After the failure of the Capital Corporate Credit Union in Maryland last year, Norm D'Amours, Chairman of the National Credit Union Administration, proposed new regulations to control the investments of the corporate credit unions and now, like Gray a decade ago, D'Amours is watching the industry brickbats zoom in his direction.
NCUA's efforts to strengthen its supervision of corporate credit unions has become a bizarre long-running miniseries. Over the past nine months, it has involved everything from a Catch 22 situation in the Senate Banking Committee to a dissident holdover board member who opposed the seizure of Capital Corporate Credit Union and refused to depart when his term expired.
It has also become entangled in a contested recess appointment. The House of Representatives, which normally leaves such matters to the advice and consent of the U. S. Senate, decided to participate through a House Banking Subcommittee Committee hearing on Presidential appointment powers -- a session which quickly became a forum to hammer NCUA Chairman D'Amours and his staff.
After Capital Corporate failed in January of 1995, Senate Banking Committee Chairman Alfonse D'Amato conducted hearings and demanded that NCUA come up with stronger regulations -- echoing similar demands by the General Accounting Office.
But, in a beautiful display of Catch 22 logic, Chairman D'Amato has refused to conduct hearings on the nomination of Mrs. Yolanda Townsend Wheat whose confirmation to the NCUA board would ensure the margin for the stronger regulations.
Encouraged by the lack of a Senate confirmation hearing on Mrs. Wheat, Board Member Robert Swan -- who often opposed Chairman D'Amours on regulatory issues including the seizure of Capital Corporate -- insisted on remaining on the board after expiration of his term in August -- despite White House requests for his departure. This raised the possibility that D'Amours' pledge to strengthen the rules governing corporate credit unions could be endangered if they were put to a vote while Swan remained on the board.
During the spring recess of Congress and eight months after Swan's term expired, the White House stopped asking and demanded Swan's exit with a threat of cancellation of building passes for he and his staff. Swan got the message, and Mrs. Wheat was named to a recess appointment.
Swan, a former Utah credit union executive who was appointed to the NCUA Board at the urging of former Senate Banking Committee Chairman Jake Garn during President Bush's administration, has now filed suit in Federal Court challenging his removal and the validity of Mrs. Wheat's recess appointment.
The Wall Street Journal reported that credit union officials are helping to finance Swan's suit. The Nader Letter has obtained a copy of a credit union solicitation for a $100 per person event for Swan's legal defense fund with checks made payable to a "Trust to Preserve an Independent NCUA."
Virtually forgotten in all the furor are the regulations that the GAO and Senate Banking Committee Chairman said a year ago were critically needed -- not only for the safety and soundness of insured institutions, but for the continued public confidence in the overwhelming majority of credit unions that are well run.
The new regulations would strengthen controls over corporate credit unions including new requirements governing capital, membership eligibility, lending, borrowing, investing and internal audits.
Nationwide, there are 42 corporate credit unions, non-profit cooperatives owned by groups of credit unions. Together, the corporate credit unions have more than $30 billion in assets. They manage money invested by smaller credit unions, provide liquidity loans and investment products and offer services such as check processing and electronic fund transfers for their members.
The General Accounting Office says that Cap Corp failed because of inappropriate investment strategy, an inadequate risk management system, insufficient board oversight, lax regulatory supervision and examination and inadequate capital. Central to the failure was a heavy investment -- 68 percent of its assets -- in collateralized mortgage obligations (CMOs), a form of mortgage derivative. (Proposed regulations, now pending before NCUA, would limit this type of investment to 25 percent a corporate's primary capital.)
Sharp increases in interest rates in 1994 caused many of Cap Corp's CMOs to lengthen in expected average maturity and the market value of the more volatile CMOs fell dramatically. Cap Corp started borrowing heavily to cover credit union withdrawals.
With runs underway and growing concerns about its liquidity and solvency, Cap Corp imposed a 60-day moratorium on withdrawals by its member credit unions. In January, 1995 NCUA placed Cap Corp in conservatorship and arranged to cover all uninsured deposits. GAO estimated losses on Cap Corps portfolio at $60 million in February of 1995.
The Republican leadership has at last promised Leach time on the floor of the House of Representatives providing he can produce evidence that all industry powers are now truly in love (or at least not terribly unhappy) with the latest in a dizzying series of drafts produced by the Banking Committee Chairman.
