The Nader Letter - Banks and Consumers

THE NADER LETTER
BANKS AND CONSUMERS
March 1996
Volume 1 · Issue 6


A MESSAGE FROM RALPH NADER: Discovering The Economy

Glass-Steagall Repeal By Fiat?

Will the long battle over Glass-Steagall and new powers for banks be decided not by Congress, but by federal regulators?

That possibility was raised in December in a meeting between House Speaker Newt Gingrich and representatives of some of the nation's biggest banks. The Speaker, however, retreated from the idea after House Banking Chairman Jim Leach complained that the regulatory ploy would take most, if not all, the remaining air out of the Banking Committee's pending Glass-Steagall bill. The Glass-Steagall Act, a major regulatory reform of the New Deal, separates banking from securities activities.

Now, the Shadow Financial Regulatory Committee has revived the idea of bypassing Congress. It has laid out a three-part plan for the regulatory agencies to follow in granting new markets for banks and bank holding companies.

The Committee is a private organization with membership drawn from the academic, banking and legal communities. It has often been influential in shaping the debate on regulatory issues.

Committee membership include: George Kaufman of Loyola University; Richard Aspinwall of Chase Manhattan Bank; George Bentson of Emory University; and, Peter Wallison of Gibson, Dunn and Crutcher, a major law firm.

Noting the many failures of Congress to weaken Glass-Steagall, the Shadow Committee said "the best opportunity for financial deregulation lies in the effective use of the discretionary authority of the regulatory agencies."

Here is the Committee's road map for bypassing the Congress:

1. Section 20 of the Glass-Steagall Act prohibits banks from being affiliated with any company "engaged principally" in underwriting securities -- defined as any company that derives more than 10 percent of its revenue from underwriting securities. The Committee urges the Federal Reserve to expand the definition to 50 percent.

2. The Committee also wants the Federal Reserve to tinker with the Bank Holding Company Act. The law limits holding company subsidiaries to those activities "closely related to banking." The Committee wants the Federal Reserve to broaden the definition to include more activities. Similarly, the Shadows want the Office of the Comptroller of the Currency (OCC) to "continue authorizing new operating powers' for national banks under Part 5 of OCC regulations.

3. The Shadow Committee also recommends that the Federal Deposit Insurance Corporation allow state banks insured by the federal government to engage in any activity granted by state legislatures.

The Shadow Committee's message is blunt. If the democratic process is too slow for the wishes of the banking industry, just ignore it and have the unelected bureaucrats in the regulatory agencies provide the industry needs and desires by administrative fiat.



Fannie and Freddie Swimming in Hot Water

Trying to be subtle about power and big money is difficult. Just ask the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

These two giants of the secondary mortgage market -- both government sponsored enterprises (GSE) who like to think of themselves as pure free enterprisers -- are in hot water again because they decided to play in the Republican campaigns in Iowa and New Hampshire.

Fannie and Freddie tossed $100,000 in the pot along with money put up by home builders and realtors to launch attacks on Republican candidate Steve Forbes' flat tax proposal during the Iowa caucuses and the New Hampshire primary. The campaign bought radio ads, newspaper ads and mailings to registered Republicans reminding voters that the proposal would end the mortgage interest deduction.

Not only did the campaign infuriate Forbes, but it also brought a blast from House Majority Leader Dick Armey who has a flat tax proposal of his own. Armey, charging that the campaign had a "partisan flavor," has asked the General Accounting Office to investigate the expenditures of Fannie and Freddie.

With the flat tax flap still bouncing off the chandeliers at Fannie and Freddie, the Shadow Financial Regulatory Committee, a private organization that monitors financial regulatory affairs, issued a recommendation that the GSEs be brought under the Credit Reform Act of 1990.

This would mean that the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) would be required to measure the annual cost of the credit enhancements that each GSE enjoys. Thus, Fannie and Freddie's $2.25 billion lines of credit from the Treasury and inferred guarantees would have to be accounted for in the budget. The credit line at Treasury allows Freddie and Fannie to borrow in the market at rates well below those paid by private corporations that have no tie to the government.

