Financial Deregulation Fiasco: HR 10 and the Consequences of Financial Concentration

by Jake Lewis

Financial Deregulation - the merging of banks, securities firms and insurance companies under common ownership - has become Capitol Hill's longest running and most expensive show. Like a bad Halloween horror movie, the issue appears as a rerun in Congress after Congress.

When the U.S. Congress convenes in January, it will mark the third straight Republican-controlled Congress in which the giants of the financial industry have succeeded in placing their deregulation wish list high on the legislative agenda. Last year, the bill went forward under the legislative flag of HR 10. Whether or not it gets a new number in the upcoming Congress, its contents will be the same.

The current efforts, which began in 1995, arc first cousins to failed deregulation schemes hatched in the Treasury Departments of the Reagan and Bush administrations in the 1980s and early 1990s. In between these grandiose efforts, there have been lesser legislative attempts, some dating back to the 1960s.

The repeated failures have often taken on a comic opera atmosphere amid inept legislative leadership, ham-handed lobbying, horrendously bad timing, unreconcilable clashes among regulatory agencies, repeated veto threats and invec-tive-laced filibusters.

Merrill Lynch, Citicorp-Travelers, Bank of America, Prudential and other marquee names on the top rungs of the nation's corporate ladder have good reason to pursue this legislation relentlessly Congress after Congress. These industries see the potential for big bucks and far-reaching control of key sectors of the nation's economy. This has motivated them to send armies of lobbyists and buckets of cash to Capitol Hill in search of a winning formula for wiping out regulatory and consumer protections.

The battle has been expensive for both taxpayers and the industry. Tax-paid staffs of both the House and Senate have been diverted to develop a case for the deregulation packages and to negotiate deals with an endless array of lobbyists from every sector of the financial services industry. This has been especially true for the staff of the Banking and Financial Services Committee of the House of Representatives, where Representative Jim Leach, R-Iowa, has kept financial services deregulation at the top of his agenda since the day he assumed the committee chair in 1995.

The financial services sector has been a generous donor to House and Senate candidates, according to data compiled by the Center for Responsive Politics. When all the contributions are tabulated and analyzed for the 1998 elections, donors linked to financial corporations will have dumped more than $100 million into congressional races - the largest sum for any one sector of the economy.

Campaign contributions pale against the outlays for lobbying. The Center for Responsive Politics identified lobbying expenditures by financial services firms at more than S177 million in 1997. But totals for 1998 - when critical markups and floor action took place - will certainly top the 1997 figures when final figures are tabulated. Like campaign contributions, the financial services industries' lobbying costs far outstripped similar spending by other industry sectors including such hot-button areas as health, defense and communications.

The ability of the financial services industry to wield such muscle is one of the things that scares consumer and community groups, which see financial deregulation opening the door to coast-to-coast consolidation of financial services firms, leading to a concentration of economic power that would limit consumer choice and further diminish credit and financial services to local communities.

Toward Super-Mega Conglomerates

Many, including some of the most active supporters of the legislation, envision a handful of conglomerates, each with a trillion dollars or more in assets, dominating market and political decisions concerning access to all phases of financial services. These giants, like a national television advertisement for one interstate giant, First Union Corporation, says, "will rise like mountains" above the rest of the financial world.

How much would be left for smaller independent banks and financial providers (boutiques in the words of one big hank executive) is problematical.

Community groups fear that the legislation would usher in an era in which financial decisions for consumers, small businesses and community investment will be made on the basis of rigid one-size-fits-all guidelines dictated front distant headquarters. It would be a world, they believe, in which the terms of access to banking and other financial services will be on a "take it or leave it" basis established by conglomerates as they sweep away competitors in a march across the nation.

At the moment, the top 10 banks control more than 35 percent of the banking system's assets. The 25 biggest banks have more assets (53 percent) than all the rest of the U.S. banks combined. Since 1980, more than 5,100 banks have disappeared, most of them through consolidations. "Extending current patterns into the future, we can only expect a continuation of the trend toward consolidation," says Federal Reserve Governor Roger Ferguson. Federal Reserve economists predict that consolidation will eliminate another 2,000 to 3,000 banks within the next decade. Most of the remaining banks will be small, with a few big banks controlling an overwhelming share of the assets.

