Washington Rule # 1 -- Never underestimate the ability of Congress to repeat its mistakes.This rule is being played out with a vengeance in the mad rush to ram the financial deregulation package through the House of Representatives before the spring recess.
The "act now, think later" stampede is sadly reminiscent of the permissive legislation of the 1980s which expanded investment powers of savings and loans, reduced regulation, forgave transgressions and enlarged the pot of taxpayer-supported deposit insurance funds that fueled the speculative gambles of the industry.
When the granddaddy of this legislation -- the Garn St Germain Act -- was adopted in 1982, only 77 of the present 435 Members were in office. That may be why the 105th Congress appears to have such a short memory about financial deregulation, and why so many seem dazzled by the pitches of the bank, securities and insurance lobbyists currently populating the hallways of House office buildings.
Memories of the financial debacle of the 1980s may be growing dim on Capitol Hill, but any Congressman who believes that the nation's taxpayers have forgotten may have less than a firm grip on reality.
When all the costs are totaled, including interest, taxpayers will have provided several hundred billions of dollars to pay for ill-advised schemes of financial deregulation and lax supervision which allowed reckless, incompetent and corrupt operators to loot an entire industry. These numbers don't include the enormous costs, real and intangible, to local economies and the loss and forced consolidation of financial services vital to consumers and communities.
Taxpayers haven't forgotten. This time around they won't be so forgiving when the news finally reaches down to the grassroots that the Congress has fallen off the wagon and is on another binge to concentrate economic power and provide banks, securities firms and insurance companies with new and lucrative profit schemes while once again transferring the risks to the taxpayers.
Already, before the legislation has reached the floor of the House of Representatives, there is a rising stench of backroom deals to satisfy the whims of lobbyists who have poured millions of dollars into the campaign troughs of the Members of the two bodies of primary jurisdiction -- the Commerce Committee and the Banking and Financial Services Committee.
What will be going to the floor will be legislation rewritten in closed-door session by a handful of Republican Members from the two Committees. Long-standing rules of open procedures -- designed to protect the public interest -- have been summarily dropped. Most of the 107 Members of the Committees have been excluded from these extra-legal markup meetings They have been little more than props for the now-forgotten open markup sessions of last year.
While the recklessness lends itself to a comparison with the savings and loan legislation, the current effort to deregulate the entire financial industry is more far reaching and vastly more dangerous than anything attempted in the legislative games of the 1980s.
The bill that Speaker Newt Gingrich and Republican Conference Chairman John Boehner are trying to slip through the House would create trillion dollar conglomerates housing banks, securities firms, insurance companies and industrial corporations under common ownership.
There is no existing regulatory structure that could properly and safely supervise such monsters. Instead of trying to strengthen and consolidate the system, the legislation scatters supervision to the four-winds, giving the Comptroller of the Currency, the Federal Reserve Board, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision as well as the bank, insurance and securities regulatory bodies in the 50 states all part of the action.
In the end, drafters gave the Federal Reserve Board the biggest share of the regulatory turf. Federal Reserve Chairman Alan Greenspan was properly appreciative. He fired off a letter of glowing endorsement for the handiwork of the Gingrich-Boehner team -- an endorsement that is being used widely to lobby Members of Congress.
It is fitting, after all, that Greenspan should be out front in support of a new version of risk for the taxpayers. In the 1980s Greenspan, as a paid lobbyist, came to Washington often to urge Members of Congress and the federal regulators to broaden the investment powers of the savings and loans -- expanded powers which ultimately sent many thrifts down the drain.
Among the clients of his consulting firm were Charlie Keating and Lincoln Savings. Lincoln failed at a cost of $3 billion to the taxpayers and Keating went to jail for fraud. Members of the current Congress may want to keep this in mind as Greenspan's letters of endorsement for financial deregulation are being scattered around Capitol Hill.
The decision of the Republican drafters to allow the long-standing walls between banking and commerce to be breached has the potential for long-range damage to the nation's economy and independent banking system. Proponents of the legislation will undoubtedly argue that bank holding companies can own only small percentages of industrial corporations under the proposed language. But, such arbitrary limits are only an open invitation to widen the breaches until the walls separating banking and commerce mean nothing.
Former Federal Reserve Chairman Paul Volcker warned the Banking Committee last year about what happens once the wall is breached:
"Once the foot is in the door, the pressures to ease the necessarily arbitrary limits, lubricated by ever larger political contributions, will grow stronger. The fissures in the dike will erode, new compromises will be struck, and the risks and concentrations will inexorably mount."