The committee argues that there is an "inferred guarantee" because the taxpayers would likely be required to pick up losses should a GSE become insolvent. This is exactly what happened when the Farm Credit System, another GSE, suffered major losses a few years ago.

All these questions come on top of ill feelings created late last year when House Banking Committee Chairman Jim Leach attempted to have Fannie and Freddie help the savings and loans pay for the Financial Corporation (FICO) bonds issued in 1987 in a failed effort to bail out the thrifts. Fannie and Freddie lobbyists surrounded the Capitol and Leach was forced to surrender before the issue was ever formally presented to his Committee.

Reports suggest Leach is still burning over the heavy handed lobbying tactics of Fannie and Freddie. So, it may be no coincidence the Committee plans GSE hearings later this year.

In addition, Fannie Mae still suffers public relations scars from the spotlight thrown on the institution because it does not pay local taxes to the District of Columbia. Fannie has ignored suggestions that it make a voluntary payment in lieu of taxes to help the financially strapped District of Columbia government.



The Eleven Million Dollar Committee
Members of the House Banking and Financial Services Committee collected more than $11 million in campaign contributions in 1995.

The 16 Republican first termers on the Committee accounted for more than $4.5 million of the total, according to a study conducted by Citizens Action.

Topping the freshman class were Jon Fox of Pennsylvania with $438,404 and Jerry Weller of Illinois with $430,791.

Here were the totals for the other GOP first term members:

* Frank Cremeans, Ohio -- $401,438
* Robert Barr, Georgia -- $358,655
* Dick Chrysler, Michigan -- $353,686
* Steve Stockman, Texas -- $294,655
* J. C. Watts, Oklahoma -- $294,136
* Robert Ehrlich, Jr., Maryland -- $271,367
* J. D. Hayworth, Arizona -- $257,071
* Sue Kelly, New York -- $253,298
* Jack Metcalf, Washington -- $236,642
* Frederick Heineman, North Carolina -- $235,205
* Robert Ney, Ohio -- $230,387
* Frank LoBiondo, New Jersey -- $181,258
* Sonny Bono, California -- $168,531
* Frank Lucas, Oklahoma -- $155,714

The lone Democratic freshman on the Committee, Ken Bentsen of Texas, collected $152,953.

The biggest recipients on the Committee were Democratic Members, Charles Schumer of New York who collected $l,l0l,223 and Joseph Kennedy of Massachusetts with $l,009,521. In total, Democrats on the Committee collected $4,494,459 and Republicans $6,689,620, according to Citizen's Action data.

Overall in the House in 1995, Republicans collected $57.9 million and Democratic members, $36.7 million.



Clinton Gives Up On The Fed
President Clinton last week nominated long-time Republican economic guru, Alan Greenspan, to a third term as Chairman of the Federal Reserve giving up what is probably the Administration's last chance to reshape the Federal Reserve.

The appointment was announced just 24 hours before the Commerce Department revealed that the economy grew a weak 1.4 percent in 1995. The picture for the fourth quarter of last year was even worse with the economy growing only 0.9 percent -- the slowest since the 1990-1991 recession.

The slow growth, many economists believe, can be traced to the decisions of Greenspan's Federal Reserve Board to raise interest rates in 1994 and early 1995.

With Greenspan's term expiring, the President had his best chance to make his economic policy clear and to reject the erratic interest rate and slow growth policies of the Federal Reserve.

He chose instead to embrace Greenspan and to give tacit approval to the Fed's handiwork. With his confirmation certain in a Republican Senate, Greenspan will control the nation's monetary policy until at least March, 2000. If reelected, Clinton will be in the last months of his Presidency before a change can be made in the top -- and decisive -- job at the Federal Reserve.

To fill two vacancies on the Federal Reserve Board, the President nominated Alice Rivlin, the current Director of the Office of Management and Budget, and Laurence Meyer of Washington University in St Louis and a former Federal Reserve employee. Neither has a reputation for "rocking boats" and neither is expected to openly challenge Greenspan, ensuring happy go-along, get- along meetings behind the closed doors of the Federal Reserve.

