The debate over the political power of business has witnessed a revival after the global financial crisis of 2007—2009. We begin by arguing that business political fragmentation or unity has important consequences for policy outcomes. The structure of the U.S. government is conducive to incremental policy changes, often in response to business pressures. In turn, these changes shape the political interests and alliances of business. We illustrate this dynamic through an analysis of the political processes leading to the enactment of the Financial Modernization Act (FMA) of 1999, which repealed Depression-era regulations and allowed commercial banks to enter the securities and insurance business and vice versa. The FMA condoned the emergence of largely unregulated diversified financial institutions, which proved “too big to fail” during the crisis. Several factors contributed to the FMA: political institutions, international competition, the ideological convergence of the Republican and Democratic parties, and the political interests of financial industry actors.
Senator Bill Graham(R-TX), cosponsor of the Financial Modernization Act of 1999, as quoted in Stephen Labaton, "Congress Passes Wide-Ranging Bill Easing Bank Laws,"New York Times, November 5, 1999.
2.
Senator Byron Dorgan (D-ND), as quoted in Ibid.
3.
Even though FMA went beyond the repeal of a section of the Glass-Steagall Act of 1933 and also amended the Banking Act of 1954, the 1999 law is commonly referred to as the repeal of Glass-Steagall. Unless otherwise noted, we use FMA, Financial Modernization Act, and repeal of Glass-Steagall interchangeably.
4.
With regards to our print media sources, we decided to rely primarily on coverage by CQ Weekly Online and the New York Times. The former has in-depth coverage of legislative processes and a Lexis-Nexis search revealed that the latter had the most extensive coverage of the political deliberations both in length and number of articles.
5.
Mauro F. Guillén and Sandra L. Suárez, "The Global Crisis of 2007-2009: Markets, Politics and Organizations,"Research in Organizational Behavior30 ( 2020): 270.
6.
As quoted in David Hosansky , "The Art of Business Lobbying Finding a Profit in Regulation,"CQ Weekly Online, April 18, 1998.
7.
Margaret Weir, Ann Shola Orloff, and Theda Skocpol, The Politics of Social Policy in the U.S (Princeton, NJ : Princeton University Press, 1988 ).
8.
Paul Pierson , "When Effect Becomes Cause: Policy Feedback and Political Change,"World Politics45, no. 4 (1993): 601-02. See also Ernesto Dal Bó, "Regulatory Capture: A Review,"Oxford Review of Economic Policy, 22, no. 2 ( 2006): 203-25 and Daniel Hardy, "Regulatory Capture in Banking" (IMF working paper, no. 06/34, 2006 ).
9.
Pierson, "When Effect Becomes Cause,"598-602. See also Jacob S. Hacker and Paul Pierson, "Business Power and Social Policy: Employers and the Formation of the American Welfare State,"Politics & Society30 (June 2002): 286.
10.
Richard Deeg and Suzanne Lütz, "Internationalization and Financial Federalism,"Comparative Political Studies, 33, no. 3 (2000): 376. See also Dale Murphy, The Structure of Regulatory Competition (Oxford: Oxford University Press, 2004).
11.
Nathaniel Nash , "Treasury Now Favors the Creation of Huge Banks,"New York Times, June 7, 1987.
12.
See Sang Rim Choi, Daekeun Park, and Adrian Tschoegl, "Banks and the World’s Major Banking Centers,"Financial Institutions Center, The Wharton School, 2002.
13.
James Barth , Dan Brumbaugh, and James Wilcox, "The Repeal of Glass-Steagall and the Advent of Broad Banking,"Journal of Economic Perspectives14, no. 1 ( 2000): 191-204.
14.
Gary Cox and Matthew McCubbins, Setting the Agenda: Responsible Party Government in the U.S. House of Representatives (New York : Cambridge University Press, 2005 ).
15.
Thomas Ferguson , The Golden Rule: The Investment Theory of Party Competition and the Logic of Money-Driven Political Systems ( Chicago: University of Chicago Press, 1995).
16.
