occurs; (4) bailout follows.
The S&L scandal should have screamed at regulators and Congress to pay attention and tighten up bank regulations. If they had, the next round of problems with banks crashing the economy would have been stopped before it started. But the politicians didn’t want to hear it. (I guess it’s hard to hear when your ears are stuffed with money.) The banks—particularly the giant banks—kept pushing for less and less oversight, and the politicians followed right along.
Instead of sobering up in the aftermath of the crisis, the big banks charged ahead. Their target: Glass-Steagall. Licking their chops over the chance to combine boring banking (and all the money in those checking and savings accounts) with high-risk financial speculation, the banks lobbied to pull down one of the pillars of our financial system. And they didn’t worry about the fallout. They figured that if anything went wrong, the government would step in and make sure that all those little depositors were protected—and in the process, the government would protect the big banks as well. Throughout the 1980s and into the 1990s, high-paid lobbyists aggressively attacked a wide array of financial regulations. Over time, they targeted one brick after another in the wall that separated banks from Wall Street trading, and, over time, the bank regulators caved in again and again. In 1999, the few remaining provisions of Glass-Steagall were repealed.
The results were immediate. Big banks grew into giant banks, and giant banks grew into monsters. In 1980, the ten biggest banks in America controlled less than one-third of the market; by 2000, they had captured more than half the market, and by 2005, their share had risen to almost 60 percent. By 2008, just five uber-banks controlled 40 percent of the market. Through it all, bank CEOs displayed a boldness that would have put a medieval royal prince to shame.
Take a look at just one example. In 1998, when Citicorp decided that it wanted to merge with a giant insurance company, the two corporations faced a teeny-tiny problem: the merger would be illegal. Such a bank-nonbank merger would violate the existing provisions of Glass-Steagall and other banking laws that had been in place since the 1930s. But why should these princes of finance let mere federal law slow them down? Laws were for the little guys, and these CEOs were bound for greatness. If the two companies joined together, it would be the biggest merger in history. The two finance giants reflected a bit, and then very deliberately, very publicly, and very illegally, they merged their companies, confident that a compliant Congress would change the law after the fact.
And, wow, did they get it right: a subservient Congress did just what it was told to do. In 1999, after the repeal of Glass-Steagall, the big-time financial world got even riskier and—for a while—even more profitable.
In the same way that some Republicans had signed on for greater regulations in earlier decades, some Democrats now got on the deregulation bandwagon big-time. As he signed the repeal of Glass-Steagall, President Bill Clinton cracked a few jokes, then praised the move for “making a fundamental and historic change in the way we operate our financial institutions.” He had fought for the repeal, and now he claimed victory: “It is true that the Glass-Steagall law is no longer appropriate to the economy in which we live.” As he presciently explained, it will help “expand the powers of banks.”
AROUND THE TIME Congress and the bank regulators were rolling over and playing dead for the big banks, I was in Massachusetts, teaching at Harvard and studying another sign of danger in the American economy: during the 1990s, American families had been loading up on debt. Credit card companies were making their products more and more complex. Credit card agreements that back in 1981 had been about a page and a half long had morphed into contracts that ran to thirty pages of tiny type by the early 2000s. Increasingly, the agreements were larded with obscure legal terms, hidden tricks, and bizarre accounting practices. Ultimately, some members of Congress became concerned. During one hearing, laughter broke out as credit card executives were called on to explain certain incomprehensible terms.
But there was nothing funny about the effects of this rising spiral of debt on working people. Banks and credit card companies encouraged families to get in way over their heads, and predatory contracts trapped people into years of staggering fees and astronomical interest rates. Credit cards were handed out like candy, and they soon began producing tens of billions of dollars in profits for their issuers. Newspapers and radios regularly reported lighthearted stories about a baby, a dog, or a cat that had been issued its own preapproved card.
The numbers I was coming up with in my research were so alarming that I started looking for more ways to get the word out—speeches, articles, op-eds, interviews, and pretty much anything else I could think of. One day in 2005, I got a phone call and was asked a surprising question: Would I please come to Washington to meet with the regulators at the Office of the Comptroller of the Currency?
Woo-hoo! This was the big-dog bank regulator, the cop that had authority to tell many of the biggest credit card issuers in the country to cut it out. Really. This was an agency that could eliminate tricks and traps from millions of credit cards. Oooh, this could be fun.
I flew to Washington on a cloudy February day. I’d never been to the OCC offices, which were sleek and modern. The acting comptroller, Julie Williams, welcomed me in the lobby and waved me through security. Upstairs, we visited for a few minutes in her office, which was outfitted with elegant modern furniture. No standard-government-issue, banged-up stuff here. Everything had a cool, well-designed look.
Acting comptroller Williams—“call me Julie”—was tall and thin, with a fashionably short haircut and an elegant cashmere jacket. She had ramrod-straight posture and an intense stare. She always kept her voice at a low volume, but every word was carefully weighed and measured for maximum impact. Here was a woman who would never disrupt markets with so much as a misplaced syllable.
Julie led me to an elevator and then to a large conference room, where she introduced me to a big group of OCC economists and bank supervisors. In these pre-PowerPoint days, I had assembled a presentation that relied on transparencies and an overhead projector. For over an hour, I carefully went through my data. First I demonstrated the increasingly precarious position of millions of American families; next I provided abundant evidence that the banks were boosting their profits by tricking many of the people who were borrowing money from them. Even when giving an academic presentation, I could get pretty wound up—and even in a room full of sober government officials, I didn’t hold back. Cheaters are cheaters.
The economists and supervisors had lots of questions. They were engaged and thoughtful, and I stayed until the last person had asked the last question. Finally I picked up my slides. I was exhausted, and I needed some water.
Julie and I headed back to her office to pick up my backpack. As we stepped into the elevator, she said that I had made a “compelling case” that credit card debt was creating serious problems.
For a moment I closed my eyes: yesssss! My fatigue evaporated. This was exactly what I wanted: the regulator in chief had recognized that there was a problem! I couldn’t wait to hear her confirm that she would put some of the OCC’s thousands of employees to work investigating these shady practices and reining in some of the predators. I had worked so hard on these data, and now they were going to have an impact. I was ready to break out my dancing shoes.
Then Julie gave a small, sad smile. She said it was just too bad.
I waited several
