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DEREGULATION REDUX 

to . From  to , the combined assets of the five largest U.S. banks—Bank
of America, Citigroup, JP Morgan, Wachovia, and Wells Fargo—more than tripled,

from . trillion to . trillion. And investment banks were growing bigger, too.
Smith Barney acquired Shearson in  and Salomon Brothers in , while Paine
Webber purchased Kidder, Peabody in . Two years later, Morgan Stanley merged
with Dean Witter, and Bankers Trust purchased Alex. Brown & Sons. The assets of
the five largest investment banks—Goldman Sachs, Morgan Stanley, Merrill Lynch,
Lehman Brothers, and Bear Stearns—quadrupled, from  trillion in  to  tril-
lion in . 
In , the Economic Growth and Regulatory Paperwork Reduction Act re-
quired federal regulators to review their rules every decade and solicit comments on
“outdated, unnecessary, or unduly burdensome” rules. Some agencies responded

with gusto. In , the Federal Deposit Insurance Corporation’s annual report in-
cluded a photograph of the vice chairman, John Reich; the director of the Office of
Thrift Supervision (OTS), James Gilleran; and three banking industry representa-
tives using a chainsaw and pruning shears to cut the “red tape” binding a large stack
of documents representing regulations.
Less enthusiastic agencies felt heat. Former Securities and Exchange Commission
chairman Arthur Levitt told the FCIC that once word of a proposed regulation got
out, industry lobbyists would rush to complain to members of the congressional
committee with jurisdiction over the financial activity at issue. According to Levitt,
these members would then “harass” the SEC with frequent letters demanding an-
swers to complex questions and appearances of officials before Congress. These re-
quests consumed much of the agency’s time and discouraged it from making
regulations. Levitt described it as “kind of a blood sport to make the particular
agency look stupid or inept or venal.” 
However, others said interference—at least from the executive branch—was mod-
est. John Hawke, a former comptroller of the currency, told the FCIC he found the
Treasury Department “exceedingly sensitive” to his agency’s independence. His suc-
cessor, John Dugan, said “statutory firewalls” prevented interference from the execu-
tive branch. 
Deregulation went beyond dismantling regulations; its supporters were also disin-
clined to adopt new regulations or challenge industry on the risks of innovations.
Federal Reserve officials argued that financial institutions, with strong incentives to
protect shareholders, would regulate themselves by carefully managing their own
risks. In a  speech, Fed Vice Chairman Roger Ferguson praised “the truly im-
pressive improvement in methods of risk measurement and management and the
growing adoption of these technologies by mostly large banks and other financial in-
termediaries.” Likewise, Fed and other officials believed that markets would self-reg-

ulate through the activities of analysts and investors. “It is critically important to
recognize that no market is ever truly unregulated,” said Fed Chairman Alan
Greenspan in . “The self-interest of market participants generates private market
regulation. Thus, the real question is not whether a market should be regulated.