In their ambitious new book “Genealogy of American Finance,” historians Robert E. Wright and Richard Sylla trace the histories of the 50 largest financial institutions in the United States. The lavishly illustrated book’s narratives and detailed “family trees” trace the evolution of a variety of financial companies from their institutional ancestors.
Wright holds the Nef Family Chair of Political Economy at Augustana College in Sioux Falls, South Dakota, and Sylla is the Henry Kaufman Professor of the History of Financial Institutions and Markets and Professor of Economics at New York University.
As Research’s in-house financial history buff, I eagerly plowed into an advance copy I received from the Museum of American Finance, which co-published the book with Columbia University Press. (Disclosure: I have done some writing for the museum’s magazine, Financial History.) To explore how the book and financial history overall relate to the concerns of financial advisors, I contacted the authors for email interviews, which appear in slightly abridged and edited form below.
Research: Your book “Genealogy of American Finance” delves into a long history of financial institutions merging with and acquiring each other. Will such transformations be similarly common in the financial sector’s future?
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Wright: Mergers likely will always be with us here in the U.S. but they will wax and wane in importance. Mergers tend to come in “waves” associated with regulatory changes and/or macroeconomic shocks. An example of the first was loosening intrastate branching restrictions and of the latter the Panic of 2008. Local or regional shocks, from natural disasters or other causes, will injure small banks, the more unlucky and poorly managed of which regulators will force to merge with bigger banks. Technological change could also induce a merger wave, though it could also potentially spur spinoffs, breakups and other types of downsizing by reducing economies of scale or scope.
Sylla: I would not expect more mergers of the very largest banks/financial holding companies [FHCs], which have been identified or pilloried as being too big to fail, and also with some concerns that they are too big to manage. In fact, some of them (e.g., Citi, General Electric) are slimming down on their own, and others may follow as a result of Dodd-Frank and other regulatory moves that may saddle the biggest banks/FHCs with higher capital requirements than other institutions have. But some of the smaller institutions among our 50 might undertake mergers, perhaps with others in the top 50.
Are there some lessons a financial advisor could take from this genealogy that might improve his or her job performance and career prospects?
Wright: Bigger banks are not necessarily better banks in terms of financial performance or behavior. Some mergers have solid economic foundations but others contain holes that are papered over to aid specific interests like CEOs more intent on building empires, or increasing their bonuses, than in building long-term shareholder wealth. Banks that perform well financially but behave badly are the most likely targets of regulatory reforms (e.g., higher penalties for rule breaking) so financial advisors should understand the ultimate sources of bank profitability before making recommendations, especially to clients with social as well as financial goals.
Sylla: Despite the problems we have seen at some of the largest banks/FHCs, a good many on our list are pretty well-managed institutions, and so a financial advisor could well study them and direct clients to them if they operate in the client’s part of the country.
Do some financial institutions or individuals have historical reputations that you think are much different (either better or worse) than what they deserve?