The President's decision to stick with the status quo at the Federal Reserve came after Senator Connie Mack and other Republicans on the Senate Banking Committee let it be known that New York investment banker Felix Rohatyn would not be acceptable. The President had floated Rohatyn's name as a possible candidate for Vice Chairman of the Fed Board.

Rohatyn, who headed the rescue of New York financies, is an advocate of strong economic growth. He has rarely been a shrinking violet in expressing his opinions on economic and financial issues. Many thought he was the ideal candidate to challenge Greenspan's cautious conservative policies inside the Fed.

Not only did that prospect make Greenspan and his supporters at the Federal Reserve nervous, but it was apparently something that the Republican majority on the Senate Banking Committee opposed.

After a few White House statements assailing Rohatyn's critics, the President refused to make a fight for the nomination and accepted Rohatyn's withdrawal.

The President's decision gave Greenspan his fourth Presidential appointment, but the first from a Democratic President.

He was appointed Chairman of the Council of Economic Advisors by President Gerald Ford. He was named Chairman of the Fed by President Reagan and reappointed by President Bush.

In between his stints in government, Greenspan has been a Republican economic guru and a consultant for financial institutions including Charlie Keating's ill-fated Lincoln Savings which cost the taxpayers $2 billion when it failed.



Remember CRA

As ranking minority member of the Financial Instititions and Consumer Credit Subcommittee, Representative Bruce Vento of Minnesota did much to rally the Democrats last sumer in defense of consumer protections and the Community Reinvestment Act (CRA).

He's sounding the alarm again. As soon as the Congress reconvened in late February, Vento invited members and staff to a special briefing, warning that CRA is not out of the woods yet. Two bills, containing anti-CRA provisions are pending on the Republican agenda.

HR 1858 -- reported by the Committee on June 28, 1995 -- is a frontal assault on CRA. Also pending is HR 2520, which modifies some of the Committee-reported bill, but leaves in provisions that prohibit the collection and reporting of data needed to enforce CRA.

In addition, the modified bill would provide safe harbors for banks preventing regulators from considering new information on community lending performance when applications are pending for mergers and other expansions. This would, effectively, wipe out the opportunity for communities to present new data in protesting bank performance.



Money Talks

Executives of some big banks are saying nice things about the Community Reinvestment Act (CRA) and inner city lending.

For example, Karen Wegmann, executive vice president of Wells Fargo Bank in California, told the Wall Street Journal this month that "It's good business...we're making money."

Similar comments have come from other banks including Bank of America and NationsBank. A consultant for big banks says that "bankers disovered that the community lending laws were a blessing in disguise."

But, if indeed CRA is helping banks -- as these quotes suggest -- why are these same banks sending thousands of dollars to Washington lobbying organizations that are trying to kill CRA?

Banks like Wells Fargo have a lot to say about what the American Bankers Association does on the lobbying front. Fat checks for dues speak loudly to ABA's inner circle.

Are the kind comments about community lending just nice sounding words for the readers of the Wall Street Journal while the banks continue to fund anti-CRA campaigns behind the scenes?



SAIF's Paul Revere

Representative John LaFalce, the second ranking Democrat on the House Banking and Financial Services Committee, has tried for two years to get the Committee to face up to the problems of the Savings Institutions Insurance Fund (SAIF).

Last year, he introduced a series of bills in an effort to get the Committee to take seriously the problems of an undercapitalized fund. In between, he managed to get the General Accounting Office to issue a report on the issue. But, still no action was forthcoming.

The problem got worse when the Federal Deposit Insurance Corporation eliminated premium payments for banks last fall. This created a huge disparity between the thrifts and the banks -- savings and loans paying 23 cents per $100 for insurance and banks zero.

After months of proscrastination, the Committee finally pasted together a Rube Goldberg-like solution and slammed it into the Budget Reconciliation Act in September which, as predicted, was vetoed.

