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Marcus Baram

Huffington Post

The Banker Who Cried Wolf: Wall Street'sHistory Of Hyperbole About Regulation

First Posted: 06/21/11 06:56 PM ET Updated: 06/21/11 07:29 PM ET

NEW YORK -- Coming from all over the country, hundreds of investment bankers from financial

powerhouses like J.P. Morgan gathered for dinner at the Waldorf-Astoria to discuss their shared

concerns.

Chief among them: The spread of investor protection laws, which they denounced as "foolish, crude andunconstitutional." Bond broker Warren S. Hayden said the laws were paternalistic and wrong in theory,

arguing that they would hurt the industry by limiting the activity of securities dealers. Bank attorney

Robert R. Reed called the new rules an "unwarranted" and "revolutionary" attack upon legitimate

business.

That was almost 100 years ago at the inaugural meeting of the Investment Bankers Association in New

York City. The group was opposed to laws passed by Kansas and other states that sought to protect

investors from fraudulent sales and practices by requiring companies issuing securities to register and

receive a permit before selling stocks.

These "blue sky laws" were prompted by an epidemic of securities fraud. Hucksters, who were so

dishonest that it was said they would sell "building lots in the blue sky," ripped off thousands of

unsuspecting farmers in the Midwest during in the first decade of the 20th century. The laws weresupported by small- and community-banks and were popular with the public.

By 1913, two years after Kansas passed the first investor protection law, 22 other states passed similar

regulations. An effort to enact a federal version failed amid intense pressure by Wall Street executives,

who claimed that it would have a disastrous impact on the financial services industry. Bankers magazine

warned that such laws would create "a nation of fools and weaklings" by protecting people against their

own mistakes.

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Decades later, many of those fears have largely been relegated to the dustbin of history. Though the

impact of New Deal programs on the recovery from the Great Depression are still debated, the benefits

of financial industry oversight are largely accepted.

THE BENEFITS OF REGULATION

Investor protection and market integrity are generally seen as enhancing efficientcompetitive markets and stimulating lending. Though the concept of deposit insurance was once

equated with socialism by bank-friendly lawmakers, the FDIC reduced bank collapses and helped restore

confidence in the financial and banking industry, say economic historians.

"This fear that new regulation would hurt the industry and wouldn't make capital available to the small

investor was overblown," says Anne Khademian, program director at the Center for Public

Administration and Policy at Virginia Tech. "Today, you'd be really hard-pressed to see someone who

would say that the creation of the SEC was a bad thing."

Though Glass-Steagall was feared by banks, it actually helped create the modern investment banking

industry, says Geisst. "These firms didn't go out of business. It helped stabilize the industry, and I don't

think we would have survived all these years without Glass-Steagall. I wish someone would dust it off,

and bring it back."

In the 1950s, proposals to raise the insurance coverage for bank depositors up to $10,000 were at first

opposed by some large bankers. But when the increase passed Congress, it benefited the larger banks

due to a reduction in their effective assessment rate, and the outcry disappeared.

Later bouts of hysteria accompanied the stricter regulation of mutual funds in the 1960s. "There was a

lot of resistance from the industry at first, but after a few years the mutual funds were on board, saying

that the SEC needs more money to do its job," says Khademian.

When the Johnson administration proposed the Truth in Lending Act in 1968, which required increased

disclosures by lenders about borrowing costs, it was also opposed by Wall Street. "The only thing it cost

the finance industry was some very creative people who wrote prose for their statements," says Geisst.

"That was not significant. They didn't lose customers -- except perhaps for a few undiscriminating

customers."When the SEC moved to get rid of fixed commissions in 1975 -- at the time, Wall Street firms charged

the same fee to execute trades -- the industry screamed in protest. After the rule was adopted, some

firms lost profits. "But the new discounters that formed brought in millions of new investors -- who

eagerly snapped up the mutual funds and stock offerings of the big Wall Street firms," noted Slate's

Daniel Gross in 2010.

Despite the hyperbole, most regulation has aided the profitability of the financial sector in the long run,

argues Edwin J. Perkins, emeritus professor in history at the University of Southern California . "It

certainly added more stability and therefore a reasonable level of profitability from 1933 to 1980.

Deregulation of [savings and loan associations] was the first false step. The weakening and final repeal

of Glass-Steagall was the second false step because it eventually allowed the more powerful investment

banking houses to seize vast assets of commercial banks for speculative activity that was largelyunregulated."