banks from transferring their safety net subsidies to affiliates engaged in capital markets activities. It would shrink the shadow banking system by prohibiting nonbanks from issuing short-term financial claims that function as deposit substitutes. It would remove the dangerous influence that large financial conglomerates exercise over our political and regulatory systems. It would end the current situation in which our financial system and our economy are held hostage to the survival of universal banks and large shadow banks. It would restore our banking system and financial markets to their proper roles as servants—not masters—of nonfinancial business firms and consumers.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116092789","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0010
Arthur E. Wilmarth Jr.
{"title":"See No Evil","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0010","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0010","url":null,"abstract":"During the 2000s, universal banks originated and securitized trillions of dollars of toxic subprime loans and sold the resulting debt securities to investors around the world. Governments on both sides of the Atlantic encouraged universal banks to engage in high-risk lending and securitization. Universal banks enjoyed unrivaled influence, and government officials ignored warnings about the dangers of subprime lending from consumer advocates and academics who did not hold “mainstream” views. Policymakers in the U.S. and Europe recognized that many households were becoming more deeply indebted and were relying more heavily on home mortgages and other types of consumer credit to cover their living expenses. Officials tolerated those developments because they viewed housing construction and household consumption as the primary drivers of economic growth in an otherwise challenging environment. The decision by policymakers to rely on housing credit as the main stimulus for economic growth in a period of stagnant incomes had catastrophic results.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129476448","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Taming the MegabanksPub Date : 2020-09-17DOI: 10.1093/oso/9780190260705.003.0009
Arthur E. Wilmarth Jr.
{"title":"Resurgence, Part II","authors":"Arthur E. Wilmarth Jr.","doi":"10.1093/oso/9780190260705.003.0009","DOIUrl":"https://doi.org/10.1093/oso/9780190260705.003.0009","url":null,"abstract":"Large banks and their political allies waged a twenty-year campaign to secure legislation that would remove the structural buffers established by the Glass-Steagall and Bank Holding Company Acts. That campaign triumphed in 1999, when Congress passed the Gramm-Leach-Bliley Act (GLBA). GLBA authorized the creation of financial holding companies that owned banks, securities firms, and insurance companies. In 2000, Congress passed the Commodity Futures Modernization Act (CFMA), which exempted over-the-counter derivatives from substantive regulation by the federal government or the states. GLBA and CFMA enabled large U.S. banks to become universal banks for the first time since the 1930s. Large U.S. securities firms responded by becoming shadow banks (and de facto universal banks) through their issuance of deposit substitutes (shadow deposits). Similar patterns of deregulation encouraged the growth of large universal banks in the U.K. and Europe. A group of seventeen U.S., U.K., and European financial conglomerates dominated global financial markets by 2000.","PeriodicalId":429407,"journal":{"name":"Taming the Megabanks","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130523145","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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