Roger Altman and Lawrence Summers, "The Democrats: Better for Business,"Wall Street Journal, October 31, 1988.
17.
Republican Party Platform, 1984.
18.
Democratic Party Platform, 1984.
19.
Democratic Party Platform, 1988.
20.
Democratic Party Platform, 1992.
21.
See The Economist, "Banking on Greenspan," June 1, 1987 and John Yang, "Greenspan is Expected to Break Down Banking Limits that Volcker Espoused, Wall Street Journal, June 4, 1987.
22.
Jeffrey Berry, The Interest Group Society (Glenview, IL: Little Brown, 1997).
23.
See Charles Lindblom, Politics and Markets (New York: Basic Books, 1977) and Jack Walker, Mobilizing Interest Groups in America (Ann Arbor: University of Michigan Press, 1991), 53.
24.
Lindblom, Politics and Markets.
25.
Berry, Interest Group, 81.
26.
James Q. Wilson, Political Organizations ( Princeton, NJ: Princeton University Press, 1995), 183.
27.
See, for example, Holman Jenkins, "Business Hooray for Soft Money,"Wall Street Journal, October 27, 1999.
28.
Sandra Suárez , Does Business Learn?Tax Breaks, Uncertainty and Political Strategies (Ann Arbor: University of Michigan Press, 2000), 7.
29.
Lori Nitschke(former banking correspondent for CQ Weekly) , personal interview, April 28, 2010.
30.
Pierson, "When Effect Becomes Cause."For the impact of political parties and party entrepreneurs on business political behavior see Cathie Jo Martin, "Business and the New Economic Activism: The Growth of Corporate Lobbies in the Sixties , Polity27, no 1 (1994): 19-43 and Andrew Polsky, "When Business Speaks: Political Entrepreneurship, Discourse and Mobilization in American Partisan Regimes, Journal of Theoretical Politics42, no. 4 (2000): 455-76.
31.
There were many more decisions made by regulatory agencies and the courts than the ones we discuss here, but we have chosen to emphasize the ones that seemed to have the most important consequences for the eventual repeal of Glass-Steagall, because of the impact they had on the marketplace and on the political interests of financial industry actors.
32.
Jacqueline Calmes , "Loopholes Closed but Deregulation Differs,"CQ Press Online, June 20, 1984.
33.
Arthur Wilmarth , "The Transformation of the U.S. Financial Services Industry, 1975- 2000,"University of Illinois Law Review2002, no. 2 (2002): 215-476. The Latin American debt crisis in 1982 further deteriorated their bottom line.
34.
John Torell III, Manufacturers Hanover Trust Vice Chairman as quoted in ABA Banking Journal, "Push on Glass-Steagall Grows,"ABA Banking Journal (October 1981): 229.
35.
See for example, "More Issues on the Financial Playing Field,"ABA Banking Journal (September 1980), 8; Joseph Asher, "The Turbulent 1980s,"ABA Banking Journal (September 1980): 49; and Joseph Asher, "Glass-Steagall: A Fresh Look,"ABA Banking Journal (February 1981): 62-70.
36.
Arthur Wilmarth , "The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis, Connecticut Law Review41, no. 4 (2009): 963-1050.
37.
See for example, Marilyn Much, "Global Markets Tempt CDOs,"Industry Week, May 18, 1987; David Clark Scott, "Foreign Banks See a Land of Plenty and US Bankers Squirm,"Christian Science Monitor, March 20, 1987.
38.
As quoted in Nash, Nathaniel Nash, "Treasury Now Favors the Creation of Huge Banks,"New York Times, June 7, 1987 .
39.
CQ Weekly Online, "Greenspan Urges Repeal of Glass-Steagall," November 21, 1987.
40.
John Cranford, "Senate Prepares to Debate Bank Power,"CQ Weekly Online , November 28, 1987.
41.
Edward J. Kelly as quoted in John Cranford , "Bank Failure, Scandals Spurred Passage of the Depression-Era Glass Steagall Act,"CQ Weekly Online, April 2, 1988.
