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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
Rather, the real question is whether government intervention strengthens or weakens
private regulation.”
Richard Spillenkothen, the Fed’s director of Banking Supervision and Regulation
from to , discussed banking supervision in a memorandum submitted to
the FCIC: “Supervisors understood that forceful and proactive supervision, espe-
cially early intervention before management weaknesses were reflected in poor finan-
cial performance, might be viewed as i) overly-intrusive, burdensome, and
heavy-handed, ii) an undesirable constraint on credit availability, or iii) inconsistent
with the Fed’s public posture.”
To create checks and balances and keep any agency from becoming arbitrary or
inflexible, senior policy makers pushed to keep multiple regulators. In ,
Greenspan testified against proposals to consolidate bank regulation: “The current
structure provides banks with a method . . . of shifting their regulator, an effective
test that provides a limit on the arbitrary position or excessively rigid posture of any
one regulator. The pressure of a potential loss of institutions has inhibited excessive
regulation and acted as a countervailing force to the bias of a regulatory agency to
overregulate.” Further, some regulators, including the OTS and Office of the Comp-
troller of the Currency (OCC), were funded largely by assessments from the institu-
tions they regulated. As a result, the larger the number of institutions that chose these
regulators, the greater their budget.
Emboldened by success and the tenor of the times, the largest banks and their reg-
ulators continued to oppose limits on banks’ activities or growth. The barriers sepa-
rating commercial banks and investment banks had been crumbling, little by little,
and now seemed the time to remove the last remnants of the restrictions that sepa-
rated banks, securities firms, and insurance companies.
In the spring of , after years of opposing repeal of Glass-Steagall, the Securi-
ties Industry Association—the trade organization of Wall Street firms such as Gold-
man Sachs and Merrill Lynch—changed course. Because restrictions on banks had
been slowly removed during the previous decade, banks already had beachheads in
securities and insurance. Despite numerous lawsuits against the Fed and the OCC,
securities firms and insurance companies could not stop this piecemeal process of
deregulation through agency rulings. Edward Yingling, the CEO of the American
Bankers Association (a lobbying organization), said, “Because we had knocked so
many holes in the walls separating commercial and investment banking and insur-
ance, we were able to aggressively enter their businesses—in some cases more aggres-
sively than they could enter ours. So first the securities industry, then the insurance
companies, and finally the agents came over and said let’s negotiate a deal and work
together.”
In , Citicorp forced the issue by seeking a merger with the insurance giant
Travelers to form Citigroup. The Fed approved it, citing a technical exemption to the
Bank Holding Company Act, but Citigroup would have to divest itself of many
Travelers assets within five years unless the laws were changed. Congress had to make
a decision: Was it prepared to break up the nation’s largest financial firm? Was it time
to repeal the Glass-Steagall Act, once and for all?