So, two years after Representative LaFalce sounded the warning, the Banking Committee and the Congress haven't solved this problem.



Slipping Subsidies To The Banks At The Federal Reserve
In 1980, the Congress by a bi-partisan majority enacted the Monetary Control Act which required the Federal Reserve System to cease providing free check clearing and collection services to the nation's commercial banks.

But on January 8, the ranking Democrat on the House Banking and Financial Services Committee -- Representative Henry B. Gonzalez --released a report which shows that the Federal Reserve is thumbing its nose at the law and continuing to provide large subsidies to banks.

The report suggests that the Federal Reserve is manipulating the costs and revenues of its Interdistrict Transportation System (ITS) in a manner which provides a 25 percent subsidy to its bank customers.

Part of the subsidy is hidden by the fact that the Federal Reserve charges the U. S. Treasury 67 percent more than its bank clients for transporting canceled Treasury checks. This sum, extracted from tax funds, goes into the pot to help lower the cost to the banks. Meanwhile, private companies which perform similar check clearing services find it difficult, if not impossible, to compete with the Federal Reserve's subsidized operation.

This backdoor subsidy was revealed as part of a report on "Waste and Abuse in the Federal Reserve's Payment System" conducted for Representative Gonzalez by Dr. Robert Auerbach, the Democratic economist on the Committee.

On the day the report was released -- January 8 --Gonzalez wrote the Committee Chairman, Jim Leach, asking that the Committee investigate the subsidies as well as a series of questionable practices ranging from payments for "ghost" airplanes, improper contracting practices, gifts to nonperforming contractors and the lack of basic controls in the Federal Reserve's check clearing and transport system.

By late February, the Committee Chairman had not replied and presumably the subsidies continue.



Increasing Checkholds Through the Back Door?
The Center for Study of Responsive Law, a nonprofit organization founded by Ralph Nader in 1968, has warned the Federal Reserve Board that the design of its proposed "Check Fraud Survey" may produce biased results that will give banks an excuse to seek longer holds on customers' checks.

Dr. Janice Shields, Banking Researcher for the Center, told the Federal Reserve that its methodology was faulty because:

1. The survey allows "estimates," rather than actual loss data, an open invitation for banks to exaggerate losses.

2. Participation is "voluntary" and this means that the returns may be heavier from those institutions most actively seeking changes in the checkhold law, rather than providing a true cross-section of bank data.

The comment filed by the Center also raised questions about the content of the survey, calling on the Federal Reserve to collect better data on the actual time required to clear checks. The comment also asked the Federal Reserve to specify how an extension of the check hold period would reduce fraud. It said the Fed should detail the reasons for check fraud, other than the check hold period.

The Center's comment said that the banks' own data showed that check fraud was not a major problem. Using data collected by the American Bankers Association, the Center said estimated fraud losses average only $.01 per check cashed and $1.36 per bounced check--while median fees charged per bounced check was $17.50 at medium-sized banks and $20 at large banks.



Why Do These Congressmen Say 'No' to CRA?
All 27 Republican members of the House Banking and Financial Services Committee voted last year to dismantle the Community Reinvestment Act (CRA) -- a law that encourages banks to invest in their communities.

Nationally, CRA is credited with generating four to six billion dollars annually in new community investment.

But, when the roll was called, members representing 27 districts across the country said "no" to CRA.

Why? Were these districts so well off that their representatives felt there was no need for a law that encouraged bank investments in their communities?

The Nader Letter took a look at some of the districts whose Representatives said "forget CRA."

Sixth District, Ohio, Representative Frank Cremeans -- Census data, prepared last year by the Housing Assistance Council (HAC) of Washington, reveals that 20.1 percent of the individuals in Representative Cremeans' district live below the poverty level. More than 26 percent of the children in the district exist below poverty. Median household income was only a little more than two thirds of the national median.

Sixth District, Louisiana, Representative Richard Baker -- More than 19 percent of the individuals in Representative Baker's district are below the poverty level, according to the HAC compilation of census data. Almost 24 percent of the children live in poverty. An equal number of elderly are in the poverty category. Forty-nine percent of the African Americans who live in the Baker district are below the poverty level.

