How Did A Bank Lobbyist Score The Top Bank Regulator Job?

Of all the architects of last year's financial crash, John Dugan remains the most obscure, despite his stature as one of the most influential. While regulatory errors have made Larry Summers, Robert Rubin and Alan Greenspan household names, most people have never heard either of Dugan or his agency, the Office of the Comptroller of the Currency. But as the chief regulator for the largest US banks, Dugan and his staff are one of the most powerful engines of economic policy in the world.

Over the course of nearly a quarter-century, Dugan has proved himself a staunch ally of the American financial elite as a Senate staffer (1985-89), a Treasury official (1989-93) and a lobbyist (1993-2005), building a career that culminated in 2005 when George W. Bush appointed him comptroller of the currency. When the financial system finally succumbed to its own excesses in September 2008, Dugan's fingerprints were all over the economic wreckage, but almost nobody noticed.

Dugan began navigating the intersection of politics and finance in the mid-1980s as an aide to deregulatory ideologue Republican Senator Jake Garn. But he didn't distinguish himself as anything more than a partisan workhorse until he entered the Treasury Department in 1989. That year, Congress ordered the Treasury to conduct a study on deposit insurance--the federal program that makes sure you don't lose all your money if your bank fails. Under Dugan's direction, the study ballooned into a nearly 750-page book that is perhaps the single most boring manifesto for sweeping economic change that has ever been written. Published in 1991 under the mundane title Modernizing the Financial System: Recommendations for Safer, More Competitive Banks, Dugan's tome became known as the Green Book, and it established him as one of the earliest architects of the "too big to fail" economy.

With the Green Book, Dugan pushed dozens of policies that were ultimately enacted, but three stand out from the pack. His first objective was to allow banks to expand into multiple states without incurring additional regulatory oversight. His second, more radical goal was to allow relatively safe commercial banks to merge with riskier investment banks and insurance companies. And his third, most extreme initiative was to allow commercial firms--General Electric, Sears--to purchase a bank.

Dugan was not the first to suggest these reforms. Congress poked holes in the wall between banking and commerce in 1987. That same year, Paul Volcker's tenure as chair of the Federal Reserve came to an end, in part because of his resistance to using the central bank to weaken Glass-Steagall. But the banking system of 1991 still largely resembled the banking system of 1951. The significance of the Green Book is that it expressed these radical deregulatory positions in a single, seamless policy platform.

"It was unquestionably the blueprint for the major Clinton-era deregulation," says George Washington University Law School professor Arthur Wilmarth Jr., a longtime banking scholar. "It was the first real recipe for too big to fail." (Dugan declined to comment for this article.)

The Green Book policies may sound like technocratic tweaks, but Dugan was injecting himself as a key player in a fundamental restructuring of the US economy. Since the 1930s, the Glass-Steagall Act had barred banks that performed essential functions like accepting deposits and extending loans from making risky bets in the securities markets. In the late 1980s policy-makers and free-market economists began questioning the usefulness of the law and urged that banks be allowed to expand their activities in the name of global competition and profit. The Green Book marked the first time that the repeal of Glass-Steagall entered the official economic policy platform of an administration.