Giving the Nod to Conglomerates

By Jim Campen

This article is from the January/February 2000 issue of Dollars and Sense: The Magazine of Economic Justice available at

issue 227 cover

This article is from the January/February 2000 issue of Dollars & Sense magazine.

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Europeans use the term "universal banks" to describe their all-purpose financial institutions. Germans, for example, have long been able to buy stocks and insurance policies at the same offices where they have their checking and savings accounts. Now, under legislation finalized in November, universal banking is headed for this side of the Atlantic. Is it a good idea?

As the accompanying article explains, the barriers between different types of financial institutions have been eroding for the last two decades, so in some ways the Gramm-Leach-Biley Financial Modernization Act of 1999 is anticlimactic. The effects still may be dramatic. For the first time, banks, insurance companies, and investment firms can buy each other without first finding obscure legal loopholes. The new law finally makes the 1998 merger that formed Citigroup from Citicorp (banking), Travelers (insurance) and Solomon Smith Barney (investments) fully legal. It also sets the stage for yet another wave of mergers, this time creating a new breed of financial conglomerates.

It took Congress 20 years of trying to finally produce a comprehensive revision of the banking laws originally passed during the Great Depression of the 1930s. Promoters of the new law argue that the "one-stop shopping" made possible by the new "financial supermarkets" will result in greater convenience and lower costs for consumers. In some cases, this may be true, but the dominant effect is likely to be a further concentration of economic and political power, and the use of this power to benefit the new financial giants at the expense of the rest of us.

The law ominously threatens individual privacy. The new companies will be able to compile vast new databases on their customers, containing information ranging from financial status (mortgage applications) and detailed spending habits (checking account and credit card records) to medical history (health insurance files). This allows people's health status to enter into a bank's calculation of whether to provide them with a loan. In fact, the prospect of sharing such diverse information about people among the different parts of the new corporations was a major factor behind banks' urge to merge.

Jim Campen teaches economics at the University of Massachusetts at Boston. He was a member of the Dollars & Sense collective from 1974 to 1982.

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