Market Rules

Bankers, Presidents, and the Origins of the Great Recession

Mark H. Rose

• Publisher: University of Pennsylvania Press
• Year: 2018
• ISBN:
  9780812295665
• Topic: History
• Subtopic: North American History
• Index: History

Although most Americans attribute shifting practices in the financial industry to the invisible hand of the market, Mark H. Rose reveals the degree to which presidents, legislators, regulators, and even bankers themselves have long taken an active interest in regulating the industry.In 1971, members of Richard Nixon's Commission on Financial Structure and Regulation described the banks they sought to create as "supermarkets." Analogous to the twentieth-century model of a store at which Americans could buy everything from soft drinks to fresh produce, supermarket banks would accept deposits, make loans, sell insurance, guide mergers and acquisitions, and underwrite stock and bond issues. The supermarket bank presented a radical departure from the financial industry as it stood, composed as it was of local savings and loans, commercial banks, investment banks, mutual funds, and insurance firms. Over the next four decades, through a process Rose describes as "grinding politics, " supermarket banks became the guiding model of the financial industry. As the banking industry consolidated, it grew too large while remaining too fragmented and unwieldy for politicians to regulate and for regulators to understand—until, in 2008, those supermarket banks, such as Citigroup, needed federal help to survive and prosper once again.Rose explains the history of the financial industry as a story of individuals—some well-known, like Presidents Kennedy, Carter, Reagan, and Clinton; Treasury Secretaries Donald Regan and Timothy Geithner; and JP Morgan CEO Jamie Dimon; and some less so, though equally influential, such as Kennedy's Comptroller of the Currency James J. Saxon, Citicorp CEO Walter Wriston, and Bank of America CEOs Hugh McColl and Kenneth Lewis. Rose traces the evolution of supermarket banks from the early days of the Kennedy administration, through the financial crisis of 2008, and up to the Trump administration's attempts to modify bank rules. Deeply researched and accessibly written, Market Rules demystifies the major trends in the banking industry and brings financial policy to life.

PART I

Lawmakers and Regulators

CHAPTER 1

Deregulation Before Deregulation: John Kennedy, Lyndon Johnson, and James Saxon

On September 6, 1960, presidential candidate John F. Kennedy “pledge[d] . . . an administration that will get this Nation moving again.” During his one thousand days in office, Kennedy’s growth prescriptions included tax reductions, accelerated spending for the military and space exploration, and reorganization of federal agencies as diverse as the Interstate Commerce Commission and the Securities and Exchange Commission. As yet another economy-expanding idea, Kennedy wanted regulators to make it easier for commercial bankers to write more loans. In the early 1960s, however, few in Congress were prepared to risk careers to advocate for looser bank regulations. Just as much, most bankers expressed no interest in changing the rules that guided taking deposits and writing loans. Bank executives were often “plodding and unimaginative, with a pronounced tendency to be hereditary,” a business historian later determined.¹ Kennedy, in other words, had few allies in his quest to change bank rules and speed economic growth.

Kennedy launched his quest to modify bank rules by appointing James J. Saxon to the post of comptroller of the currency. Although most Americans had never heard of the comptroller’s office, Saxon and his small staff actually served as the federal government’s principal bank regulator. The comptroller’s rules governed every banker operating with a federal charter; and the comptroller decided who received those charters.

Appointing Saxon to the comptroller’s post was only a modest first step in the long road to changing the way bankers operated. Nothing about Kennedy’s initiatives and the subsequent changes in bank regulations took place easily, and they certainly were never automatic in nature. Beginning in the late 1960s, a few bank officers, led by the gigantic First National City Bank’s Walter B. Wriston, joined with Saxon’s successors in the comptroller’s office and with sitting presidents to press their case for fewer restrictions in the way government permitted them to conduct business. Still other bankers opposed those changes. Bankers, it turns out, were rarely united on policy questions. But, most important, every president of the United States after Kennedy—from Lyndon B. Johnson in the 1960s to Donald J. Trump in 2017—looked for legislative and administrative devices to foster bank growth and the economic development judged certain to follow.

