Segment 2 Of 3     Previous Hearing Segment(1)   Next Hearing Segment(3)

 Page 202       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to notice, at 10:08 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives McCollum, Roukema, Bereuter, Baker, Bachus, Castle, Lucas, Kelly, Paul, Ryun, Cook, Riley, Hill, Manzullo, