The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is over 2,300 pages long. The Glass-Steagall Act, the landmark bank reform bill of 1933, was about 100 pages long.

Less is more.

Glass-Steagall gained strength from its simplicity. The 1933 Congress concluded that the combination of investment banking and commercial banking (and other businesses) had led to the stock market crash and the failure of thousands of banks. Therefore, it separated the two forms of banking. It severely restricted the activities of commercial bank holding companies by banning any cross ownership with any other industry, financial or otherwise. In order to re-establish public confidence in banks, it created the FDIC to insure bank deposits, and said that only commercial banks, with their less-risky activities, could hold such deposits. Finally, it limited the size of banks by mandating that national banks operate within state limits on branching in their headquarters state. That’s the whole Glass-Steagall Act.

Simple, straightforward and powerful:  it broke up the House of Morgan, the banking combine founded by the early 20th century’s most powerful banker, John Pierpont Morgan.

Thereafter, American commercial banks were limited in scope and size. They were not “big,” much less “too big,” but they served the banking needs of American business, which grew to dominate global commerce, and U.S. consumers, who came to enjoy unparalleled wealth and prosperity.

“Too big” is a relative term. And the much-used phrase “too big to fail” (TBTF) is meaningless without further definition.

If a bank is failing, something must be done. In this context, TBTF usually means too big to be handled like most bank failures: takeover by a larger stronger bank, the approach used for the few bank failures during the first half century under Glass-Steagall.

Then, in 1984, the nation’s ninth largest bank, Continental Illinois, failed. Continental was TBTF simply because it was bigger than virtually all potential acquirers. So, the U.S. government (the FDIC) had to take it over, prompting Connecticut Congressman Stewart McKinney to coin the term TBTF.

But Continental, with $40 billion in assets or less than 2% of banking industry assets, was not TBTF in terms of threatening the system.

In 2008, huge Citigroup, with $2 trillion in assets, or about 15% of bank industry assets, essentially collapsed. It was clear that Citi’s outright failure would threaten the entire system, especially after Lehman Brothers’ downfall.  So, with no other bank capable of a takeover, the government stepped in with about $50 billion of TARP money in exchange for about a 35-40% ownership position. In addition to this virtual takeover, the government guaranteed (agreed to absorb any losses on) about $300 billion of Citi’s bad assets and facilitated another $65 billion in loans for Citi under a special loan guarantee program for banks (TLGP).

Today, each of the nation’s three largest banks has over $2 trillion in assets. Each is TBTF, both in terms of potential for resolution by takeover and in terms of systemic risk.

Yet, Dodd-Frank leaves these inherently TBTF institutions intact.

TBTF is actually a catch-all for a variety of dysfunction based upon excessive size and complexity. Our three largest banks are not only TBTF, but too complex to manage or regulate – and too big to care.

Under Glass-Steagall, banks were local and regional champions. In New England, for example, Connecticut had Connecticut National Bank and Rhode Island had Fleet Bank.  Then, as the states formed regional banking “compacts,” New England had Bank of New England and a much-larger Fleet. No matter how well or poorly managed (many failed), these institutions cared. Local and regional bankers knew local and regional businessmen.

Then, in 1994 Congress scrapped state control of interstate banking under Glass-Steagall and allowed nationwide branching. Banks became behemoths with no loyalties and no person-to-person knowledge or understanding of borrowers.

In 1999, Congress repealed the rest of Glass-Steagall, i.e. its separation of commercial and investment banking. And that unleashed huge, highly complex, diversified financial conglomerates — a very new phenomenon. The short experience with these giants has not been good.

Robert Rubin, former head of Goldman Sachs and later  Treasury Secretary under President Clinton, served as Chairman of the Executive Committee of Citigroup from 1999 to 2009, the period during which Citi made all the moves that led to its collapse. So, if such an experienced senior manager can oversee such mismanagement, how can giant institutions be considered manageable?

Or regulate-able. And that brings us back to the Dodd-Frank Act, which relies upon regulation to restrain our diversified banking giants – 2,300 pages of regulations plus mandates for more regulators to create even more regulations.

Dodd-Frank is legislation in the image of the “too” problem it is meant to address: the bill is too long, too convoluted, too complicated to work, too prone to the Law of Unintended Consequences, and, ultimately, toothless.

Smaller less-diversified banks are safer and sounder. Shorter, less-complicated laws are more effective. Less is more.

The Senate has not yet passed the monstrous Dodd-Frank Act. It should vote it down and start work on a 100-page bill.

Red Jahncke is president of the Townsend Group, a Greenwich-based management-consulting firm. He can be reached at

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