Words and ideas surely mattered in the quest to change bankers’ ways. In line with the favored words Americans used to talk about the economy, presidents and bankers like Wriston always cited abstractions such as a free market to describe the changes they wanted to bring about. But, in fact, the rules government officials and bankers put in place between 1961 and 2017 actually fixed the rules for those markets. Government made bankers’ markets; and persuading lawmakers and regulators to make those bankers’ markets still larger, faster, and then safer, it turns out, was a presidential project that endured across more than six decades. In order to understand the seeming paradox of bankers’ and lawmakers’ resistance to changes in the rules of the commercial banking that Saxon first brought into being, we first must understand the way that bankers conducted business at the start of the 1960s.

Conservative Bankers, Protective Lawmakers, and James J. Saxon

American bankers during the Kennedy era fashioned themselves both as the paragons of a capitalist economy and as sober evaluators of loan applications. Their loans allowed business owners and executives to purchase inventories, invest in new equipment, and meet payrolls. And in turn, bankers’ loans to businesses served as an important factor in the prosperity that millions of Americans enjoyed daily in the form of suburban homes, new automobiles, home appliances, and maybe even tickets on jet airplanes for holidays in Miami, Hawaii, and Europe. By this way of thinking, bankers served as the bedrock for a dynamic capitalism. During the1960s, only a few like Saxon dared to question the business decisions of sensible and respected bankers.

But the plain truth was that commercial bankers operated in a rule-bound environment created during the Depression era. In 1933, as noted earlier, members of Congress and President Franklin D. Roosevelt approved the Glass-Steagall Act. Bankers were to stick to the business of taking deposits and making loans, and they were to stay out of riskier areas like underwriting stock issues. The Glass-Steagall Act also required large banks that offered both checking and securities services to break in two. The great J. P. Morgan & Co., for example, emerged as Morgan Stanley & Co., an investment bank prohibited from offering checking accounts, and as J. P. Morgan & Co., a commercial bank barred from underwriting securities issues.²

State lawmakers piled on more rules. Illinois law prohibited executives at Chicago’s mighty First National Bank from opening branches in fast-expanding suburbs. Although sixteen states, including North Carolina and California, permitted in-state branching, legislatures and regulators in eighteen states, including Texas and Illinois, prohibited branch offices. First National Bank executives or executives at any bank operating under a federal charter also needed federal regulators’ approval to merge with a bank located in that state or even up the street. In the early 1960s, some 13,500 commercial banks operated in the United States, but officers of no more than 100 competed for large corporate deposits in other states. Small banks, with limited capital, offered services in their towns and neighborhoods.

Additional rules fixed bank practice in considerable detail. Federal officials determined the interest rate bankers paid savers, which eliminated price competition among them. In short, law, regulation, and custom largely fixed bankers’ way of conducting business. Those laws and customs in turn applied with equal force in the decisions of officers at the smallest, farm-belt banks as well as among executives at the nation’s largest banks, such as San Francisco’s Bank of America and New York’s First National City Bank. (In 1976, Walter Wriston changed his firm’s name to Citibank.)

Most bankers in turn endorsed those tight restrictions in theme and detail. Heads of the largest banks, including David Rockefeller at the storied Chase Manhattan Bank, participated willingly in a regulatory system that guided them toward steady growth, predictable profits, and security for capital. In 1960, the sixty-story Chase Manhattan headquarters opened across the street from the Federal Reserve Bank of New York, putting in concrete and spatial terms the mostly cooperative relationships between Chase’s officers and powerful Federal Reserve officials. Again, whether among most bankers or public officials, to think about a substantial reworking of these time-honored rules about interest rates and nationwide branch banking was to think the unthinkable.