The risks of the legislation are large, and Congress has failed miserably to set up a rational regulatory scheme that could cope with supervision of trillion dollar conglomerates. Congress has done little to analyze the risks and nothing to shield the taxpayer-supported deposit insurance funds from being looted again.
These conglomerates will be a new and much bigger generation of "too-big-to-be-allowed-to-fail" institutions. This invariably will mean taxpayer bailouts not only for insured banks, but for the uninsured affiliates. Non-bank affiliates won't be allowed to collapse for fear the public will lose confidence in the insured banking corporations in the holding company.
Congress owes it to the taxpayers to learn from the mistakes of the 1980s, not repeat them.
Regulators frequently lapse into cheerleader stances to promote the policies and practices -- good and bad -- of the industries they regulate. But Norman D'Amours, chairman of the National Credit Union Administration, used an appearance before the Credit Union National Association (CUNA) to warn credit union executives of the danger of credit unions drifting toward bank-like structures and forgetting their origins as a volunteer program with a social mission. Here are excerpts from D'Amours' speech:"...I believe credit unions of all sizes and differing memberships need to decide whether they wish to remain involved in the historical, philosophical and statutory mission of reaching out to people of small means. Whatever their own size, structure or membership characteristics, credit unions need to decide whether they wish to remain involved in the cooperative effort to reach out to empower the economically underserved.
"Indeed, whether they wish to continue operating in a cooperative atmosphere.
"...Unpaid volunteers must demand at least an equal voice in setting the direction of the credit union movement. This is necessary because in many instances some professionals have taken a command of the movement that has effectively usurped the role that was intended for volunteers.
"...Certainly, no one is suggesting that competent and professional managers are not vital to credit unions. They surely are. The point is that credit union founders understood the system needed a decision-making function as untainted as possible by self-interest and the drive for profit or personal enrichment. They knew that the course of economic decision-making will necessarily be different if the decision makers have a financial stake in the outcome, be it profit or pay.
"...It is surprising to observe how far we've strayed from this principle. While credit union directors are still volunteers who act unselfishly and take their responsibilities to heart, it is not uncommon to find professionals in control of policy...
"...professionals in the credit union world should not dominate policymaking to the virtual exclusion of volunteers. Credit unions deserve a system that includes strong and efficient volunteer participation at the national and state decision-making levels.
"...It is amazing how much subtle and not-so-subtle resistance can be provoked in certain quarters simply by pointing out the social mission to which credit unions were dedicated by their founders, their history and by federal statute.
"...I know that very many of you are accomplishing that social mission...But, there is much more that could be done by the credit union movement to reach out to people who are financially underserved in order to help them bring themselves into financial mainstream.
"...If credit unions lose sight of their social mission they will become indistinguishable from the for-profit banking sector. And that will cause credit unions to lose the support they now receive from consumer groups, from the U. S. Congress, and from the American public."
There likely will still be a Gonzalez in the 106th Congress.It won't be Henry B. Gonzalez, the long-time leader of the Democrats on the House Banking and Financial Services Committee, who is retiring because of ill health after 37 years in the House of Representatives. But, it now appears that his son, Charlie Gonzalez, a former state judge in Texas, will take his father's place in the House as Congressman from the 20th District in San Antonio.
The son garnered 44 percent of the vote in a seven person race in the Democratic primary on March 12. Since he did not gain an absolute majority, he faces a runoff against Maria Berriozabal, a member of the San Antonio City Council. She had 22 percent of the vote in the primary, but few expect that she will be able to catch Gonzalez in the April 14 runoff. The district is heavily Democratic and Gonzalez is expected to win the general election handily in November.
"Big-picture CEOs and shareholders will like this bill. Lawyers and Washington lobbyists who get bogged down in the expectations game will have to get on board or be left behind." -- House Commerce Committee Chairman Tom Bliley announcing a Republican draft of financial deregulation (aka Financial Modernization).
Philadelphia, the birthplace of American banking, is becoming a hotbed of opposition to efforts of First Union Corporation of North Carolina to dominate banking markets up and down the east coast.Grassroots groups in the city are turning up the heat in opposition to the proposed $17.1 billion takeover of CoreStates Financial Corporation by First Union. Officials of North Carolina bank have been piling up frequent flier miles in trips to Philadelphia to promote the merger and to quiet the growing political and community uproar about the loss of CoreStates, the last major Philadelphia-based bank.
The protests were given a big boost when Senator Arlen Specter, joined by 11 members of the Pennsylvania Congressional delegation, succeeded in convincing the Federal Reserve to hold hearings in Philadelphia on the takeover.