Ninth District, Texas, Representative Steve Stockman -- Nearly 16 percent of the population is below the poverty level. Among the children, almost 22 percent fall in the poverty category. More than 35 percent of African Americans and 22 percent of the Hispanic population are below poverty.

Sixth District, Arizona, Representative J. D. Hayworth -- More than 21 percent of the population is below the poverty level including nearly 29 percent of the children. About 54 percent of the district's American Indian population is listed below poverty according to HAC.

Measuring the percentage of household income required for shelter, the HAC compilation of census data suggests that there is a significant shortage of affordable housing in all four districts.



A Professor's Battle for the Truth
Richard L. D. Morse, a former professor at the University of Kansas, has been battling for a quarter of a century to require banks and other financial institutions to give consumers clear and unambigious information on savings -- information which allows consumers to shop for the best return on thier money.

Finally in 1991, the Congress enacted Truth in Savings, but now the 104th Congress is seeking to dismantle the law as part of so-called regulatory relief packages.

Operating at his own expense from his home in Manhattan, Kansas Professor Morse is sounding the alarm about what is happening to Truth in Savings and urging defeat of the law's rollback in both the House and Senate.

Professor Morse raises this question about the banks' claim that the Truth in Savings Act is burdensome:

"f bankers find that telling the truth to depositors about savings is too difficult and burdensome, is it not questionable whether banks should be entrusted (as pending legislation provides) to sell insurance and securities?"



A MESSAGE FROM RALPH NADER:
Discovering The Economy
Suddenly basic economic and trade issues are front and center in national politics.

Discussions of job security, stagnant wages, corporate ethics and flights of factories to Mexico are pushing out the endless renditions of balanced budgets, deficits and arcane tax proposals as the hot button issues. Belatedly, politicians and pundits are discovering that jobs and bread and butter issues count big with America's working families.

Pat Buchanan's tough talk on economic issues is the impetus for the new awareness, but other candidates are quickly learning how to talk the new talk. Even Bob Dole, no stranger to the corporate-banking lobbyists on Capitol Hill, recognizes the new language of 1996 politics, lamenting that he did not "realize that jobs and trade and what makes America work would become a big issue..."

Polling data collected in the wake of the early caucuses and primaries establish that the economic issues are, indeed, touching a raw nerve among middle class families that are being squeezed in an economy that for them is barely moving.

In coming weeks, the Republicans will sift out their increasingly muddled nomination process. But, the more important question is whether the campaign has turned a policy spotlight on corporate America that cannot be easily extinguished in either the Republican or Democratic parties--or in the Congress.

Politicians, with unerring instinct for self-preservation, watch polls, election results and examine political tea leafs with the utmost care.

Will some Republican members, who marched lockstep with the corporate interests in the 104th Congress, suddenly realize that their constituents are catching on that the GOP revolution of 1994 was no more than "big business and big banking as usual?" And, more to the point, will that bring some changes in the monolithic, no-questions-asked votes that pushed so much anti-consumer and anti-community legislation in the current Congress?

For example, it has always been puzzling that Republican members of Congress have consistently opposed the Community Reinvestment Act (CRA) and the efforts to encourage banks to invest private monies (not tax money) in their communities. This has been true even for members who represent districts with high levels of poverty, substandard housing and that are in critical need of development funds.

That is what happened last summer in the House Banking and Financial Services Committee where all 27 Republicans voted for the banks and against their communities in support of legislation that would have wiped out CRA.

Perhaps these members feel that no one really cares about bread and butter economic issues at the grassroots of America. Or maybe they feel no one will ever be the wiser that it was banks first, communities last, when the bank regulatory relief legislation was before the Committee.

But, the economic concerns coming out of this year's primaries and caucuses may require some rethinking. There may be a new awareness--a few pointed questions--when members who voted the straight pro-bank, pro-corporate line in Congress come home to explain their records.
#END#