Congress was not the place to amend these rules. Congressional leaders had regularly pledged their support to the maintenance of these many regulations. Starting in 1929, as a critical example, Rep. Wright Patman (D-TX) kept a wary eye open for any effort to modify the rules that threatened his small-town bankers, local businessmen, and their farm customers. In 1933, Patman was among the members who approved the Glass-Steagall Act, forcing commercial and investment bankers to break their firms in two and stop doing business with each other. In 1956, members of Congress, including Patman, tightened bank rules again. To reinforce the protection that state boundaries offered bankers, members of Congress determined that a banker seeking business in another state would have to be invited in by the legislature, which would surely not prove an easy undertaking. “We have boarded up the big hole in the barn door,” one of the congressional supporters announced.³ The Glass-Steagall Act of 1933 and the 1956 legislation set the framework within which bankers operated when Kennedy took office. And yet, as one of the curious idioms of American life, bankers along with most Americans included banking as another example of their much-extolled system of free enterprise.

Kennedy inherited this rule-bound system. The new president, who had promised to speed up a sluggish economy, was not about to invest limited resources to launch a frontal assault on self-satisfied bankers, state lawmakers, and avid congressional watchdogs like Patman. Since World War II, the president was the economic commander in chief, but members of Congress had never created devices to enable the president to take a direct role in economic development. And besides, no one could say for certain—at least based on hard evidence—that loosening restrictions on bankers to merge and open branches would speed the economy’s growth. During the late 1920s, the last time it was attempted, the nation fell into depression and millions lost their homes and savings. Three decades later, President Kennedy was willing to try out the idea of fewer restrictions once again. But he mostly had to go it alone. He chose to proceed slowly and carefully in the face of wide and deep opposition.

Kennedy selected a path of indirection to speed up banking and the larger economy. He would bring about changes in banking by making a key appointment. In November 1961, Kennedy invoked the mighty authority of the presidential office to appoint James J. Saxon as the nation’s comptroller of the currency. Saxon was forty-seven years old. He had earned an undergraduate degree at St. John’s College in Toledo, where he grew up. Later, Saxon graduated from Georgetown University’s law school. Saxon also took graduate level courses in economics and finance at Catholic University. By 1966, according to a New York Times writer, the “pugnacious” Saxon had “shaken the financial world” during his term as comptroller.⁴

At quick glance, the comptroller’s office was an unlikely place from which to launch a challenge to bank rules and bankers’ habits built up since Glass-Steagall’s passage nearly three decades earlier. In 1863, members of a Civil War Congress had created the Office of the Comptroller of the Currency to oversee the new system of national banks. The comptroller’s office operated as a largely independent agency within the Department of the Treasury. A century later, the comptroller remained among the federal government’s chief bank regulators, alongside the Federal Reserve and the Federal Deposit Insurance Corporation. In several areas, the comptroller was the first among equals. The comptroller approved every national bank charter. Later, the comptroller’s examiners inspected those banks’ books for compliance with federal law and the comptroller’s rules. The understaffed comptroller’s office was obscure, potentially powerful, and susceptible to a strong administrator’s shaping directions.

In Kennedy’s savvy hands, Saxon’s appointment as comptroller offered a lonely outpost in his plan to speed up banking without having to work with Congress or seek to overcome standpat bankers and intransigent lawmakers like Congressman Patman. To be sure, the Senate had to consent to Saxon’s appointment, which was for the standard five-year term. But the comptroller’s office was financially independent. To pay employees and maintain the office, the comptroller levied semiannual assessments on member banks. Those same member banks also paid examination fees to the comptroller. Saxon was financially independent of Congress. Meddlesome congressmen, such as Wright Patman, lacked a direct path to control Saxon or another comptroller who headed off in new directions. Like any federal regulator, moreover, federal law and court holdings largely awarded deference to the administrator’s determinations. In other words, the comptroller’s office contained the potential for legal innovations. Up to Saxon’s appointment, however, his predecessors had chosen not to expand their boundaries, much like the bankers they regulated. Saxon, once installed in office, was supposed to foster changes in bank rules that sped economic growth. Presidential authority and Saxon’s administrative discretion would substitute for bankers’ inaction and congressional obstruction. Kennedy no doubt hoped that Saxon would somehow prevail in the fearsome politics sure to follow his appointment. Several years later, according to a Time magazine reporter, Saxon remembered simply that Kennedy had urged him to “start stirring things up.”⁵

