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
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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