Opening the Door to New Taxpayer Bailouts

From The Nader Letter

Feb./March 1998

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

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