On September 21, 1961, Kennedy submitted Saxon’s name and background materials to the Senate for confirmation. Saxon’s career, which started in the Depression, had followed a series of upward steps. Beginning in 1937, Saxon worked in the U.S. Treasury Department, where by 1952, he served as assistant to the secretary. Between 1952 and 1956, Saxon was assistant general counsel to the American Bankers Association (ABA), with headquarters located in Washington, D.C. The ABA was a trade association that represented bankers before Congress and regulatory agencies. Saxon’s assignments included tax and other legislative issues. Starting in 1956, Saxon took up the post of counsel to the First National Bank of Chicago, the city’s largest bank. Up to 1961, Kennedy had not known Saxon. But Saxon enjoyed the support of C. Douglas Dillon, Kennedy’s secretary of the treasury, and his undersecretary, Robert V. Roosa.⁶ In 1961, as Saxon headed for his office in the Treasury Department building across from the White House, he had accumulated more than two decades’ experience in the complementary realms of litigation, lobbying, bank operations, and federal and state bank politics.

Saxon Goes to Work

James Saxon had exchanged a well-paid, prestigious, and influential post at Chicago’s First National Bank for the limited authority and visibility that inhered in a lowly and largely unknown federal office. In late 1961, about 1,200 employees worked in the comptroller’s office, including 1,000 bank examiners in the field and some 196 employees located in Treasury Department offices. With such a small staff, including only five deputies, any comptroller’s ability to learn about bank conditions, assess merger and branch applications, revise bank rules, and enforce administrative orders was necessarily limited. The former comptroller had approved several large mergers and, with the ensuing tumult, had to leave the office early.⁷ Saxon, nevertheless, made merger applications his first order of business.

Saxon held his first merger hearing on December 4, several days after taking office. That hearing spotlighted Saxon’s determination to reorganize the banking landscape in major ways. The case before him was whether First National City Bank of New York (where Walter Wriston won promotion to president in 1967) and the National Bank of Westchester, White Plains, New York, deserved the comptroller’s approval to merge operations. Again, every merger between banks holding national charters required the comptroller’s approval in advance. First National City was New York’s second largest bank, behind Rockefeller’s Chase Manhattan, and the nation’s third largest. But in 1961, officials at the Federal Reserve as well as Attorney General Robert F. Kennedy opposed the merger. Those officials used words such as “undue concentration” and monopoly. Saxon, seeking to demonstrate his office’s independence in public, sent objections to the merging banks’ attorneys for reply at the hearing. Saxon was supposed to take account of views supplied by the attorney general, the Federal Reserve, and the Federal Deposit Insurance Corporation, but authority to approve the merger in the first instance rested squarely and exclusively in Saxon’s hands.⁸ Legally speaking, however, the attorney general could file a lawsuit to block this merger or any other. Saxon’s responsibilities existed as part of a regulatory regime that allowed top officials to operate at cross-purposes.

Saxon denied the merger request. Antitrust ideals such as those put forward by the attorney general and Federal Reserve leaders, he contended, had played no part in his decision. The National Bank of Westchester already operated twenty-six branches. Larger banks brought improved banking services and lower costs, Saxon explained to members of the Federal Reserve Board on January 22, 1962. Yet Saxon wanted that growth to take place gradually rather than instantly through merger. The arrival of First National City and ot...

Table of contents

• Cover
• Half title
• Title
• Copyright
• Contents
• Dedication
• Preface
• Introduction. Politics and the Markets They Made
• Part I. Lawmakers and Regulators
• Part II. Bankers in Politics
• Part III. New Regimes For Bankers
• Epilogue. Another Round of Bank Politics
• Notes
• Index
• Acknowledgments