Combining the growing concentration of resources in the banking arena with the wave of mergers among insurance and Securities firms in recent years points to the tremendous economic and political power that would be controlled by the newo conglomerates.

Liberal Betrayal

Despite the tact that the pending legislation is an open invitation to more and bigger mergers, the issue of economic concentration has generated little excitement in Congress. This is a sharp contrast to congressional attitudes of a decade or two ago, when the mention of mergers, interstate banking and the disappearance of independent banks would raise a firestorm of concern.

Representative Bruce Vento, who represents St. Paul, Minnesota and is the second most senior Democrat on the House Banking Committee, personifies the changed attitude. Coming from a state with a strong independent bank constituency, Vento could always be Counted on to sound populist alarms over economic concentration when any legislation was proposed which might increase the power of the nation's big banks. In the 1980s, Vento fought hard to include concentration limits in interstate banking legislation.

Now, Vento is in the front ranks of a minority of the Democrats who "see no evil" in turning over the national financial system to a handful of conglomerates - even to the point of allowing these giants to combine forces with big industrial firms as well as securities, insurance and banking corporations.

Vento's political shift parallels a transformation in the Minnesota banking scene. In recent years, Norwest Bank Corporation has emerged as a megabanking operation, which dominates the state and banking in much of the upper Midwest. Norwest recently stretched its reach on the West Coast by acquiring California's Wells Fargo Bank.

Vento's support was a key in garnering the 10 Dei"oci-1tic votes needed by the Republicans to keep the legislation alive and move it out of Committee on a 28 to 26 vote in 1997. On the floor, he rejoined the majority of the Democrats in voting against final passage after the Commerce Committee changed the bill's regulatory structure and clipped bank powers. Nonetheless, he remains an important member of the pro-deregulation forces in Congress.

More surprising than Vento's conversion was the 1998 makeover of Maryland Senator Paul Sarbanes, the ranking Democrat on the Senate Banking Committee, who became an unexpected cheerleader for passage of HR 10.

Sarbanes lobbied his fellow Democrats, voted proxies and generally became New York Republican Chair Alfonse D'Amato's number one aide in putting together the votes in Committee and pushing for support on the floor. Sarbanes' passion for the bill was caught in a dramatic moment on the floor of the Senate as time was running out on the session. There was Sarbanes not D'Amato on the floor making a fervent but futile plea for Majority Leader Trent Lott to keep the bill alive.

Opponents of the legislation had expected something much different from one of the Senate's most liberal Members. Throughout 1997 and cark, 1998, Sarbanes and his staff had attacked provisions in the House bill that allowed the mixing of banking and commerce - that is, a combination of a financial firm with an industrial or other non-financial corporation. Consumer and community groups that were in close contact with Sarbanes staff were led to believe that the Maryland Democrat's problems with the bill were deeper than simple the banking and commerce issue.

But when the banking and commerce provision was unexpectedly deleted from the bill on the floor of the House, file Sarbanes camp began sending up new signals. The central theme of Sarbanes and his Committee staff: "This is the best we can do ... and we should go along lest a worse bill emerge in a new Congress. The amended House bill still permitted banks, insurance companies and Securities firms to merge, and it "grandfathered" extensive banking and commerce combinations without adequate regulation.

Sarbanes was cool to efforts by community organizations that wanted to extend a community responsibility to securities and insurance companies which Would join with banks in new conglomerates - responsibilities similar to those imposed by the Community Reinvestment Act (CRA), which requires banks to help meet credit needs of their communities, including low and moderate income areas. Community groups Were united by a fear that credit and management resources of banks will he siphoned off into the non -hank affiliates, diminishing banking assets that could be evaluated and lapped for community lending. At a minimum, they wanted provisions that would push securities firms to encourage investments in inner-city neighborhoods and would require insurance companies to Issue insurance policies and invest in low and moderate income and minority neighborhoods on a non-discriminatory basis.