For months Leach has been engaged in closed door negotiations with bank and insurance lobbyists in an effort to divide the legislative candy evenly among the competing industry segments.
In recent days, Leach has once again announced "victory" for his shuttle diplomacy among the special interest camps.
But, before the champagne corks popped, the latest effort at a truce among the warring industry factions appeared to be slipping, and doubt was growing that Leach could deliver on his promise for a peaceful floor consideration of his legislation.
To Leach's dismay, banking groups continued to find "poison pills" among the array of legislative goodies.
In addition Undersecretary of the Treasury John Hawke warned banks that the newest Leach version would freeze national bank insurance powers as of January 1, something that he described as not only "discriminating against national banks, but anti-competitive, anti-consumer and inconsistent with a reasonable approach to financial modernization."
The usual suspects among the bank consultants and lawyers who double as public relations flacks for the industry also argued publicly that the new Leach language continued to unfairly curtail new insurance products for banks.
The insurance agents, already flattened by a Supreme Court decision reaffirming national banks' powers to sell insurance, were quoted as saying they "could swallow" the newest Leach proposal.
But, on the eve of Leach's "victory" statement, the Executive Council of the State Community Bankers Associations warned House Majority Whip Tom DeLay against bringing the bill to the floor, suggesting the potential for a "bloody and unnecessary" fight that could "likely result in considerable political damage to the member [of Congress] back home."
Following that blast, 24 state bank associations--members of the State Association Division of the American Bankers Association--wrote Speaker of the House Newt Gingrich, contending there was no consensus on the insurance issues and asking that Leach's legislation be put over until next year.
Leading much of the effort among the state associations is John Heasley, general counsel of the Texas Banking Association and former Republican counsel on the House Banking Committee. Significantly, two of the top three leadership positions in the House are held by Texans -- Majority Leader Richard Armey and Republican Whip DeLay.
On Leach's side of the scorecard, the American Bankers Association remained silent -- read that neutral for the moment -- primarily because some members like the fact that the legislation would authorize common ownership of banks and insurance companies. Leach has had success in picking off some individual banks including NationsBank and BancOne.
The Committee Chairman pled with the Bankers Roundtable -- a group of the banking elite -- to support his bill unconditionally. The Roundtable has circulated various drafts of a reply, some with conditions. The Leach-Roundtable summit is continuing.
While enough drafts of Leach's insurance and securities provisions have been distributed to fell a Maine forest, no new drafts of the consumer-community provisions have surfaced since last fall.
After the Banking Committee reported out HR 1858, Leach modified the bill and introduced what became HR 2520. The Committee has taken no action on HR 2520, but it is expected to be the vehicle if and when Leach gets a hearing before the Rules Committee and is cleared for floor action.
While the assaults on the Community Reinvestment Act (CRA) were modified from the Committee passed bill, Leach's HR 2520 still contains major dangers for CRA in the form of "safe harbors" that will prevent regulators from considering new data from communities when banks file applications to merge or expand. The bill also stops the collection and reporting of key information necessary for monitoring bank performance and enforcement of CRA.
Also buried in the bill is a significant weakening of disclosures under the Truth in Savings Act, the Home Ownership and Equity Protection Act and the Home Mortgage Disclosure Act. The bill gives the Federal Reserve Board unilateral authority exclude transactions from disclosures under the Truth in Lending law and weakens a number of provisions intended to ensure safety and soundness of insured institutions including those governing insider lending, audits and accountability of bank directors.
On the Senate side, a somewhat less onerous regulatory rollback measure will probably await floor action until after Banking Chairman Alfonse D'Amato's Whitewater investigation is completed in June. Glass-Steagall repeal (new securities powers for banks) is moving on separate track in the Senate and is unlikely to be linked with the regulatory rollback package.
But whether the bills are more than props for the fall political campaigns remains a very big question mark.
The latest legislative excitement was prompted by surcharges slapped on ATM transactions by the owners of the ATM networks. The surcharge is in addition to a fee charged consumers when they use an ATM other than one operated by their own bank.
Legislative proposals range from an outright ban on the surcharges to statutorily prescribed disclosures of the specific amount of the fees at the point of service with the consumer retaining right to cancel the transaction.