Community, welfare and senior citizen groups turned out for the hearing to protest the merger and its potential for the loss of jobs, the padlocking of branches and the diminution of lending and other banking services for the poor neighborhoods should CoreStates be absorbed as part of the North Carolina corporation.
Senator Specter also appeared at the hearing to express concerns about the merger and has written the Anti-trust Division of the Department of Justice about what he described as the "far-reaching anti-competitive impact on the economy of Pennsylvania, including the negative fallout of massive branch closing and job losses." He asked that the Justice Department undertake a prompt review of the antitrust implications of the merger.
But, Specter's interest in the First Union takeover may have a broader impact on banking and the growing wave of mergers nationwide.
During the hearing, he announced that he was introducing legislation -- the Bank Merger Community Protection Act -- which would tighten significantly the standards governing the approval of bank mergers.
The legislation would require the Federal Reserve Board to treat a city of more than 250,000 population as a "separate section" in measuring anti-competitive effects and would make mandatory Federal Reserve hearings for any application involving more than $3 billion in assets where the applicant would control more than 10 percent of the total deposits in the community.
The legislation would require denial of an application where a bank, on consummation of a merger, would control 30 percent or more of deposits in a metropolitan statistical area. The bill would also limit the ability of a merged bank to close branches.
The provisions of the Specter legislation, if enacted, would severely limit the free -wheeling takeovers by First Union and other interstate banks. Dr. Kenneth Thomas of Wharton School in Philadelphia estimates that First Union, if the CoreStates merger is approved, would control 39.4 percent of the banking market in the Philadelphia MSA. That would make the Philadelphia market the most concentrated in the U.S., moving it ahead of Dallas, where NationsBank -- another Charlotte, North Carolina giant -- controls 35.5 percent the market. Dr. Thomas says Congress should hold hearings on the consumer impact of the First Union-CoreStates and other mega mergers with special emphases on their effect on small businesses and low- and moderate-income consumers.
The Federal Reserve is exempt from budget procedures, appropriation processes, full audits and its operations are subjected to only the most cursory Congressional oversight.Its news when any attempt is made to bring the Federal Reserve Board, the 12 Federal Reserve Banks and their 25 branches -- plus the Fed `s 25,000 employees -- under standards and laws that apply to other agencies of the Federal Government.
So, it was a big surprise when Representative Carolyn Maloney of New York not only attempted, but succeeded on March 12 in convincing the House of Representatives to place the Federal Reserve under the requirements of the Government Performance and Results Act (GPRA) which is designed to help combat waste, fraud and inefficiency in government. Under the Act, all agencies are required to submit five-year plans on how to improve efficiency.
The Fed has been claiming that the law didn't apply to it, just to the other agencies -- lesser agencies in the eyes of the Federal Reserve Board. Maloney's amendment ended that argument.
"Why should the nation's central bank be excused form performing to the highest standards possible?," Maloney asked. "GPRA will force the Fed to improve some of its operations. It has a two billion dollar budget for non-central bank activities. There is no reason that those activities should be exempt from oversight."
Financial deregulation legislation -- posing as "Financial Modernization" -- not only raises significant questions about economic concentration and the potential for taxpayer bailouts, but it also directs some big blows at consumers and communities.Here are some of the direct hits:
1. UNDERMINES THE COMMUNITY REINVESTMENT ACT (CRA) -- The legislation would push non-bank financial activities out of banks into separate holding company affiliates where CRA would not apply. This would shrink the asset base currently covered by CRA and siphon resources desperately needed by local communities. Efforts to extend CRA-like responsibilities to the activities pushed out of the banks into holding companies have received nothing but a blank stare from the proponents of the deregulation package. As these new conglomerates expand, more and more resources will be pulled away from communities and the future of CRA will be placed at risk.
2. ELIMINATES COMMUNITY INPUT -- Financial conglomerates will not be required to seek prior approval from regulators before engaging in insurance, securities or industrial activities. This means that citizens and local officials will not have an opportunity to be heard even when these new activities have a significant impact on communities. The bill simply lets the holding company self-certify that "all is well."
3. ELIMINATES FAIR HOUSING PROVISIONS -- The leadership version of the bill strips out a provision which would have barred insurance companies from affiliating with banks if they had discriminated against minorities in the sale of insurance. This provision was adopted in the Banking and Financial Services Committee, but the leadership summarily dropped the anti-redlining language when it redrafted the legislation.