More than 800 community organizations from across the nation urged Sarbanes and other senators to oppose the bill. They Were joined by national organizations like the National League of Cities, the National Low Income Housing Coalition, the National Catholic Social Justice LOW,, the National Congress of Black Churches, the National Organization for Women, National Council of La Raza, the U.S. Conference of Mayors, the United Auto Workers, the Teamsters, the Lawyers Committee for Civil Rights, the Center for Community Change, the National Community Reinvestment Coalition and other organizations active oil issues affecting low-income families, civil rights and community development.

The pleas were ignored.

Even when provisions to establish lifeline accounts for the poor and others without access to banking facilities were dumped in the Senate Committee, Sarbanes continued to back the legislation with apparent enthusiasm. (Lifeline accounts would provide deposit, checking and minimal banking services to the poor with minimum balance requirements and reasonable fees.) Sarbanes has long been a strong proponent of privacy, but after his amendment to establish privacy protections for of the conglomerates was defeated, he remained an unwavering backer o f the deregulation package. It emerged from the Committee as a D'Amato-Sarbanes product.

With Sarbanes and his Democrats on the Banking Committee in lockstep with D'Amato, it was left to senators like Byron Dorgan of North Dakota, Paul Wellstone of Minnesota, Barbara Mikulski of Maryland and Russell Feingold of Wisconsin to raise basic issues that have long been considered part of the fabric of the Democratic Party.

"This legislation does more to hinder competition in the banking industry than to spur it ... 'I'he bill will lead to fewer banks and financial service providers, increased charges and fees for bank customers, dwindling credit for rural America and taxpayer exposure to potential mega losses should newly-created financial conglomerates go belly up," Dorgan, Wellstone and Feingold warned the Senate. "In short, this is the worst possible bill being advanced at exactly the wrong time."

Separately, Senator Mikulski warned of the impact of the "firestorm" sweeping global markets and expressed concern that the bill was "the result of last-minute deal-making."

The Greenspan Torpedo

Despite the opposition from these quarters, the D'Amato-Sarbanes package had the important forces behind it money, bipartisan Committee support and temporary unity among the major industry forces.

So what went wrong? Why did the bill die in the closing days and fail to become law?

Hidden behind the shining front of a bipartisan 16 to 2 vote by which the legislation emerged from the Banking Committee were some serious, and ultimately fatal, flaws.

Surprisingly, one of the bill's supposedly strongest points - support from Federal Reserve Board Chair Alan Greenspan - became one of the serious roadblocks.

Sponsors of the bill enlisted Greenspan as a key promoter early on. In addition to testifying for the bill in glowing terms, Greenspan penned letters of support at key points in both the House and Senate deliberations, and met with members in thinly disguised lobbying sessions. During the final vote in the Senate Banking Committee, D'Amato deposited the Federal Reserve Board Chair in quarters near the Committee hearing room where members could be briefed and lobbied before voting. His words of support for the product were extremely useful, as well, in convincing the media of the wisdom of the legislation.

But Greenspan exacted a price. He adopted a hardline, no-compromise demand that the regulatory machinery created by the legislation be controlled by the Federal Reserve.

This created a direct confrontation with the Treasury Department, which Would not agree that banking policy be ceded to a largely unaccountable Federal Reserve.

The Treasury Department also backed concerns of community organizations which opposed Greenspan's insistence that the new activities authorized for the conglomerate--holding companies (which could own both banks and other financial service firms) be housed only in affiliates under Federal Reserve regulation where CRA does not apply.

Nonetheless, D'Amato, Sarbanes and the Senate leadership thought the Treasury Department Would ultimately retreat. This belief proved mistaken. During the final days, the threat of a presidential veto chilled the thought of tying the Senate into knots over a bill that would not become law.

