To anyone interested in how the financial industry has evolved over the past forty years, The Megabanks Mess, by Herbert M. Allison provides an ample introduction. In addition to describing how a wide collection of small banks and thrifts grew into just a handful of highly complex, interconnected Megabanks, Allison shows how America’s largest banks contributed to the severity of the recent financial crisis. He concludes by offering fundamental changes to help break the cycle of periodic banking crises.
Earlier today my review of The Megabanks Mess was published on the reason.org site and can be found here. From my review:
Whatever the cause, The Megabanks Mess chronicles well that the outgrowth of market structure changes and innovation was a prolonged boom in financial assets that grew tremendously for almost forty years until the industry was abruptly brought to its knees during the financial crisis.
Allison points to flaws in the megabanks' business model as root cause of the crisis. He notes the obsession with short-term profit, excessive compensation plans, conflicts of interest with clients, and misaligned pricing structures as direct contributing factors. Though the actors, both junior level and board level, should clearly be faulted, the industry, itself, exerted perverse influence, as well. Allison writes: "Far more useful than 'greed' in explaining the bankers' excessive risk-taking is that they dutifully responded to the industry’s prevailing pressures and incentives, and to stakeholders’ expectations, without stepping back to reflect on the gradual distortion of corporate principles and personal behavior that was almost imperceptible in their day-to-day pursuit of narrow goals."
Allison also offers a forum where interested readers can discuss the topics covered in his book which can be found here.