4. ENDANGERS CONSUMER RIGHTS THROUGH CONFLICTING PROVISIONS ON PREEMPTION OF LAWS -- In different sections of the bill dealing with insurance, the leadership bill alternately takes away and adds to the authority to preempt state law. In one section, the bill declares that provisions dealing with consumer protections in insurance sales are valid only if they are not "inconsistent with or contrary" to state laws. In other words the leadership bill holds that states can preempt federal law, a provision that presumably flies in the face of the U. S. Constitution. In another section, the bill goes sharply in the other direction, broadening the power to preempt state laws if they "restrict directly or indirectly" the ability of banks to engage in any authorized activity.
5. ALLOWS INSURANCE COMPANIES TO RIP OFF INSURANCE POLICY HOLDERS -- The bill would allow a mutual insurance company to declare a change in its domicile to another state to avail itself of anti-consumer laws -- laws which would allow it to avoid compensating the policy holders when it converts from a mutual to a stock company. The mutual insurance companies have successfully lobbied a number of states to enact such laws. Now they need the Congress to join the conspiracy at the federal level so the lax state laws can be utilized. Under the scheme, if Congress adopts the provision in the leadership bill, policyholders -- the true owners of the mutual companies -- could lose billions of dollars when the companies convert to stock and walk with proceeds.
A TEPID RESPONSE ON THE HILLGrowing reports of discrimination in the treatment of African American employees in the Federal Reserve System appear to be evoking little interest in the House Banking and Financial Services Committee which has legislative and oversight jurisdiction over the Fed.Until he fell ill and returned home to San Antonio last September, Representative Henry B. Gonzalez, as Chairman and as ranking Democrat on the Banking Committee, had kept up a steady drumbeat, insisting that the Federal Reserve make a greater effort to diversify its 25,000 member work force and end policies and practices that had led to a number of lawsuits charging racial discrimination in the treatment of minority workers.
But, when employees brought new charges in February, the response from the Committee was tepid, at best.
In answer to an inquiry from the Nader Letter, a spokesman for Chairman Jim Leach said there was no plan to investigate the Federal Reserve's personnel practices while the cases were pending in the Federal courts. A similar question about the issue posed to a spokesperson for the Democrats' new ranking Member -- Representative John LaFalce -- elicited no response.
However, Representative Jesse Jackson, Jr.'s office said that Jackson had made an inquiry in writing to Federal Reserve Board Chairman Alan Greenspan. Jackson had joined Gonzalez in earlier protests about Fed employment practices.
The latest action was brought in February by eight present and former employees of the Federal Reserve Bank of Chicago, charging that they had been subjected intentionally to unequal and discriminatory treatment because of their race and color. The suit charges that the Federal Reserve has "pursued and maintained a pattern and practice of implementing and maintaining racially discriminatory employment practices designed to hire and promote white individuals and to deny African-Americans promotions, regardless of their qualifications." The action potentially covers a class of 700 African-American employees in the Chicago bank and its branches.
Pending in Federal courts in Washington are several lawsuits brought earlier by 19 African American women. Attorneys for the employees say that the suit may ultimately include 198 workers in a class action against Greenspan and the Board of Governors of the Federal Reserve.
The suits against the Board are currently embroiled in a controversy over whether the employees had exhausted administrative remedies in the form of counseling by a Federal Reserve equal employment officer before filing the suits. The employees have filed affidavits stating that they did indeed take advantage of what counseling was available and charge that the Federal Reserve has filed false information to the contrary with the court. Hearings in the case are scheduled in April
The Board has lost one jury trial brought by an African-American employee who charged that she had been repeatedly denied promotion. In that case, Federal District Court Judge Ricardo Urbina ordered Greenspan to promote the employee, give her back pay and $150,000 in compensatory damages. There are reports that other cases have been settled prior to trial.
Plaintiffs in the suit against the Federal Reserve Bank of Chicago not only accuse the Fed of discrimination, but charge that one employee -- a senior compliance/CRA officer -- was retaliated against after complaining about "defacto" policies of discrimination at the Bank and the ongoing discriminatory practices of various managers and officers.
The charges against the Chicago Fed include repeated denial of promotions for African-American employees; steering African-American employees to low-level dead-end jobs; falsely representing that such low-level jobs had "growth potential"; denying increases in grade level to reflect performance and responsibilities; excluding plaintiffs from officer, management and supervisory level positions; assigning higher levels to white employees who have the same or similar or lower level responsibilities as the plaintiffs; denying plaintiffs training and mentoring opportunities; subjecting African-American employees to a higher level of scrutiny and to stricter standards than white employees; paying plaintiffs less than similarly situated and less qualified white employees.
(See January issue of the Nader Letter for details on the cases filed against the Federal Reserve Board in Washington: Artis v. Greenspan and Logan v. Greenspan, Federal District Court for the District of Columbia.)