The failure of the bill can also be traced in part to poor timing. Worrying over the effect oil his reelection, D'Amato waited too long to start the process and, too often, allowed industry groups to extend private negotiating and drafting sessions on key points. D'Amato was coy about taking tip the bill and did nothing to advance it until the House of Representatives passed HR 10 on a 214 to 213) vote on May 13.

The most publicized factor in the demise of the bill was a filibuster by Senator Phil Gramm, R-Texas, who launched a series of wild-swinging speeches demanding removal of the limited references to CRA that remained in the bill. Gramm's refusal to give up the floor ate Up valuable time as the Senate pushed to final adjournment in late October. Finally, Majority Leader Trent Lott threw in the towel and pulled the bill from the floor so that other legislation could be considered before the end of the session.

Gramm got credit in the media for stopping the legislation, but the filibuster Would have meant little had the Committee moved the legislation to the floor earlier, when there would have been time to invoke cloture and cut off debate.

A Safe and Sound Banking System?

While proponents of the legislation, like the House Banking Committee's Jim Leach, have issued cheerleader-like statements in an attempt to rally their troops for another try when Congress reconvenes in January, there are some major changes in the landscape.

D'Amato is gone, defeated in New York by Representative Charles Schumer. As a replacement, Gramm is an unknown quantity. His ]ionic state of Texas has 700 independent banks, a group not enthused about the go-go new world of banking envisioned by the legislation.

But, as new chair, Gramm may want to demonstrate that he can move legislation, his filibuster of the last Congress not-withstanding. And he is certainly no opponent of the big banks and corporations which are lobbying for passage. But if Gramm insists that the bill include his no-holds-barred attack on CPA, he may solidify, Democratic opposition and eliminate the legislation's prospects for passage.

On the House side, there are no major changes in the committee leaderships as they relate to the deregulation legislation. However, there are sharp differences remaining between the two committees of jurisdiction Commerce and Banking - differences that were only temporarily papered over in the last Congress. In addition, Reprehensive John Boehner of Ohio lost his job as Republican Conference Chairman. Boehner was the head of an ad hoc task force in the last Congress which helped smooth Committee differences and pave the way for House passage.

The legislation has been marked by major disputes among banking, insurance and securities firms, with the competing industry groups each trying to gain the upper hand in the new conglomerate Structures. These conflicts were Often the death knell for efforts in earlier congresses. Temporary truces were pulled together in 1998 long enough for D'Amato to assure the Senate leadership that the bill could be scheduled for floor action, but many expect the agreements to be abandoned and the industry wars renewed on a new bill, particularly in areas like insurance activities of banks, regulator jurisdictions and the powers of thrift institutions.

As their massive nationwide sign-on letter indicated late in the last Congress, there is growing concern among community groups, city governments, civil rights organizations and their allies about the short shrift that the Community Reinvestment Act was given in the last Congress. The push for recognition of the need to "modernize" CRA along with the "modernization" of the financial industry will be launched earlier and more vigorously in the new Congress and this may become a quid-pro-quo issue for Democratic votes on the industry's package.

But the chances for success may ultimately hinge heavily on how the Congress treats two issues that both houses attempted to ignore in 1998 - safety and soundness of financial institutions and privacy for individuals.

Acting Comptroller of the Currency Julie Williams and consumer and privacy organizations emphasized the privacy issue late in the last Congress, but D'Amato took the bill to the Senate floor minus protections after industry forces blocked Democratic efforts to insert a privacy amendment.

Privacy groups argue that legislation will force consumers into an Orwellian world where a handful of giant bank-securities-insurance conglomerates with hundreds of affiliates will exchange the most intimate and confidential information of an individual's life - everything from medical and hank records, to investment decisions, employment data and detailed analysis of buying and entertainment patterns.

Much of the industry support for the legislation will fade if the bill prohibits the sharing of this data or requires prior approval of customers before their personal information is passed among affiliates. Cross-marketing schemes, utilizing personal customer data, are the profit-making centerpiece of this ne-w world of finance. In the end, this issue, a growing public concern, may loom large in the success or failure of the bill in the new Congress.