42.
As quoted in John Cranford"Senate Prepares." See also "Bank Deregulation: A Debate Over ‘Fire Walls,’"CQ Weekly Online1987.
43.
As quoted in John Cranford, "Senate Panel Approves Bank Deregulation,"CQ Weekly Online, March 5, 1988.
44.
As quoted in The Globe Mail, "Securities Industry Group Attack Fed’s Banking Ruling,"The Globe Mail (Canada), February 11, 1989.
45.
International Banking Report, "SIA Tries to Bar Citibank from Mortgage-Backed,"International Banking Report, March 1, 1989.
46.
American Banker, "The Top 500 Banks in the World," July 11, 1989.
47.
Kurt Eichewald , "A Reversal by Brokers On Banks,"New York Times, December 2, 1989.
48.
Choi, Park, and Tschoegl, "Banks and the World’s Major Banking Centers."
49.
John Cranford , "Big Banks Win First Round Pursuit of New Powers,"CQ Weekly Online, June 29, 1991.
50.
As quoted in John Crawford, "Fate of Overhaul in Doubt as Conflicts Solidify,"CQ Weekly Online, September 21, 1991.
Leslie Wayne , "Bank Barriers Resist Foes,"New York Times, September 18, 1991.
53.
Leslie Wayne , "As Bank Legislation Evolves, Bankers Worry,"New York Times, September 30, 1991.
54.
Stephen Labaton , "Congress Takes Up Banking Bills,"New York Times, September 17, 1991.
55.
John Bader, Taking the Initiative: Leadership Agendas in Congress and the "Contract with America" (Washington, DC: Georgetown University Press, 1996).
56.
A "subsidiary" of a bank is owned by the bank, which is, in turn, owned by a bank holding company. An "affiliate" of a bank is owned by the holding company, not the bank.
57.
Andrew Taylor , "Reversal Pleases Insurance Industry,"CQ Weekly Online, June 10, 1995.
58.
As quoted in Andrew Taylor"Committee Approves ‘Narrow’ Glass-Steagall Rewrite,"CQ Weekly Online, May 13, 1995.
59.
George Hager, "Banking: Congress, Administration Agree on Finance Industry Reform,"CQ Weekly Online, March 4, 1995; and Andrew Taylor, "Once Again, House Panel Bids to Revamp,"CQ Weekly Online, April 29 1995.
60.
Andrew Taylor, "Disputes Over Regulatory Relief May Put Bill on ‘Crash Course,’"CQ Weekly Online, June 24, 1995.
61.
Andrew Taylor, "Cleft Between Agents, Big Banks Mires Glass-Steagall Rewrite,"CQ Weekly Online, July 29, 1995; and "Bankers’ Opposition Stalls Glass-Steagall Rewrite," CQ Weekly Online , October 21, 1995.
62.
As quoted in Taylor, "Bankers’ Opposition."
63.
Lori Nitschke(former banking correspondent for CQ Weekly) , personal interview, April 28, 2010.
64.
Michael Barone and Grant Ujifusa, "Iowa: First District," in The Almanac of American Politics1996 (Washington, DC: National Journal Groups, 1995): 509; and Andrew Taylor, "Banking: Fed Suggests Expanding Securities Operations,"CQ Weekly Online, August 3, 1996.
65.
Andrew Taylor, "Under Treasury Plan, Congress to Decide Tough Issues,"CQ Weekly Online, May 24, 1997.
66.
Andrew Taylor , "Wall between Financial Services Dealt First Blow in the House,"CQ Weekly Online, June 21, 1997.
67.
David Hosanky , "Banking Lobby Flays Rewrite of Financial Services Law,"CQ Weekly Online, October 25, 1997.
68.
For a synopsis of the year’s consolidation activity see Richard Siklos, "Banks Shift Their Paradigm,"Financial Post (Canada), December 27, 1997.
69.
As quoted in Courier Mail, "US Merger Extends Trend,"Courier Mail (Australia), February 7, 1997.
