Financial Modernization Legislation

Last year’s deregulation monster-the so-called financial modernization legislation-was riddled with anti-public interest provisions, but nothing illustrated Congressional recklessness more than the way safety and soundness of the nation’s financial system was ignored.
In its rush to deliver for the financial corporations, a bi-partisan coalition in both the Senate and the House of Representatives turned its back on demands to strengthen the antiquated federal regulatory system.

Unfortunately, the legislation was taken up at the height of economic euphoria with a skyrocketing stock market, mounting corporate profits and rising income at the upper levels of society. With their typically short-sighted view, Congress and the financial lobbyists crafted the legislation on the fairyland premise that these “good times” would last forever.

But, the prosperity bubble may be receding for some of the nation’s big banks. Bank of America, the nation’s largest bank, for example, revealed earlier this month that its loan losses could more than double in the fourth quarter from the $435 million the bank reported in the third quarter. Analysts on Wall Street were even blunter, predicting that the losses would translate into charge-offs of about one billion dollars for the quarter. First Union, the nation’s sixth largest bank, said it expected to write off $125 million on a single large loan.

James Dimon, head of Bank One Corp, the nation’s fourth largest bank, told executives in Chicago that “credit is deteriorating quarter by quarter and we expect it to continue.”

To their credit, bank regulators have been warning for months about the erosion of lending standards, cautioning that an economic slowdown will make it much tougher for highly leveraged companies to make good on their loans. But, regulatory hand wringing isn’t going to save the taxpayer-backed insurance fund or prevent taxpayer bailouts.

What’s needed is a modern coordinated regulatory system that can deal with and properly monitor the mega banks and financial conglomerates that are being created under last year’s financial modernization legislation. As I recommended during the hearings on the legislation, we need a single regulatory body to replace the overlapping, conflicting and disjointed system composed of six different federal regulators plus a Heinz 57 variety of state regulatory agencies.

Regulators, banking officials, financial analysts, key members of Congress and the General Accounting Office have repeatedly pointed to the inefficiencies, conflicting interpretations of rules, and the lack of accountability created by the current system. Through the years, bills have been introduced to create a single coordinated agency that would have the sole responsibility of regulation, but the legislation has failed in the face of opposition from segments of the financial community wanting to keep their own agency and from agencies, themselves, wanting to hold on to their turf.

During the 1990’s Charles Bowsher, the head of the General Accounting Office (GAO) often pled with Congress to upgrade and coordinate the regulatory system.

Here’s what he told the House Banking Committee in 1993:

“The current regulatory structure has evolved over more than 60 years as a patchwork of regulators and regulations…we question the ability of the current regulatory structure to effectively function in today’s complexbanking and thrift environment.”

This warning was issued six years before passage of the financial modernization legislation of 1999?a measure which creates huge financial conglomerates combining the biggest of the insurance companies, banks and securities firms. If the GAO in 1993 found the financial system too complex to be monitored by the present regulatory system, then certainly the new, much larger and infinitely more complex system created last year cries out for immediate action to craft a modern, more nimble and more accountable regulatory system.

Congress also needs to return to the drawing up board to ensure that there is an adequate deposit insurance system and to make certain that the too-big-to-be- allowed to fail conglomerates don’t become candidates for taxpayer bailouts.

The deposit insurance fund has only about $32 billion in reserves, a totally inadequate sum to cope with the sagging fortunes or the outright failure of banks which are part of conglomerates with nearly a trillion dollar in assets and growing. The deposit insurance system needs to increase deposit insurance premiums paid by the banks to build a “rainy day” fund that will protect not only the soundness of the banking system, but the taxpayers who are inevitably left holding the bag when the big corporations fail.