An even bigger problem for the proponents' hopes for quick passage in the next Congress is the issue that never got more than a footnote in the last Congress - safety and soundness. That phrase includes such delicate questions as the federal government's "safety net," deposit insurance funds and the creation of conglomerates that will simply be "too big to be allowed to fail" and candidates for taxpayer bailouts.

The companies involved in combining huge insurance, securities and banking corporations under common ownership place heavy new burdens on the financial regulatory system. But proponents of HR 10 did nothing to strengthen and coordinate that system as the General Accounting Office and other experts have recommended for years.

Under HR 10, regulation would have been scattered across six federal agencies and authorities in the 50 States. Insurance companies will be allowed to be full partners in the federal financial services holding companies without being subject to federal safety and soundness regulations. Except under extraordinary circumstances, federal regulators could not even set capital standards or examine insurance companies that become part of one of the new conglomerates.

Throughout consideration of HR 10 in 1997 and 1998, the lobbyists for the big banks, securities firms and insurance companies - and their favorite regulator, Alan Greenspan - assured Congress and the public there was nothing to fear. No savings and loan-like disasters would flow from a top-to-bottom deregulation of the entire financial industry. Everything would be just fine, these self-appointed experts said.

Embarrassingly, just as the Senate thought HR 10 was headed for passage, headlines were blaring news about an overnight $3.5 billion bailout of a Greenwich, Connecticut hedge fund called Long-Term Capital Management.

Suddenly, it was apparent that some of the biggest lobbyists t6r the HR 10 deregulatory bill - Congress' purported experts on safety and Soundness - were mired deep in the Long-Term Capital debacle.

Merrill Lynch and Company had been the most prominent promoter of financial deregulation, running full-page newspaper advertisements and sending its top executives to knock on the doors of U.S. senators. Merrill Lynch's chief, David Koniansley, was present at virtually every major Capitol Hill lobbying session on the deregulation legislation.

Merrill was involved in setting up Long-Term Capital Management and many of its clients are involved in the fund and facing losses. Merrill announced it had exposure of $1.4 billion to the ailing hedge fund.

The Federal Reserve's decision to bail out Long-Term Capital raised lots of eyebrows, including some in a hearing conducted by the House Banking Committee. In his testimony, the Federal Reserve's Alan Greenspan repeatedly returned to fears about the ripple effects of a failure in the "fragile" world markets as a justification for his engineering the bailout.

Words about "fragile" markets and scary financial scenarios were missing from Greenspan's testimony and lobbying when he was promoting the glories of HR 10 to the Congress. Such a rank discussion would not have helped promote Greenspan's campaign to have the legislation pass quickly and the Federal Reserve installed as the dominant federal regulator.

Near the end of the last Congress, the three other bank regulators in the federal system at long last began to sound off about the safety and soundness shortcomings of HR 10.

In a letter to D'Amato and Sarbanes, Acting Comptroller Of the Currency Julie Williams and Director of the Office Of Thrift Supervision Ellen Seidman warned that some provisions of the legislation "would undermine the safety and Soundness of the insured institutions regulated by our two agencies." Separately, Federal Deposit Insurance Corporation Chair Donna Tanouc told the senators that the provisions "change Current law by placing serious and unwarranted restrictions oil the FDIC'S ability, as deposit insurer, to determine and report the financial condition of insured depository institutions."

As these statements Suggest, the deregulation legislation - HR 10 and its Successors - has the potential to change the entire landscape of the nation's financial system, its regulatory machinery and the terms and conditions on which vital services and credit are made available to Consumers and communities. The proponents of the legislation have been highly successful in downplaying and hiding the negative impact on individual consumers as well as the entire economy.

The media has aided and abetted this effort by reporting the legislative developments as an inside ball game, affecting the only the financial elite. Unless this changes and a spotlight is thrown on the dangers and shortcomings, the legislation is likely to become law - and then it will be too late to force changes against the economic and political power that will flow from these new conglomerates.

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