The Campaign to Eliminate the Separation Between Banking and Commerce

by Jake Lewis

Modernization. That is the new buzzword employed by many in the Clinton Administration and in the U.S. Congress to justify various schemes to enhance the power and profits of the financial industry.

There are as many definitions of "modernization" as there are congressional bills that would allow banks, securities firms and insurance companies to acquire and be acquired by each other in a new monopoly game.

The game has taken a radical turn in the new Congress as factions of the Senate Banking Committee and the Treasury Department have launched serious efforts which go beyond the melding of "financial services" to permit a full-scale marriage of banking and commerce -- a total rollback of the Bank Holding Company Act's proscription against banks and commercial corporations owning each other.

Proponents and opponents alike agree that breaching the wall of separation between banking corporations and commercial firms could bring about major changes in the economy -- and enable corporate conglomerates to enhance their power through a new and powerful leverage of bank credit [see "A Dangerous Mix II," this issue].

Undersecretary of the Treasury John (Jerry) Hawke, author of a draft plan being circulated within the administration, argues that financial reform cannot succeed without mixing banking and commerce. Hawke says that banks will be "handicapped" and "less competitive" unless the traditional prohibitions are lifted entirely.

People like Sam Baptista, president of the Financial Services Council, which represents an alliance of securities firms, insurers and major banks, applaud Hawke's views.

On the other side of the issue is a vocal band of consumer, community, labor, senior citizen, agricultural and independent banker groups who fear that their interests would suffer if big banks and commercial corporations join into powerful megaconglomerates.

"At a minimum, common ownership of banks and commercial firms will create powerful conglomerates that would dominate the nation's economy, reduce competition, limit consumer choices, misallocate credit and place enormous strains on the deposit insurance funds," consumer advocate Ralph Nader warned the Clinton Administration in a January letter.

Leaders of the Consumer Federation of America, Consumers Union, the AFL-CIO, the American Association of Retired Persons, the Center for Community Change, the Association of Community Organizations for Reform Now (ACORN), the National Farmers Union, the National Family Farm Coalition, the National Cattlemen's Beef Association and the Independent Bankers Association of America have echoed these complaints in letters opposing the proposal.

The D'Amato-Rubin connection

Whether the big banks see their dream of common ownership of banks and commercial firms come true may depend on an odd potential alliance between a rough-and-tumble New York politician and an urbane Wall Street expatriate.

Senator Alfonse D'Amato, R-New York, chair of the Senate Banking Committee, has fired the opening shot in the campaign to allow common ownership, introducing a comprehensive package to tear down the existing wall between commerce and banking.

Down Pennsylvania Avenue, Secretary of the Treasury Robert Rubin -- a former co-chair of Goldman Sachs, a major investment banking firm -- is mulling the draft that Undersecretary Hawke has placed on his desk.

Senator D'Amato is anxious to obtain Rubin's blessing. He needs it to place a bi-partisan gloss on his bill, something that he hopes will lead to a winning coalition of Republicans and Democrats in the committee and on the Senate floor.

The ranking Democrat on the committee -- Senator Paul Sarbanes, D-Maryland -- met with Rubin and urged that the administration not link hands with the Republican chair. Sarbanes and other Democrats see a D'Amato-Rubin alliance as potentially fatal to their efforts to head off the mixing of banking and commerce.

While the consumer-community-labor-independent banker coalition undoubtedly has had an impact on the Clinton administration's deliberations, the loudest and most forcible message has come from Paul Volcker, the former chair of the Federal Reserve Board and a long-time opponent of mixing banking and commerce.

Volcker told a House Banking subcommittee in March that "modernization" was not "worth the risks and costs of embarking on a new experiment -- an experiment foreign to our traditions and experience -- of relaxing prohibitions on combinations of banking and commerce."

"In my judgment, the subcommittee could make no greater contribution to speeding constructive legislation than by making clear now, at the very start of the legislative process, that the idea of combining banking and commerce should remain 'off the table,' just as it has in the past," Volcker emphasized.

