December 8, 2023

Op-Ed Columnist: The Banking Miracle

Modern echoes, for sure. But I read about the speech in a Jan. 27, 1933, article culled from the wonderful archives of The American Banker, the bankers’ bible now celebrating its 175th birthday. The speaker, one Francis H. Sisson, was complaining about an early version of the Glass-Steagall Act, the most famous of all Depression-era bank laws, and the one that, in retrospect, probably did the most good. Less than six months after Sisson’s speech, President Franklin Roosevelt signed it into law.

From my vantage point here in 2011, Glass-Steagall seems miraculous. It was amazingly radical, not just for its time, but for any time; it didn’t so much reform banking as upend it. Most notably, it ordered banks to get out of the securities business. As Sisson complained: “The effect of the proposed banking reform is to renounce investment banking rather than regulate it.” Because investment banking was then the chief activity of the big banks, this was a very big deal.

Glass-Steagall also created the Federal Deposit Insurance Corporation, which insured customer deposits for the first time, and outlawed branch banking by national banks, among other things. It is impossible to imagine anything like it passing today; although the modern reform bill, Dodd-Frank, surely does some good, it’s not even comparable.

I’d long wondered how Senator Carter Glass, the powerful Virginia Democrat, and his House counterpart, the Alabama congressman Henry Steagall, managed to get it passed. What were the politics like? What did they fight over? Why didn’t people like Sisson have better luck pushing back against it, the way bank lobbyists do today? So I asked the editors at American Banker if they would send me some articles from the era that would shed some light on the question. Happily, they obliged.

The first thing I realized is that all the horse-trading over the bill’s provision was done by Democrats. The Republicans, having been badly defeated in the 1932 election, had no ability to block it or even amend it. For instance, Republicans tended to view the creation of deposit insurance as “socialism.” (Sound familiar?) But it didn’t matter: Steagall cared deeply about deposit insurance. Many community bankers — as strong a force back then as today — also supported the idea because they believed it would renew customers’ faith in the banks, and bring back deposits. (This turned out to be true.) Glass, though skeptical, went along so he could get things he cared about, mainly a stronger Federal Reserve with more power over the banks.

The second thing I realized was that, the Sisson speech notwithstanding, there was surprisingly little controversy over what we now think of as the law’s primary achievement: splitting commercial and investment banking. The fights were all over issues that seem inconsequential by today’s lights. It’s as if the notion of breaking the banking business into two was always a foregone conclusion.

And, for the most part, it was. Partly, this was because, unlike today, bank failures in the 1930s were often ruinous to customers. So reform was more pressing. But it was also because, for the entire time the legislation was under consideration, the Pecora hearings were going on — in which Ferdinand Pecora, the flamboyant chief counsel of the Senate Banking Committee, dragged one well-known banker after another before the committee and grilled them mercilessly, exposing how they had abused their investment banking roles, sometimes to the point of criminality. The Pecora hearings serve as a steady drumbeat in the American Banker articles.

Those hearings infuriated the country, and made it unthinkable that banks would continue to be allowed to sell securities. In fact, some banks, seeing which way the wind was blowing, applauded: “The spirit of speculation should be eradicated from the management of commercial banks,” declared Winthrop Aldrich, the chairman of Chase National Bank, according to Michael Perino, Pecora’s biographer. Ironically, Glass loathed the Pecora hearings, deriding them as “a circus, and the only thing lacking now are peanuts and colored lemonade.” But the hearings made his bill — which had been filibustered by Huey Long just 18 months earlier — not just possible but inevitable.

How inevitable? Charles Geisst, a finance professor at Manhattan College and an expert on the law, says that the House and Senate didn’t even bother with a roll-call vote for final passage. This seminal piece of legislation, which helped keep the banks out of trouble for the next 70-plus years, flew through on a voice vote. On Friday, June 16, 1933, when Roosevelt signed it into law, The American Banker gave the news all of three paragraphs. There was nothing left to say.

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DealBook: At a Time of Needed Financial Overhaul, a Leadership Vacuum

After the worst crisis since the Great Depression, President Obama has unleashed an unusual force to regulate the financial system: a bunch of empty seats.

