Taming the Megabanks

Banks were allowed to enter securities markets and become universal banks during two periods in the past century - the 1920s and the late 1990s. Both times, universal banks made high-risk loans and packaged them into securities that were sold as safe investments to poorly-informed investors. Both times, universal banks promoted unsustainable booms that led to destructive busts - the Great Depression of the early 1930s and the Global Financial Crisis of 2007-09. Bothtimes, governments were forced to arrange costly bailouts of universal banks.Congress passed the Glass-Steagall Act of 1933 in response to the Great Depression. The Act broke up universal banks and established a decentralized financial system composed of three separate and independent sectors: banking, securities, and insurance. That system was stable and successful for over four decades until the big-bank lobby persuaded regulators to open loopholes in Glass-Steagall during the 1980s and convinced Congress to repeal it in 1999.Congress did not adopt a new Glass-Steagall Act after the Global Financial Crisis. Instead, Congress passed the Dodd-Frank Act. Dodd-Frank's highly technical reforms tried to make banks safer but left in place a dangerous financial system dominated by universal banks. Universal banks continue to pose unacceptable risks to financial stability and economic and social welfare. They exert far too much influence over our political and regulatory systems because of their immense size and theirundeniable "too-big-to-fail" status.In Taming the Megabanks, Arthur Wilmarth argues that we must again separate banks from securities markets to avoid another devastating financial crisis and ensure that our financial system serves Main Street business firms and consumers instead of Wall Street bankers and speculators. Wilmarth's comprehensive and detailed analysis demonstrates that a new Glass-Steagall Act would make our financial system much more stable and less likely to produce boom-and-bust cycles. Giant universalbanks would no longer dominate our financial system or receive enormous subsidies. A more decentralized and competitive financial system would encourage banks and securities firms to fulfill their proper roles as servants - not masters - of Main Street businesses and consumers.

Wilmarth's wide-ranging commentary on underlying issues merits close attention in debates on the future of banking regulation., ...Wilmarth's wide-ranging commentary on underlying issues merits close attention in debates on the future of banking regulation., Wilmarth's deeply researched book, "Taming the Megabanks: Why We Need a New Glass-Steagall Act," is a testament to his dedication to a topic that has only periodically drawn close attention in Washington., [Professor Wilmarth's] knowledge of the subject is unparalleled... Taming the Megabanks brings all of that immense knowledge into a compelling narrative of a decades-long process that gave us today's corporate behemoths: Citigroup, JPMorgan, Bank of America, and a few other familiar names... everyone with an interest in, or desire to understand, U.S. financial regulation and prospects for reform should read Professor Wilmarth's book. It is incredibly well-researched, densely packed with facts, deep, and thoughtful. It makes a strong case for an important structural change. And it is bound to be part of the canon., In his new book, Taming the Megabanks, he presents a masterful summation of this critique by chronicling the history of universal banking — engagement by banks in securities activities — and its consequences. He then makes a powerful argument for the separation of the banking, insurance, and securities industries

Arthur E. Wilmarth, Jr. is Professor of Law at the George Washington University Law School. Wilmarth is the co-editor with Lawrence E. Mitchell of The Panic of 2008: Causes, Consequences, and Implications for Reform and a member of the international advisory board of the Journal of Banking Regulation. He has testified before committees of the U.S. Congress and the California legislature on financial regulatory issues.