Market Rules

Market Rules explains in accessible language how federal laws, regulatory rulings, and bankers' decisions shaped the financial industry as it existed at the time of the 2008 financial crisis.

Market Rules
Bankers, Presidents, and the Origins of the Great Recession

Mark H. Rose

2018 | 272 pages | Cloth $39.95
American History / Business / Public Policy
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Table of Contents

Introduction. Politics and the Markets They Made

Chapter 1. Deregulation Before Deregulation: John Kennedy, Lyndon Johnson, and James Saxon
Chapter 2. Supermarket Banks: Richard Nixon and Donald Regan

Chapter 3. Rescuing Banks Through Growth: Walter Wriston and Citicorp
Chapter 4. A Marine in Banker's Clothing: Hugh McColl and North Carolina National Bank

Chapter 5. Full-Service Banks: Bill Clinton and Sandy Weill
Chapter 6. God's Work in Finance: Ken Lewis, Charles Prince, Richard Fuld, and Henry Paulson
Chapter 7. Reregulating the Regulators: Barack Obama and Timothy Geithner

Epilogue. Another Round of Bank Politics


Excerpt [uncorrected, not for citation]


I grew up in Chicago during the 1950s and 1960s. Chicagoans have a placename for every part of the city. We lived in West Rogers Park. At the time, I perceived banks and bankers through my parents' eyes. They had a mortgage with a savings and loan association (S&L) located near Devon and California, a half mile from our house. The S&L's senior officer sat in an office just beyond the doorway, where he greeted customers. I had a passbook saving's account at that S&L. No minimum balance was required for my child's account, which came with a desk bank for me to deposit coins at home.

Perhaps because S&Ls were not permitted to offer checking accounts, my father and uncle maintained a business checking account at a bank on Clark Street near their shop. My parents' financial arrangements had a neighborhood quality, now that I think about it. They did not have contact with the First National Bank of Chicago or with one of the other major banks in the city's famous Loop. Illinois law, I discovered years later, prohibited branch banking, even among the city and state's largest and most influential firms. My mother handled my father's bookkeeping as well as the household budget. For her to deposit cash at the First National would have required a fatiguing trip on public transit. And surely, my parents and uncle asked each other, would executives at a "downtown" bank approve loans to unincorporated partners in a drapery and slipcover shop who had a history of falling behind on payments during the off-season?

Other parts of our household finances were both local and personal. "Shelly," an insurance agent and my parents' friend, came to our house to collect premiums—and to recommend additions to existing policies. My mother paid Shelly in cash. He sometimes settled for less than the amount due, returning the following week to pick up the balance. The "off-season" permeated most aspects of our financial and domestic lives. Yet, my parents owned a home and paid the mortgage.

In 1967, when Marsha Lynn Shapiro and I married, we inherited those financial arrangements. We opened a checking account at a bank in Columbus, Ohio, across the street from The Ohio State University, where we were graduate students. The account was in my name. In 1974, members of Congress and President Gerald R. Ford passed the Equal Credit Opportunity Act, the terms of which prohibited bankers from including race, age, gender, and marital status in making determinations about account ownership and loans. In other respects, the organization of financial services remained as before. Marsha Lynn and I purchased renters and auto insurance at Allstate. They stationed agents in Sears, Roebuck's doorway at the mall. We had heard about Merrill Lynch's nationwide presence and its efforts to sell shares of stock to the middle class. We lacked the surplus funds and an ideological orientation toward investments. As a result, until the mid-1970s, our experience with financial institutions consisted of a checking account, two insurance policies, our Sears charge card, and a short-term loan with a finance company at the end of our block. Nor did I have reason to doubt that bank executives remained among the nation's most prestigious citizens, especially in rural America, where they ranked only a notch below the town doctor.

During the next ten years, I observed important changes taking place in still-distant financial realms. Federal law and regulators had capped interest rates that banks and S&Ls paid depositors. Those depositors in turn, I read in the daily newspaper, were moving savings and checking balances to money market and mutual funds, which paid higher rates of interest. In the early 1980s, a colleague told me about a money market fund paying some 18 percent, which presented a stark comparison with the more modest interest rate paid at our local bank and at our credit union located on campus. I also noticed that brokerage firms like Merrill Lynch "made a market" in the stocks they sold to retail customers. At the time, I was uncertain what that meant.