With Sheila C. Bair soon to leave her post at the Federal Deposit Insurance Corporation, the Obama administration will have five major bank regulatory positions either unfilled or staffed with acting directors.

The administration has inexplicably left open the vice chairman for banking supervision, a new position at the Federal Reserve created by the Dodd-Frank Act, despite having a candidate that many people think is an obvious choice: Daniel K. Tarullo. The new Consumer Financial Products Board chairman is unnamed. There are some lower-level positions that don’t have candidates, including the head of the Treasury’s Office of Financial Research and the Financial Stability Oversight Council insurance post.

Perhaps most important, the Office of the Comptroller of the Currency, is being headed by an acting comptroller, John Walsh, who took over the agency last August. Nine months have passed without a leader who might better reflect the Obama administration’s views on banking regulation, a time lag made worse by the office’s coddling of the banks even as they have acknowledged rampant abuse and negligence in the foreclosure process.

The vacancies come at a time that calls for stiffer regulatory examination. The financial regulatory system was remade under Dodd-Frank and requires strong leaders to put the changes into effect. Though the acting heads insist they feel empowered to make serious decisions, they have roughly the same authority as substitute high school teachers.

Supposedly, the Obama administration is getting close to naming people to head the comptroller’s office and the F.D.I.C. But we’ve been hearing that for a while. In April, Barbara A. Rehm of American Banker wrote that the administration was working on a big package of nominations to send to the Hill all at once. A month later, we’re still twiddling our thumbs in anticipation.

So what’s going on?

In a vacuum of leadership, conspiracy theories arise. One is that Treasury Secretary Timothy F. Geithner is making a power grab and doesn’t mind that these roles aren’t filled. The idea is that he is asserting his influence over the Dodd-Frank rule-making process. A former adviser to Mr. Geithner dismissed that notion as ridiculous, and that’s persuasive to me. It seems too Machiavellian by half.

If it’s not Mr. Geithner, then who or what is responsible for the vacancies? Not surprisingly, people close to the administration blame Republicans. The nomination process has become hopelessly broken in Washington. Even low-level appointments are now deeply partisan affairs, the playthings of score-settling senators with memories like elephants and the social responsibility of hyenas (which probably insults hyenas).

The Obama administration put up Peter A. Diamond for a position on the Federal Reserve board. Winning a little something called the Nobel Prize hasn’t helped him with confirmation, however. Senator Richard Shelby, the powerful Alabama Republican and ranking member of the banking committee, is standing in his way. The senator also quashed the nomination of Joseph A. Smith Jr. to head the Federal Housing Finance Agency.

But much of the blame for this situation lies with the Obama administration. It’s almost as if the president and his staff have thrown up their hands. The administration has had trouble finding good candidates who are willing to go through the vetting process and has shied away from fights. It also hasn’t seeded the ground or supported the nominations it has made, people complain.

A Democratic Senate staff member confided worry to me about the fate of Mark Wetjen, whom the administration nominated last week as a candidate for a seat on the Commodity Futures Trading Commission. “They didn’t shop it and they didn’t get buy-in,” the staff member said. “The administration doesn’t seem to be putting any sort of effort into it.”

Making these appointments will help answer a question: Where does Mr. Obama stand on financial regulation?

With the Geithner appointment, the president chose early on the path of continuity over muscular regulation. Immediately, the Treasury secretary became the personification of every Obama financial policy. Mr. Geithner remains the most politically costly appointment Mr. Obama has made, saddling him with all the Bush presidency’s financial crisis decisions. After all, Mr. Geithner, as head of the Federal Reserve Bank of New York, was intimately involved in the emergency actions of September 2008. Republicans made great hay tying Democrats to the Wall Street bailouts in the 2010 midterm elections. Now, of course, Republicans are leading Democrats in Wall Street campaign donations.

With these positions unfilled, Mr. Obama is losing out on a political opportunity to draw a line between himself and his opposition.

But it’s more important than that. Allowing these vacancies to linger drains leadership from the financial overhaul at the exact moment when it is needed most.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: Follow him on Twitter (@Eisingerj).

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