Crashing the 'Deregulation Party': A Blast from Fernand St Germain

American Banker, March 5, 1984 | Go to article overview

Crashing the 'Deregulation Party': A Blast from Fernand St Germain


As long as most of us can remember, there has been a steady drumbeat by banks and other depository institutions demanding an opportunity to reshape and expand their spheres of influence in the U.S. economy.

The effort has tekan many forms. In the 1960s, the brightest of the bright lawyers in the indusry urged their clients to make creative use of the exemption in the Bank Holding Company Act for those companies with only one bank -- an exemption thought to be limited to relatively small, passive holding companies.

But in the expansive mood of the late 1960s, the big banks started leaping through loopholes, and suddenly we found heretofore staid institutions owning everything from pizza parlors to manufacturing and oil concerns. The longstanding separation of commerce and banking was about to crumble.

Alarmed about these shotgun marriages of commerce and banking and the potential for a greater concentration of economic power, Congress plugged the loophole in a bitter legislative battle that extended over 1969 and 1970. No longer could holding companies mix the vast credit powers of a bank with the control of nonbanking businesses.

Like all legislative loophole closings, it was less than airtight, but it did sharply limit the activity and essentially maintained the banking/commerce separation--in some cases by actually requiring a divestiture of nonbanking acquisitions. The Expansionists Kept Fighting

This setback didn't stop the expansionist element in the financial community. Their appetite was growing, amendments to the Holding Company Act and congressiuonal intent notwithstanding.

Not only was the Glass-Steagall fence being probed for weaknesses, but the laws limiting geographical expansion were under constant attack. A loan production office here, an industrial bank there, or, where all else fails, an emergency acquisition or an appeal to a friendly state legislature as Mr. McFadden turns over in his grave.

Deregulation, a phrase that didn't even appear in popular dictionaries two decades ago, suddenly became the buzzword of the 1980s.

With an almost fundamentalist religious fervor, we are told to accept it, to support it, to bask in it. like the oldtime patent medicine salesmen, the proponents of deregulation peddle the deregulation tonic as a cure-all for everything from in-grown toenails to sagging balance sheets. No Thoughts of the Morning After

No one defines it, no one seems able to talk about the bottom line, no one can draw a clear picture of the shape of the financial community once the last drop of the deregulation tonic has been drained from the bottle. Certainly, some of the early swigs make the patient seem awfully lively, and thoughts of tomorrow morning's hangover are pushed aside. The party is going full blast, and talk of moderation isn't popular.

The worst question that can be asked is "What does this Deregulation Party do for the uninvited -- the American public?" As the deregulation bottle gets passed one more time, we're simply told, "Oh, it's good for the people -- if we like it, they'll like it."

When the euphoria wears off and the din of the party becomes a dull roar, the public may well demand a fuller, more specific explanation of its benefits before it pays for and sends in another supply of the deregulation tonic. The party-goers should realize that.

It is true that the Deregulation Party began under the friendliest of circumstances. The depository institutions, anxious to get the party under way, could point to their nonbank competitors that had already launched ad hoc parties of their own. They could point to rapid change, new demands, and a fast-moving technology in the marketplace. And they could point to the gurus of an administration that believes that the marketplace is a holy place. Black Tie Only?

Many think the climate for deregulation was never better. …

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