Among those promoting the ban on surcharges are Senate Banking Chairman Alfonse D'Amato and Representative Bernie Sanders in the House Banking Committee. Consumer groups reported that D'Amato was expected to be joined by Senators Carol Moseley-Braun, Richard Bryan, Barbara Boxer and John Kerry in the call for a ban on the surcharges.
In a statement opening hearings on ATM charges, House Banking Chairman Jim Leach suggested the industry consider a delay in the surcharges. And Representative Maxine Waters of California wants a general two year freeze on all bank fees including the ATM charges for persons with less than $3,000 in their accounts. Others like Representatives Bruce Vento, Cleo Fields and Charles Schumer are pushing disclosure measures.
The lone federal regulator called to testify in the House Banking Committee hearings -- Federal Reserve Governor Lawrence Lindsay -- wandered through a long statement only to express the opinion that the present disclosures on ATM machines were just fine, echoing earlier testimony from industry witnesses..
"The effort at secrecy has only one source: That is the long-standing effort of those having to do with banking and central banking to feel that they are above the procedures ordinarily required of other individuals and agencies."Nothing has been so assiduously cultivated over so many years as the feeling there is some mystery associated with these matters which should not be revealed after the fact to the public. The participants in the Federal Reserve's Open Market Committee meetings are highly paid people selected on the basis of their presumed qualifications. There is not the slightest reason why their positions should not be known, and they should not be held fully responsible for their comments."
But changing the present balkanized structure seems farther away than ever.
Even the Treasury Department, which drafted a version of agency consolidation two years ago, backed away from the idea, at least for now.
Calling the present regulatory system "needlessly complex", Undersecretary of the Treasury John Hawke told the Committee that a full-scale consolidation, nonetheless, should be deferred because there were "too many open questions about where the structure of the industry, itself, was going."
He suggested the Congress would have a "better fix" on the question "over the next couple of years".
Consolidation did get a nudge from the General Accounting Office. GAO proposed combining the Office of the Comptroller of the Currency and the Office of Thrift Supervision and the bank supervision powers of the FDIC. Under this plan, FDIC would essentially remain an insurance agency with only "backup" authority to examine banks if it felt the insurance funds were threatened. The FDIC Chairperson -- Ricki Tigert Helfer -- strongly opposed this approach, contending that bank examination powers and insurance fund oversight should go hand in hand.
The only consolidation that seems likely any time soon is a merger of the Office of Thrift Supervision into OCC. That consolidation is being pushed by the prospect that the separate thrift deposit insurance fund will be folded into the bank insurance fund and thrift charters converted to bank charters.
During consideration of bank reform legislation in 1991, Chairman Henry Gonzalez proposed a full consolidation with the formation of a single independent agency solely devoted to bank supervision and consumer compliance. Under that plan, the Federal Reserve would have been left with the sole duty of carrying out monetary policy and the FDIC would have functioned only as an insurance and liquidation agency.
For a few months, the Gonzalez proposal teetered on the brink of success, but it was ultimately dropped from the legislation under fierce opposition by the agencies seeking to keep their turfs intact and by an uproar from each segment of the financial industry lobbying to retain its own regulator. This same combination of agency-industry opposition has stopped the push for consolidation that dates back to Hoover Commission in the late 1930s.
The idea was supported vigorously by Representative Wright Patman and Senator William Proxmire in the 1960s and 1970s, but industry and agency lobbying prevailed.
As a result, the banking industry is rushing forward in an age of rapidly changing technology, mega mergers and a complex web of new products with regulation housed in a jerry-built overlapping regulatory structure little changed since President Franklin D. Roosevelt's Administration. nnNL
The reason: Senator Tom Harkin of Iowa, not happy with the Federal Reserve's interest rate and slow growth policies, wants a chance to fully air Greenspan's handiwork in a debate on the floor of the Senate.
Just before Greenspan's term expired on March 2, he was reappointed by President Clinton. A long-time Republican economic advisor and consultant to financial institutions, Greenspan was first appointed to the Federal Reserve by President Ronald Reagan and was reappointed by President Bush. He continues to serve pending Senate confirmation of the new term. nnNL
Greenspan's response caused Gonzalez to renew his demand for a full scale investigation of what he has described as "waste and abuse" in the Fed's check clearing operations.
"The stonewalling and obstructionist tactics provoke only more questions," Gonzalez warned Greenspan.
