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. Both times, 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 their undeniable "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 universal banks 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.

"This book uses a chronological and narrative approach and draws on a wide range of sources. It demonstrates that universal banks - which accept deposits, make loans, and engage in securities activities - played central roles in precipitating the Great Depression of the early 1930s and the Great Recession of 2007-09. Universal banks promoted a dangerous credit boom and speculative stock market bubble in the U.S. during the 1920s, which led to the Great Depression. Congress responded by passing the Glass-Steagall Act of 1933, which separated banks from the securities markets and prohibited nonbanks from accepting deposits. Glass-Steagall's structural barriers prevented financial panics from spreading across the banking, securities, and insurance sectors for more than four decades. Regulators could address problems arising in one financial sector without needing to bail out the entire financial system. Large U.S. banks pursued a twenty-year campaign to remove Glass-Steagall's barriers. Regulators opened loopholes in Glass-Steagall during the 1980s and 1990s, and Congress repealed Glass-Steagall in 1999. The United Kingdom and the European Union adopted similar deregulatory measures. Large U.S. securities firms became "shadow banks" as regulators allowed them to issue short-term deposit substitutes to finance long-term loans and investments. Universal banks and shadow banks fueled a toxic subprime credit boom on both sides of the Atlantic during the 2000s, which led to the Great Recession. The limited reforms that followed the Great Recession did not break up universal banks and shadow banks. Those reforms left in place a financial system that is prone to excessive risk-taking and vulnerable to contagious panics. A new Glass-Steagall Act is urgently needed to prevent another systemic crisis and restore a more stable and resilient financial system"--

"[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." -- Saule T. Omarova, Cornell Law School, JOTWELL

"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" -- Joseph A. Smith Jr., Global Financial Markets Center, The FinReg Blog

"Taming the Megabanks is a rare gem in financial regulation scholarship. It is both magisterial in its scope and urgent and compelling in framing a vital policy debate. This book is meticulous in its legal analysis, while providing a sweeping and lucid narrative of decades of transformation in the
financial industry. Arthur Wilmarth provides a vital book for policymakers, scholars, students, and citizens looking to understand what went wrong with financial regulation and where law and policy need to go. They don't make scholars like him anymore." -- Erik F. Gerding, Professor of Law and
Wolf-Nichol Fellow, University of Colorado Law School

"Taming the Megabanks is an enormous contribution to understanding the two most financially destructive banking crises in recent America history: The Great Depression and the Great Recession. It describes the role megabanks played in each instance, and despite reforms that followed, illustrates the
need to make these powerful institutions more accountable for their actions. This is a must-read book for anyone wanting to understand and improve the American banking system." -- Thomas Hoenig, Distinguished Senior Fellow, Mercatus Center at George Mason University

"Arthur Wilmarth's magnificent magnum opus bears witness to Santayana's words: 'Those who cannot remember the past are condemned to repeat it.'Through careful and exacting research, Wilmarth exposes our country's repeated experiments with mixing banking with securities underwriting and the disasters
that ensued. A must-read, this important book is by an expert who bravely warned about the dangers of too-big-to-fail long before mainstream policymakers took those dangers seriously." -- Patricia A. McCoy, Liberty Mutual Insurance Professor, Boston College Law School

"Arthur Wilmarth, a leading scholar of financial regulation, has written a comprehensive and riveting narrative of big banks since the early 1900s. His warnings are authoritative and timely." -- Frank Partnoy, Professor of Law, University of California Berkeley School of Law

"The book brilliantly takes the reader through a riveting guided tour covering the past century and the resurrection of this same disastrous U.S. banking model in 1999....We can envision it becoming one of the most important works of this century...Wilmarth's writing is so insightful and profound in
its analysis of the similarities between the banks of the late 1920s and today that it feels like the ghost of Ferdinand Pecora might have been whispering in Wilmarth's ear." -- Pam Martens and Russ Martens, Wall Street On Parade

"Arthur Wilmarth's new book calling for a new Glass-Steagall law is timely, and critical...It's time for Glass Steagall, and I strongly recommend this book." -- Nancy Spannaus, Author of Hamilton Versus Wall Street: The Core Principles of the American System, American System Now