Corporate Governance in Banking

Corporate Governance in Banking

A Global Perspective

Edited by Benton E. Gup

Recent corporate scandals, together with the effects of globalization, have led to an increasing interest in corporate governance issues. Little attention has been paid, however, to international laws and recommendations dealing with corporate governance in banking from a global perspective. This impressive international set of expert contributors – academics, practitioners and regulators – remedies the lack of attention by examining the various issues and concerns of this important topic.

Chapter 6: Conflicts of Interest and Corporate Governance Failures at Universal Banks During the Stock Market Boom of the 1990s: The Cases of Enron and WorldCom

Arthur E. Wilmarth Jr.

Subjects: business and management, corporate governance, economics and finance, corporate governance, financial economics and regulation, money and banking, law - academic, corporate law and governance, finance and banking law


6. Conflicts of interest and corporate governance failures at universal banks during the stock market boom of the 1990s: the cases of Enron and WorldCom Arthur E. Wilmarth, Jr. INTRODUCTION The re-entry of commercial banks into the securities business transformed US financial markets during the 1990s. Beginning in the 1980s, federal regulators and courts began to open loopholes in the GlassSteagall Act of 1933 (Glass-Steagall), which had effectively banished commercial banks from the securities industry. In 1989, the Federal Reserve Board permitted bank holding companies to establish ‘Section 20 subsidiaries’ that could underwrite debt and equity securities to a limited extent. By 1996, Section 20 subsidiaries were able to compete effectively with securities firms as a result of the Federal Reserve’s liberalization of the rules governing those subsidiaries. In 1998, the Federal Reserve took a more dramatic step by allowing Citicorp, the largest US bank holding company, to merge with Travelers, a financial conglomerate that owned a major securities firm, Salomon Smith Barney (SSB). That merger produced Citigroup, the first US universal bank since 1933, and it placed great pressure on Congress to repeal Glass-Steagall. In November 1999, Congress enacted the Gramm-Leach-Bliley Act (GLBA), which removed the most important Glass-Steagall barriers and allowed commercial banks to affiliate with securities firms and insurance companies by forming financial holding companies.1 In adopting GLBA, Congress determined that the potential benefits of combining commercial and investment banking outweighed concerns about promotional pressures and conflicts of interest that were...

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