“There were two pieces of legislation that facilitated our migration toward too big to failInterstate Banking and Branching Efficiency Act of 1994, which permitted banks to grow across state lines, and the Gramm-Leach-Bliley Act, which eliminated the separation of commercial and investment banking. Since 1990, the largest twenty institutions grew from controlling about 35% of industry assets to controlling 70% of assets today.”

-Kansas City Federal Reserve president Thomas Hoenig. in an August 6 speech before the Kansas Bankers Association.


There is a fascinating discussion of John Dugan, one of the earliest architects of the “too big to fail” concept, in the January 2010 issue of The Nation. Nothing in the article will surprise regular readers of this blog; however, the extent of the wrongheaded belief system and policy initiatives still has the power to shock.

Dugan’s main work came about in 1989, when Congress ordered the Treasury to conduct a study on FDIC deposit insurance. Dugan ballooned the project into a 750-page manifesto, titled Modernizing the Financial System: Recommendations for Safer, More Competitive Banks (1991).

The title is misleading: There were many policy ideas pushed in the tome, but in terms of the current economic collapse, there were three of significance:

• Allowing banks to expand into multiple states without incurring additional regulatory oversight;

• Allowing relatively safe commercial banks to merge with riskier investment banks and insurance companies (Repeal of Glass Steagall);

• Allowing commercial firms (General Electric, Sears) to purchase banks.

There is no small irony in that a hard core GOP ideologue wrote the blueprint for Democrat Bill Clinton’s deregulation. “It was the first real recipe for too big to fail” said banking scholar Arthur Wilmarth Jr., professor at George Washington University Law School.

Dugan next became head of the Office of the Comptroller of the Currency (OCC), Dugan played a leading role in dismantling the existing system of consumer protection.

Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program, and Harvard University Law School professor, lambasted the OCC: “For years, the OCC has had the power and the responsibility to protect both banks and consumers, and it has consistently thrown the consumer under the bus.”

The rest of the article details the usual revolving door story: Dugan leaves government, goes to work as an industry lawyer, helping banks circumvent the very regs he helped to create. In 2005, he is appointed as head of the OCC (it expires in August 2010).

For those people who believe that more deregulation is the way to regulate financial institutions, I advise you to closely study Mr. Dugans life work . . .


Sheila Bair vs. John Dugan (June 14th, 2009)

A Master of Disaster
The Nation, January 4, 2010

Category: Bailouts, Credit, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “John Dugan: Architect of “Too Big to Fail” Banks”

  1. Marcus Aurelius says:

    I’ll start building the new gibbet as soon as the holidays are over.

  2. MA,

    you know, “for the Holidays~” http://www.thefreedictionary.com/gibbet

    This post is, actually, pretty funny(timely).. I was just having a convo, recently, “People have no idea why there, even, were restrictions on “Interstate Banking”, and in some States, restrictions on “Branch Banking”…let alone the perniciousness of the phrase: “the Democratization of Credit”..

    LSS: “Back in the Day, when JohnQ wanted to ‘lever-up’ to get Long a new Washer/Dryer set, He, oftentimes, had to go for a ‘sit-down’ with the local Bank Mgr.–who lived in the Community, and was unlikely to be ‘transferred to Albequerque’..

    but, the video of Hank Aaron’s 715th says it All..the Left-Center Field billboard of BankAmericard’s w/the tag line “Think of it as Money!~” from ’74 , ~35 years ago..
    see it @ ~1:08

    and, for all the “(D) makes all the difference in the World”-believers out there, remember, ol’ 42 (WJC), and his DLC-crew, are the best “Republicans” ‘Money’ can Buy.

  3. David Merkel says:

    One quibble — insurance companies are safer than banks. They fail less frequently, and are not a source of systemic risk. (AIG’s insurance ops were fine, aside from securities lending, cross guarantees, and capital stacking, all of which are non-insurance issues.)

    As it is, insurance companies and commercial enterprises have not done well owning banks… they are different skill sets. Same for banks and commercial enterprises owning insurance companies. They are different skill sets. Even in Europe, Bancassurance has had a poor record.

    I’m wondering if state regulation isn’t better than federal regulation for banks. Why? State regulators are scaredy cats — when they don’t get something, they just say no. Regulatory capture is less frequent, aside from single state entities. It’s a non-starter, I know, but I think state regulation of all depositary institutions would actually be better policy for the US. From the experience of the insurance industry, it is hard to gain favor with a regulator if you are not domiciled in the state.

    Federal politicians will not give up such a precious piggy bank, though.

  4. Kurt Brouwer says:

    Barry– my only quibble is with your use of the term deregulation. The fact that Dugan and others stacked the deck in favor of big institutions does not constitute deregulation in my book. It is a perversion of regulation.

    I don’t think we should just point to the repeal of Glass-Steagall as an example of ‘deregulation’ as the root cause of the problem. Instead, we should ask why was it repealed? Who benefited from repeal? And, who had the power to get 67 years of regulation overturned?

    In my view, there is only one answer: The repeal of Glass-Steagall illustrates the power of the Treasury-Banking Complex to get favorable legislation passed. The Treasury-Banking Complex is fine with added regulations as long as they serve to foster more consolidation and benefits for the very large banks.

  5. David,

    to your point, these-

    Amendment IX
    The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

    Amendment X
    The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.
    weren’t stumbled upon, by accident..

    btw, wonder how many of those are still left, standing, in effect..

    also, remember, these guys http://www.wepin.com/articles/afp/ -the so-called ‘Anti-Federalists’ were responsible for the inclusion of the “Bill of Rights” and, sadly enough, their arguments are as applicable now, as they were then..