In the 1980s, the organization of financial services like banking and insurance remained divided, much as when I was a teenager. Insurance companies including Allstate and State Farm sold insurance, and S&Ls, like the one near my parents' house, wrote most home mortgages. Banks such as New York's mighty Chase Manhattan and Citibank made business loans and offered checking accounts, as did thousands of small banks in towns throughout the United States. Money market and other mutual funds, more recent to the scene, operated as independent actors, with no visible connections to banks or insurance firms. Equally normal, we thought, our bank in Upper Michigan could not open a branch in Illinois or Wisconsin. To cash a check on visits to family in Chicago required multiple forms of identification. African American travelers could not bank on that privilege.

We were not alert to the tumultuous changes that had begun to roil the business of banking. Credit cards and the automated teller machines (ATMs) offered remarkable convenience. Starting in the late 1970s, bankers touted the ATM as evidence of their customer orientation and technology's unstoppable march toward nationwide customer service. The introduction of ATMs and credit cards like Visa, I learned years later, had only a little to do with technology and nearly everything to do with politics.

In 2003, Marsha Lynn and I secured a brief look at the changes in bank practices. Now, we resided in South Florida. We had a mortgage as well as checking and savings accounts at one of the largest banks in the United States. We sought to refinance our mortgage in order to pay our daughters' college bills. Bank officials not only approved our application, but also cheerfully offered a home equity line of credit and a new credit card. A bank officer brought in coffee and soft drinks while we completed the paperwork. Refreshments for teachers! We met in a conference room on an upper floor of a handsome downtown office building. The main banking room and phalanx of tellers, where customers cashed checks and made deposits, were located on the first floor. Customers like us transacted more business outside, at the ATM. The executive who greeted customers at my parents' S&L had disappeared generations earlier.

I could not discern each aspect of what was new about our transaction that afternoon. We had only to send our payments each month. In subsequent years, we had no reason to visit a bank branch office. Five years went by until I began to connect changes at our bank to my understanding of main themes in financial history and in American political development.

This study of bank politics began serendipitously. In 2008, I had the good fortune to serve as president of the Business History Conference. I needed a presidential address for June 2009. Then, in mid-September 2008, Lehman Brothers Holdings filed for bankruptcy. Massive financial and job losses followed. I would study how that financial calamity took place.

Early on in my study, I noticed that bankers and their publicists did a poor job explaining their past. They talked about how computers made interstate banking inevitable and how their dedication to customer service had virtually dictated legislative outcomes such as the lifting of restrictions on interstate branch banking. As I studied bankers, lawmakers, regulators, and presidents, I began to identify a far more sophisticated and nuanced story of social and political institutions that extended back to the 1960s.

Historians seek to answer large questions by looking for contexts and by pushing back in time. We also believe that people matter and that we need to allow those people to take the lead in our stories. I poked around the web and our university library. I began to read in the literature aimed at bankers, investors, and insurance agents. American Banker, for years delivered each day to most banks in the United States, emerged as a must read for understanding the ideas bankers relied on to lure depositors, evaluate loan applicants, and prepare strongly worded messages for their congressional representatives. Politics resided at the core of American banking, I learned.

My immersion in archives and in trade journals like American Banker suggested a large and previously unearthed series of stories about bankers' political behavior. During the period 1961 to 1999, I learned, everyone with a stake in the money business, such as S&L executives, insurance agents, and bankers, relied on courts, Congress, and regulators to advance their interests. Bankers and S&L executives, to identify only two sets of actors, had business organizations, income, an honored place in the business community, and long-established ways of life to protect and advance. Each president between John F. Kennedy and Bill Clinton also played an important part in fostering changes in the money business. To conclude my study in 1999 with congressional passage of important bank legislation would have created what historians describe as a natural periodization. That legislation overturned the remaining bank practices I had noticed growing up.

I decided, however, to study developments leading up to 2008, when the financial crisis started. And next, I wanted to understand the process by which lawmakers, regulators, bankers, and Treasury Secretary Timothy F. Geithner reached conclusions about how to prevent a similar catastrophe in the future. In 2010, Geithner and congressional leaders secured passage of the Dodd-Frank Act. By the time I completed that portion of my book, I detected the presence of yet another story that I wanted to tell. In this final phase, I studied leading figures in bank politics during the years between 2010 and early 2017. One of my key actors, Rep. Thomas Jeb Hensarling, sought to unravel the Dodd-Frank Act in theme and detail. Beginning in January 2017, President Donald J. Trump's aides worked with Hensarling to bring about new bank legislation and changed regulations that were supposed to accelerate the pace of economic growth.

Between 1961 and the first months of 2017, I had learned, every president wanted bankers to help speed the economy's pace. And yet, for presidents, bankers, or anyone else to foster their favored legislation required a steely outlook, long-term patience, and a willingness to engage in a grinding politics without end. That politics started with lofty symbols like freedom and prosperity but always included negative and even hostile views of opponents who, it was said, had set out to destroy the American economy.