The former Fed chair said it is ironic that the "modernization" issue is being raised in Congress at the very time the concept is being questioned in other nations. "Just as the proposal to relax our restrictions is being pressed by some, debate has emerged in Germany and elsewhere about the wisdom of their approach, partly because of the implications for corporate governance and for concentration of economic influence," Volcker told the subcommittee.

A basket case

Volcker's testimony echoed much of what current Federal Reserve chair Alan Greenspan had told the subcommittee earlier, particularly in areas designed to protect the Fed's turf as the regulator of bank holding companies.

Unlike Greenspan, however, Volcker adamantly refused to go along with proposals to allow banks to fill limited "baskets" with non-financial holdings.

"By adopting special baskets or other compromise approaches to accommodate particular interests this year, you will be presented in the years ahead with the argument that the compromises are arbitrary and inequitable," he warned the subcommittee. "An enlarged phalanx of lobbyists will appear, dedicated to enlarging whatever room for maneuver has been achieved."

That remark put Volcker at odds with Greenspan's idea for a "pilot project" and cast aspersions on a bill by subcommittee chair Marge Roukema, R-New Jersey. That bill would permit a bank holding company to have a basket of commercial activities, so long as they do not exceed 25 percent of its total assets.

Volcker's strong stance against such a compromise also may complicate the Administration's maneuvering should it decide to play with a "basket" as a middle ground.

Some of the impact of Volcker's testimony may be lost on the House Banking Committee which is so badly split that it had difficulty moving lesser legislation in the last Congress.

Committee chair Jim Leach, R-Iowa, opposes the mixing of commerce and banking. Roukema clings to the middle-of-the-road basket approach as does a senior Democrat, Representative Bruce Vento of Minnesota. Others, including Representatives Richard Baker, R-Louisiana and John LaFalce, D-New York, are closer to D'Amato and Hawke.

The stakes

Standing anxiously in the wings are the two big regulatory agencies -- the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board. Both have been engaged in a bitter turf war and the proposals for the mixing of commerce and banking are only serving to increase anxiety in the agencies.

New regulations adopted by the Fed last year allowed affiliates of bank holding companies to expand their securities activities by 150 percent.

The OCC countered with regulations permitting banks to undertake expanded securities and insurance activities. Unlike the Fed's separate holding company affiliates, the securities and insurance activities covered by OCC's regulations are placed in "operating subsidiaries" within the bank structure itself.

The Bank Holding Company Act is the major obstacle to banks and commercial firms linking hands. Under this act, holding companies may engage only in those activities that are closely related to banking.

This restriction must be removed if banks are to acquire any firm that holds an equity position in a commercial corporation.

Under the existing law, insurance companies and securities firms, for example, might be designated as financial services "closely related to banking." This designation would permit banks to acquire insurance and securities companies, or they to acquire banks. If these firms, however, have a stake in commercial corporations, the acquisitions would be blocked by the current prohibitions of the Bank Holding Company Act.

This explains why the limited basket proposals by Roukema and others are attractive for many of the financial services firms that now own equity positions in commercial companies. The limited-basket proposals would free these firms to buy into the banking business.

Both the D'Amato and Roukema bills would eliminate the current Bank Holding Company Act structure and permit financial services holding companies to engage in a broader range of activities.

Whether it is a no-holds-barred meshing of banking and commercial activities, a limited basket of commercial operations or a return to the status quo, it is unlikely the Congress will resolve the bank-commercial corporation relationship until late next year.

Ultimately, if the drive to concentrate economic power by permitting bank-commercial firm cross ownership is to be derailed, it may be by narrow political considerations, rather than out of concern for preserving democracy, the bank insurance system or some semblance of a level economic playing field for competing big and small corporations. Many of the now-famous Clinton White House coffees were with leading bankers, and the administration is likely to be sensitive to the fact that dispensing huge favors to those same bankers may leave a bitter taste in voters' mouths. Similarly, in the wake of the huge taxpayer bailout of the savings and loan industry, the thought of stretching the federal safety net to cover a combination of General Motors and Citicorp may be too much for members of Congress to explain to voters back home.

Jake Lewis is editor of the Nader Letter on Banks and Consumers, and former professional staff member of the Banking, Finance and Urban Affairs Committee of the U.S. House of Representatives.