How soon Washington forgets. Less than a decade ago, the taxpayers were called on to contribute hundreds of billions of dollars to bail out the “free enterprise” savings and loan industry and to set aside another $30 billion as a contingency fund to prop up deposit insurance for the commercial banks.
Now the banking industry is enjoying quarter after quarter of roaring profits. Memories of the financial debacles of the 1980s are dimming. Caught up in the economic euphoria, the Congress is on another legislative binge to relax regulations and let banks, securities firms, insurance companies and industrial corporations operate under common ownership in huge conglomerates.
A few weeks ago, I was invited to testify before the Senate Banking Committee on this legislation and took the opportunity to remind the Committee of the risks and the large new burdens that would be placed on regulators, and more to the point, on the taxpayer-supported deposit insurance funds. I urged the Committee to take notice of the new risks inherent in these large conglomerates and to adopt amendments which would shield the taxpayers from another giant bailout.
In response, the Committee Chairman—Senator Alfonse D’Amato of New York—asked me to give the Committee specific ideas for provisions which limit taxpayer liability. Though surprised by the Senator’s request, I was quite happy to respond.
My response to the Committee was in three parts:
First, I urged a specific statutory prohibition against the use of taxpayer monies to bail out these conglomerates or any of their affiliates or subsidiaries. Similarly, under my proposal, deposit insurance funds could not be diverted to rescue the corporations nor could emergency funds of the Federal Reserve System or the Federal Deposit Insurance Fund be used to assist these corporations. In short, these corporations would make their own mistakes and pay for their own mistakes without turning to the taxpayers for a rescue.
Secondly, my proposal would limit the concentration of economic resources in these conglomerates by prohibiting the merger of any of the top 20 banks (measured in consolidated assets) with the 20 largest insurance companies or insurance firms.
Thirdly, I proposed a tightening of the supervision of the conglomerates including giving federal regulators authority to set capital standards for the affiliates of the new holding company and to pass on the adequacy of management before applications for new activities were approved. Under the legislation pending before the Committee, insurance companies, for example, would be regulated only by stale agencies, many of which arc poorly staffed, underfunded and dependent on the industries they regulate.
These amendments are now in the hands of Chairman D’Amato, their ultimate fate unknown.
Whether or not these particular amendments survive, it is critically important that not only the Congress, but the American people wake up to the realization that we need a financial system and a regulatory system that can stand the test in economic downturns as well as in the present period of record profits.
There are some signs—perhaps not bold enough—that the regulators are beginning to realize that rosy scenarios do not last forever. Acting Comptroller of the Currency Julie Williams was the first to lend her voice to a call for more vigilance. She has pointed to the fact that new risks invariably ride alongside the new mergers and she has called on banks to strengthen internal controls and has vowed to tighten her agency’s supervision.
More recently, even the Federal Reserve Board has joined in the effort, warning the banks about the dangers of relaxing loan standards. The media, too, have shown some signs of awakening to the dangers, although much of the editorial comment continues to be more of the cheerleading variety for the new legislation and less about changing, the regulatory system to meet the demands of a regulatory system facing these merged giants of the financial community.
Noteworthy, is the fact that the New York Times carried a lengthy piece on new banking problems on the front pages of its July 16 editions under the’ headline “Worries About Loans Revive Ghost 1980s Debacle.”
These are encouraging signs from the regulators and the media, but Congressional lawmakers—lobbied and funded by the financial corporations—still seem to be in a state of denial. The pending legislation—HR10—piles huge new duties on the regulatory system. Yet Congress does nothing to strengthen or coordinate a regulatory system that the General Accounting Office and other experts have long deemed outdated.
At a minimum, the Congress needs to adopt amendments—similar to those I have proposed to Senator D’Amato—to protect taxpayers from another bailout. But Congress needs to do more before it sends the pending legislation to the White House. The bill needs to be rewritten, the regulatory system strengthened, consumer protections upgraded, and safeguards imposed to prevent the financial system from being dominated by a handful of mega corporations.
In the 1980s, the Congress rushed through measures which deregulated the savings and loan industry, granted vast new powers to the industry and weakened supervision. Apparently conveniently forgetting Maud period, Congress once again is in a great hurry to drastically concentrate the financial system in fewer mega corporate hands. Taxpayers revolt!