70.
As quoted in David Hosansky, "Paralyze Congress on Sidelines in Financial Services Evolution,"CQ Weekly Online, September 27, 1997.
71.
As quoted in Peter Truell, "More Pressure Seen on Big Banks to Acquire Securities Firms,"New York Times, April 7, 1997.
72.
New York Times, "State Farm Plans Banking Subsidiary," July 1, 1997.
73.
Peter Truell , "A Wall Street Behemoth,"New York Times, September 25, 1997.
74.
Lori Nitschke , "House Panels Inch Toward Deal on Financial Services Overhaul,"CQ Weekly Online, March 7, 1998.
75.
Lori Nitschke , "GOP Touts ‘One-Stop’ Shopping as Key Benefit of Overhaul Bill,"CQ Weekly Online, March 21, 1988.
76.
As quoted in David Hosanky, "The Art of Business Lobbying Finding Profit in Regulation,"CQ Weekly Online, April 18, 1998.
77.
American Banker , "Verbatim: Fed as Umbrella Regulator Would Stifle Fund Firms," April 2, 1998.
78.
Janet MacFarland and Susanne Craig, "Merger Spawns Financial Giant Citicorp,"Globe and Mail (Canada), April 7, 1998 .
79.
See Timothy O’Brien and Joseph Treaster, "Shaping a Colossus: The Overview"New York Times, April 7, 1998; Leslie Wayne, "Shaping a Colossus: The Politics,"New York Times, April 8, 1998; and Dean Anason, "Citicorp Decides to Back House Reform Bill,"American Banker, April 16, 1988 , 4.
80.
Testimony of Governor Laurence H. Meyer"Mergers and Acquisitions in Banking and other Financial Services," before the Committee on the Judiciary, U.S. House of Representatives, June 3, 1998.
81.
Ibid.
82.
Testimony of Alan Greenspan, chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, June 17, 1988. See also Gary Dymski, The Bank Merger Wave: The Economic Causes and Social Consequences of Financial Consolidation (New York: M. E. Sharpe, 1999), 83.
83.
Lori Nitschke , "Securities Industry: Huge Financial Services Merger Puts Pressure on Hill to Lead,"CQ Weekly Online, April 11, 1998.
84.
Christian Science Monitor, "A Solid Banking Bill, Editorial," May 18, 1998.
85.
Daniel Parks, "Banking: Senate Passes Banking Bill Vulnerable to a Clinton Veto,"CQ Weekly Online, March 13, 1999. See also "Hearings before the Subcommittee on Finance and Hazardous Materials of the Committee on Commerce House of Representatives One Hundred and Sixth Congress, First Session on H.R. 10, April 28-May 5, 1999." Testimony by Alan Greenspan, 27-39 and Testimony of Robert Rubin, 83-90.
86.
Stephen Labaton , "Senate Votes to Drop Barriers between Nation’s Financial Industries,"New York Times, May 6, 1999.
87.
Daniel Parks and Lori Nitschke, "Banking: Financial Services Overhaul Sees Home Stretch at Last,"CQ Weekly Online, June 10, 1999.
88.
CQ Weekly Online, "Legislative Summary," September 21, 1999.
89.
Stephen Labaton , "Close but No Banking Cigar,"New York Times, October 21, 1999 and "The Deal on Bank Bill Was Helped Along by Midnight,"New York Times, October 23, 1999.
90.
Alan Greenspan , "Insurance Companies and Banks under the New Regulatory Law,"Remarks Before the Annual Meeting of the American Council of Life Insurance, Washington, DC, November 15, 1999.
91.
As quoted in Labaton, "Congress Passes," 1999d.
92.
See for example, Gary Mucciaroni, Reversals of Fortune: Public Policy and Private Interests (Washington, DC: The Brookings Institution, 1995); David Plotke, "The Mobilization of Business," in The Politics of Interests, ed. M. Petracca (Boulder, CO: Westview), 175-98; and David Vogel, Fluctuating Fortunes ( New York: Basic, 1989).