On the same day, he wrote Greenspan about the abuses in the system -- January 5 -- he sent a letter to Banking Chairman Jim Leach requesting hearings. Like Greenspan, Leach has been slow to pick up a pen to reply. In blasting the non-answer from Greenspan, Representative Gonzalez again called on Leach to let the Committee investigate the charges. Leach has yet to reply. nnNL
A MESSAGE FROM RALPH NADER:
The problems could have been avoided with just a modicum of foresight on the part of the Congress and the Federal Deposit Insurance Corporation a year ago.
But, in a rush to reward the banking industry, President Clinton's appointee as Chair of the Federal Deposit Insurance Corporation (FDIC) -- Ricki Tigert Helfer -- capped the Bank Insurance Fund (BIF) at its statutory minimum of 1.25 percent of insured deposits. Before the year was out, premiums for banks were eliminated except for a handful of risk-prone institutions.
Meanwhile, the reserves in the SAIF fund were far short of their statutory minimum and this left the thrifts paying 23 cents per $100 of deposits. On top of that, about $800 million of the thrifts' premiums are diverted from the SAIF fund annually to pay off the Financing Corporation (FICO) bonds voted by the Congress in 1987 in a failed attempt to bail out the savings and loans.
Suddenly, it dawned on the Clinton Administration and the Congress that the equation didn't work with one class of depository institutions paying the maximum for insurance and another class riding high on free government insurance.
After wringing their hands for months over the dilemma, the House and Senate Banking Committees decided to cram an insurance "fix" into last year's Budget Reconciliation resolution. The plan involved a one-time payment of about $6 billion by the thrifts to bring their insurance fund up to the statutory minimum of 1.25 percent of deposits -- with the banking industry picking up most of the $800 million annual bill for the old FICO bonds. The cost to the banks would have been roughly 2.5 cents per $100 of insured deposits. The plan would have allowed insurance premiums paid by thrifts to drop to a level more competitive with the banks.
As predicted, the Budget Reconciliation measure was vetoed by the President on other grounds and the insurance fix went down the tubes.
This sent Congress back to the drawing board. House Banking Committee Chairman Jim Leach -- stung by the banks' criticism of the SAIF plan -- decided that he would tap the bulging bank accounts of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Bank Corporation (Freddie Mac) to help pay for the FICO bonds. But, a quick lobbying campaign by Fannie and Freddie killed that idea before it got out of the word processors.
Congress and the Clinton Administration have returned to the idea of the banking industry sharing the cost of the FICO bonds as a means of closing the premium disparity between the two industry groups.
But, the banks aren't buying. Lobbyists -- from both the Independent Bankers Association and the American Bankers Association -- are battling hard against being part of any plan that requires a bank contribution. Despite a plea from President Clinton, the banks were successful in stripping the deposit insurance plan from the last short-term funding measure. Now, Congressional proponents of the plan are talking about tacking the measure on a "must" piece of legislation such as the possible gas tax repeal or a budget bill should one emerge.
A year ago, before the FDIC decided to cut bank premiums from 23 cents per $100 of deposits to zero, the attitude of the banks might have been dramatically different. Then, the industry might well have been coaxed to the negotiating table and the Clinton Administration and the Congress likely could have worked out a compromise that would have included a moderate cut in premiums for the banks combined with a deal on the FICO bonds.
Such an approach not only would have solved the thrift problem, but would have allowed the bank insurance fund to continue to grow as a bulwark against a future taxpayer bailout if bank fortunes go sour.
But, now the banks are fat and happy with the feast of free insurance provided by Mrs. Helfer's FDIC -- and in no mood to give any of it back to pay for the FICO bonds -- or even to strengthen their own deposit insurance fund.
Likely, some last-minute solution to the SAIF problems will be enacted. The stakes are too great to allow it to flounder indefinitely. Already, thrifts are moving deposits into affiliates that are members of the bank insurance fund, further weakening SAIF. And without a solution, the FICO bonds may face default, an event that would mean a taxpayer bailout.
But, the current management of the deposit insurance funds is absurd -- and the blame rests equally with the Executive and Legislative Branches.
When Congress awoke form its deep slumber in the late 1980s., there was genuine bi-partisan alarm over the careless manner in which the deposit insurance funds had been managed. President Bush and leaders from both parties in the Congress vowed "never again" would the taxpayers be subjected to a "Perils of Pauline" style of management of the insurance funds. But, for the past year, the FDIC and the Congress seem to have gone back to business as usual.