  6. hgordon says:

    To0l or not, this guy Dugan probably believed he was doing the right thing by removing restrictions on growth limitations for banking. Going back multiple decades, a large part of the motivation must have been to help US banks compete more effectively against foreign banks in the international domain, and that could only be accomplished with a larger asset base and more leverage. Between various unintended consequences and a lot of crony capitalism, we are where we find ourselves today, but it’s simplistic to believe we are victims of some criminal mastermind.


    BR: Throughout history, most of the worst human acts are committed by true believers.

    That he drank the Kool Aid does not forgive his stupidity — or culpability . . .

  7. hgordon says:

    BR – no argument. It seems that the current administration is content to whitewash over the past and promise that new legislation will prevent a repeat, but just about everyone gets to keep their jobs. And that’s the real disconnect.

  8. bbishop says:

    Love your blog, read it religiously. Curious why you deleted these passages from the original version of this post. They seem quite accurate:
    “The issue for Democrats and members of the American Left raised by this article in The Nation is why does Barack Obama allow this situation to continue one day longer? The continuance of Dugan at OCC and Treasury Secretary Tim Geithner at Treasury illustrates how feeble the White House remains when it comes to financial services policy.

    Or maybe the problem is one of conflict. Like Larry Summer’s derivatives toxic waste dump inside Harvard’s endowment fund?

    And let’s not forget Rahm Emmanuel’s proud legacy as a director of Freddie Mac. Maybe the Obama White House just can’t go there when it comes to financial anything.”

  9. [...] of 1994). After all, the 20 largest financial institutions only had 35% market share in 1990, but doubled to 70% market share by [...]

  10. Jack says:

    Phil Gramm caused it all. Geithner will fix it. Commenters will continue to blame individuals for the plagues upon our land. Obama is a ______________; Bush was a _____________; Summers is a ____________;

    And we all know that Dugan is a ____________.

    Let’s make sure we blame somebody else. We never did “nuttin” wrong, did we?

  11. Jack,

    as has been said: “The Past is a Carcass that no longer Hunts”.

    to your point, the blame-game is pointless.

    but, in perusing Policies that, obviously, have not worked, it is, potentially, worthwhile to take note of their ‘Authors’..

    though, more importantly, is the effect, currently, of the Policies in place, and understanding who is driving them-for what benefit..

    with that, we may want to begin with-

    to provide a sounder basis for further understanding/discussion of ‘ways forward’..

    or, you know, for further, we can begin closer to the beginning, with-

    and, btw, this “Phil Gramm caused it all. Geithner will fix it.”, is complete Non-sense..

  12. Transor Z says:

    One quibble — insurance companies are safer than banks. They fail less frequently, and are not a source of systemic risk.

    Not true, David.

    Insurance companies are a BIG source of systemic risk through their shady system of re-insurance and side letters. There was quite a bit of discussion about that last year, esp. with respect to whether there truly was a sufficient wall between AIG investment and insurance operations. There wasn’t, which is a major factor in why AIG was a bailout hub.

  13. Transor Z says:

    Sorry: screwed up the itals.

    One quibble — insurance companies are safer than banks. They fail less frequently, and are not a source of systemic risk.

    Not true, David.

    Insurance companies are a BIG source of systemic risk through their shady system of re-insurance and side letters. There was quite a bit of discussion about that last year, esp. with respect to whether there truly was a sufficient wall between AIG investment and insurance operations. There wasn’t, which is a major factor in why AIG was a bailout hub.

  14. Patrick Neid says:

    Not to be forgotten was the incredible zeal with which Clinton and Rubin embraced Dugan’s ideas. I wonder why the these knighted saints would fall for such a supposed rube. Worse still the tradition follows with the current anointed one.

    Blame is such a wonderful game while we look for the last straw that broke the camel’s back. My pick–interventionist politicians who think they have a clue.

  15. dsawy says:

    OK, so why hasn’t Obama replaced him? If this is a result of so much ideology (as opposed to my theory of incestuous Harvard connections), then wouldn’t a relatively obscure bureaucrat be gone by now?

    Because don’t look now, boys and girls, but Dugan is moving on up in the world:



    BR: His term does not expire until 2010:

    Dugan’s term expires in August 2010, when President Obama can reappoint him or nominate someone else. But given Dugan’s record, it’s hard to see why he has been allowed to stay on the job for Obama’s first year. It is not customary for the president to discharge the comptroller in the middle of his term, but he does have the legal authority to do so.

  16. dsawy says:

    Given Dugan’s track record and his lack of any regulatory oversight on the banks, if Obama wanted to get even the current regulations enforced more vigorously, he’d sack Dugan.

    We have regulations. The Fed has had regulatory powers that it could have used to prevent some of this, as we’ve all discussed before. Greenspan didn’t want to lift a finger. The OCC, FINRA, FDIC, Fed, SEC, et al – they ALL have regulations at their disposal that they could have used four to five years ago. None of them did it. eg, how many SarbOx violations could we bring against financial companies right now? Without any more laws, how many CEO’s could be brought up on charges that they lied about their company’s finances?

    A stopgap solution, it would appear to me, is to broom out the people that a) refused to use their regulatory powers to investigate obvious and clear violations of regulatory compliance, b) put in people who will use the regulatory powers at their disposal before they start whining “we need more laws.”

    Doing this would change Wall Street’s tune very quickly, because their influence is stronger on the Congress, where they can spread money around. That Obama hasn’t lifted a finger to implement current regulations in a more effective way is ample evidence that he’s as bought and paid for as any in Congress.