Columns » Ernest Dumas

Unlikely populist: Warren Stephens

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This is not quite on the plane of Republican Gov. Frank White suggesting in 1982 that Arkansas socialize the private power industry, but it is about as head turning. Warren A. Stephens, the head of Arkansas's and the region's most formidable financial house, penned an op-ed editorial in the Wall Street Journal the other day suggesting that the government crack down on the big banks like Franklin D. Roosevelt did.

Unlike his uncle Witt, Stephens would never utter a paean to FDR, and he did not even mention Roosevelt or the New Deal, but he said Congress made a terrible mistake in scrapping the Glass-Steagall Act, the 1933 banking law adopted months into Roosevelt's first term as an antidote to the financial crash of 1929 and the Great Depression, and that it should embrace something like that law again to avoid another crash and the inevitable sorrows that will follow.

The CEO of Stephens Inc. has never professed liberal or populist tendencies, or demonstrated any, but with a few rustic flourishes his WSJ op-ed would read like it had been written by the wisest economic sage of the last century, Leland Duvall, the author of Moreland's Laws of Economic Behavior.

Duvall, who wrote for the Arkansas Gazette for 45 years, believed that the finest exhibition of legislative genius, ever, was the Banking Act of 1933 (Glass-Steagall), which separated commercial and investment banks and erected a scheme of rules for what banks and other lending and investment institutions could do to make money without unduly risking their customers' assets. The periodic financial collapses and depressions that had marked the growth of the American republic from 1837 until 1929 vanished, lending institutions flourished after the recovery, and the country grew almost seamlessly for 45 years — until restive bankers persuaded Washington to remove the fetters and let them show once again what they could do.

Stephens wrote that while the Dodd-Frank financial reform bill in 2010 sought to limit the size of banks to forestall another crisis like the one in 2008 that sank us into the current malaise, the big banks are bigger than ever. He suggested forcing banks to divest if they exceeded 5 percent of the nation's deposits (Dodd-Frank says 10 percent and it is not airtight) and restoring Glass-Steagall's separation of commercial and investment banking.

Perhaps the worlds of finance and politics will heed this voice from the Arkansas wilderness when it didn't the rustic warnings of Duvall. After all, Stephens has access periodically to the editorial columns of the Wall Street Journal and owns an MBA. Duvall's highest pedigree was his eighth-grade report card at Moreland grammar school, and the easternmost reach of his words was Armorel.

When Congress first chipped away at Glass-Steagall in 1980 to liberate savings and loan associations and Reagan administration regulators gave the thrifts "forbearance" to go out and seek greater fortunes than could be had in the dull home-mortgage trade, Duvall wrote that it would pretty much doom the thrifts. Arkansas's big thrifts soon leaped into the booming Dallas real-estate market and, of course, went down with it. Most of the nation's S&Ls collapsed, and with the help of thrift bailouts from the Reagan and Bush I administrations the taxpayers eventually took a $124 billion hit.

When Reagan's nominee for the Supreme Court, Robert Bork, wrote an appeals court order that permitted the National Westminster Bank in Washington to offer brokerage services and investment advice, forbidden by Glass-Steagall, Duvall wrote that the gates had been opened and the end would not be pretty. Reagan's appointees to the Fed Board had overridden the chairman, Volcker, and authorized Westminster to poach on the brokerage business.

Duvall began an editorial a short while later: "The difference between the pilot of a four-wheel-drive pickup or Jeep and the conventional motorist is that the daring driver gets stuck in deeper swamps. In a way, the rule holds true in the financial community, where bankers are tempted to park their Cadillacs and Continentals, mount their Land Rovers, and venture into the high-risk fens and marshlands that currently are the province of securities dealers, managers of mutual funds, and other free-wheelers."

An MBA and the Wall Street Journal require a more elegant metaphor but Stephens and Duvall found the same conclusion.

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