Strong Managers, Weak Owners: The Political Roots of American Corporate Finance

By Mark J. Roe | Go to book overview

CHAPTER 4
A Political Theory

THE FIRST STEP in the political paradigm is to show that law restricted the dominant financial institutions from the end of the nineteenth century onward. American banks were fragmented geographically, lacking the size to take big slices of capital of the large American firms emerging at the end of the nineteenth century. Banks' products and portfolios have been further restricted: they were barred from the securities business and from owning stock. Their affiliates were also restricted in the stock they could own. Insurers could not buy stock for most of this century. Mutual funds cannot easily devote their portfolios to big blocks and face legal problems if they go into the boardroom. Pensions cannot take very big blocks without legal and structural problems; the big private pensions are under managerial control, not the other way around.

The second step is to show that these rules were neither random nor economically inevitable. While public interest goals of keeping financial intermediaries prudent and stable explain some of the rules, they do not explain all of them. Two dominant themes lay behind many of the rules: American public opinion, which mistrusted private large accumulations of power, and interest group politics. There were winners in fragmenting financial institutions. These winners had a large voice in Congress, and their goals matched public opinion. For example, small banks wanted to shackle large ones and succeeded in getting and keeping branching limits, bans on banks in the securities business, bans on bank affiliates' moving outside of banking, and deposit insurance (which, by guaranteeing depositors that they will be paid if the bank fails, helps smaller, weaker banks more than it helps more solid, often bigger banks).1 Investment bankers later sought to thwart commercial bankers' effort to enter the securities business.2 Public interest rationales were invoked, but cannot explain the results fully. Foreign banks have so far survived without Glass-Steagall (in Germany, for example), without branching limits (in most of the world), and without American banks'

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1
Donald Langevoort, Statutory Obsolescence and the Judicial Process: The Revisionist Role of the Courts in Federal Banking Regulation, 85 Michigan Law Review 672, 694 (1987). Other interest groups could have been in play. See infra chapter 7.
2
Cf. Jonathan Macey, Special Interest Group Legislation and the Judicial Function: The Dilemma of Glass-Steagall, 33 Emory Law Journal 1 (1984); Investment Co. Institute v. Camp, 401 U.S. 617 (1971); Securities Industry Ass'n v. Federal Reserve Board, 807 F.2d 1052 (1986).

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