Opinion ID: 501705
Heading Depth: 3
Heading Rank: 1

Heading: Envisioning Sec. 20--Congress' Purpose

Text: 43 The Act's legislative history reflects the notion that the underlying cause of the stock market crash in 1929 and subsequent bank insolvencies came about from the excessive use of bank credit to speculate in the stock market. See S.Rep. No. 77, 73d Cong., 1st Sess. 3-9 (1933) [hereinafter 1933 Senate Report ]; see also 75 Cong.Rec. 9883-84 (1932) (remarks of Sen. Glass) (criticizing transformation of the Federal Reserve System from a commercial banking system into one used for stock-market speculative operations). Bank affiliates were identified as a major factor in the overextension of credit for security loans. See 1933 Senate Report, supra, at 9-10. 44 Congress' concern was not limited solely to how securities affiliates contributed to the excesses in bank credit; its apprehension was far more fundamental and structural. Senator Bulkley, for example, repeatedly stressed that the debate over affiliates should not obscure [t]he important and underlying question [of] whether banking institutions receiving commercial and savings deposits ought to be permitted at all to engage in the investment-security business. 75 Cong.Rec. 9910 (1932). He argued that [t]he existence of security affiliates is a mere incident to this question, id., and reiterated that the real question is not whether ... banks shall be permitted to have investment-security affiliates but rather whether they should be permitted to engage in the investment-security business in any manner at all, through affiliates or otherwise, id. at 9911. 45 Two large problems attendant upon the involvement of a commercial bank in investment banking--either on its own or through use of an affiliate--were identified by Congress. The first was the danger of banks using bank assets in imprudent securities investments. ICI, 450 U.S. at 66, 101 S.Ct. at 986-87; see also Camp, 401 U.S. at 630, 91 S.Ct. at 1098. The second focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments. Camp, 401 U.S. at 630, 91 S.Ct. at 1099. 46 In Camp the Supreme Court described these subtle hazards: loss of public confidence in a bank if its affiliate lost money; the temptation for a bank to shore up an affiliate through unsound loans; imprudent lending to companies in which the security affiliate has invested or become interested; possible loss of a bank's goodwill should its depositors suffer losses on investments that they purchased in reliance on the relationship between the bank and its affiliate; bank loans used for purposes of buying securities; commercial bank involvement in investment banking which might facilitate the loss of disinterested investment advice and encourage violations of fiduciary obligations. Camp, 401 U.S. at 631-33, 91 S.Ct. at 1099-1100; see Operation of the National and Federal Reserve Banking Systems, Hearings on S. 71 Before a Subcomm. of the Senate Comm. on Banking and Currency, 71st Cong., 3d Sess. 1063-64 (1931) [hereinafter 1931 Hearings ]; 75 Cong.Rec. 9911-12 (1932) (remarks of Sen. Bulkley). 47 Sections 16 and 21 effectively barred commercial banks from direct engagement in investment banking, with the notable exception of government securities. Yet even before the 1929 crash, direct involvement by a bank had been considered improper, see Camp, 401 U.S. at 629, 91 S.Ct. at 1098, but bank affiliates had developed as the medium for commercial banks' indirect entry into investment banking, see id. Even though the stock market debacle laid bare the dangers arising from the activities of securities affiliates, opinion was divided on how best to mitigate those dangers. 48 No one argued that the affiliate system had not been abused in the past, see, e.g., 1931 Hearings, supra, at 298-99 (remarks of Charles E. Mitchell, Chairman, National City Bank of New York). Experts believed that an adequate check on such abuse was to establish rigorous examination requirements for affiliates, which had remained largely unregulated before 1929. See, e.g., id. at 117 (testimony of J.H. Case, Chairman, Board of Directors of the Federal Reserve Bank of New York); id. at 192 (testimony of A.H. Wiggin, Chairman of the Governing Board, Chase National Bank); id. at 364 (testimony of O.D. Young, Chairman of the Board, General Electric Co.); id. at 405 (testimony of M.W. Traylor, Chairman of the Board, First National Bank of Chicago). Others thought that if the slate were wiped clean, affiliates should not be legal, but that in 1933 a complete divorce between commercial and investment banking was not feasible given the established role of affiliates in the banking system. See, e.g., id. at 22 (testimony of J. Pole, Comptroller of the Currency); id. at 38-39 (testimony of G.L. Harrison, Governor, Federal Reserve Bank of New York); id. at 148 (testimony of A.C. Miller, Member, Federal Reserve Board). 49 Some advocated complete separation of the commercial and investment banking industries. See, e.g., id. at 231 (testimony of B.W. Trafford, Vice Chairman, First National Bank of Boston). Senator Glass--an adherent of this view--was of the opinion that a complete separation was both warranted and capable of being accomplished. E.g., Operation of the National and Federal Reserve Banking Systems, Hearings on S.4115 Before the Senate Comm. on Banking and Currency, 72d Cong., 1st Sess. 42, 267 (1932) (remarks of Sen. Glass) [hereinafter 1932 Hearings ]. Senator Glass' views are significant, of course, because of his role in drafting and shaping the Banking Act of 1933, a portion of which bears his name. Cf. North Haven Bd. of Educ. v. Bell, 456 U.S. 512, 526-27, 102 S.Ct. 1912, 1920-21, 72 L.Ed.2d 299 (1982) (remarks of sponsor of language ultimately enacted are an authoritative guide to the statute's construction). Yet, despite the Senator's goal of complete separation, the Senate took a less drastic step. Acknowledging that [i]t has been suggested ... that the affiliate system be simply 'abolished,'  the Senate rejected this as impossible and stated that its goals toward regulating affiliates were to (1) separate as far as possible  member banks from affiliates of all kinds; (2) limit advances or loans from parent to affiliate; and (3) install satisfactory examination requirements for affiliates. 1933 Senate Report, supra, at 10 (emphasis added).