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which permitted national banks to underwrite securities to the extent authorized by the Comptroller.

The Comptroller

soon granted national banks extensive authority to underwrite both debt and equity securities.*

Only six years later, Congress brought the banks' investment banking activities to an abrupt halt through enactmont of the Glass-Steagall Act. An examination of what happened during the six year "window" during which commercial banks were permitted to engage in the securities business provides ample justification for Congress' conclusion that the experiment in expanded bank activity had been a grave mistake which should not be repeated.

The hearings that preceded enactment of the Act demonstrated that "commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by the stock market decline, partly because of their direct and indirect involvement in the trading and ownership of speculative securities."** The hearings revealed that banks had promoted their securities affiliates through loans and through purchases of securities from these

Perkins, "The Divorce of Commercial and Investment Banking: A History," 88 Banking Law Journal 483, 494 n. 27 (1971).

630 (1971).

(1971)

Investment Company Institute v. Camp, 401 U.S. 617,

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affiliates, either for the banks' own accounts, or on behalf of trusts under bank management. Bank loans were used to promote securities affiliates in various ways. Banks made loans to their own affiliates to finance underwriting activities and financed customers' purchases of securities underwritten by bank affiliates. Funds were also loaned to corporations that agreed to use bank affiliates for underwriting their securities issues.

Banks were found to have placed additional funds at risk in order to protect securities affiliates whose collapse would threaten the bank's stability or diminish public confidence in the bank. Banks also purchased securities from their affiliates in order to assure the success of an underwriting or to relieve the affiliate of excess holdings.

In general, the abuses and conflicts of interest that arose in connection with the combination of banking and securities activities, and which led to enactment of the GlassSteagall Act, fell into the following categories:

Banks invested their own assets in imprudent
securities investments;

Banks succumbed to promotional pressures, such as the pressure to make bank credit facilities available to companies in whose securities the bank had invested or become involved;

Bank depositors made investments in reliance upon the relationship between the bank and its affiliate;

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Banks traded upon their reputations for prudence
and financial integrity to make sales of securities;

Banks were tempted to make loans to customers where
the loan could facilitate the purchase of securities;
Banks succumbed to conflicts of interest between
their promotional interests as investment bankers
and their obligations as commercial bankers to make
disinterested investment and lending decisions; and
Bank trust departments were used as a dumping ground
for excessive or undesirable securities holdings.*

Relevance of the Policies of the Glass-Steagall Act
Today

Congress determined to keep commercial banks and their
affiliates out of the securities business largely because
it believed that the promotional incentives of the securities
business, and a securities firms' pecuniary stake in the
success of a particular investment opportunity, were destruc-
tive of disinterested commercial banking and of public

confidence in the commercial banking system.**

Any amendment to the Glass-Steagall Act should not defeat or undercut the original purpose of the Act by introducing the banking industry to new risks, or by endangering

Investment Company Institute v. Camp, 401 U.S. 617, 629-633 (1971). See also, Hearings before a Subcommittee of the Senate Committee on Banking and Currency, 71st Cong., 3d Sess. Part 7 at 1063-64 (1931).

✰✰ Investment Company Institute v. Camp, supra, 401. U.S. at 634.

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public confidence in the stability and impartiality of the banking community. Moreover, today, with segments of the depository industry in delicate financial condition, it is particularly important to act with caution in this most sensitive area.

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CONSEQUENCES OF BANK EXPANSION INTO THE MUTUAL FUND BUSINESS

Before permitting banks to expand their activities into the mutual fund field, as would be accomplished by S. 1720, Congress must take account of the consequences that would attend such a major change in national policy.

Increased Concentration of Economic Power

Bank entry into the mutual fund business (including com-
mon stock and bond funds, as well as money market funds),
raises serious questions whether the banks' new activities
would lead to, or exacerbate, an undesirable concentration
of economic power. Such concentration could take two forms:
conglomerate and horizontal. Conglomerate concentration
could result in instances where a single large bank provided
a broad range of financial services. Horizontal concentra-

tion could occur if the number of firms providing a particular
investment service was reduced. Horizontal concentration
could result from bank entry into the mutual fund business,
for example, where the entry is accomplished through merger
or acquisition of existing mutual fund firms, or through
the attrition of competitors that provide the same services
that the banks will offer.*

Public Policy Aspects of Bank Securities Activities: An Issues Paper, U.S. Department of the Treasury, at 14, (Nov., 1975).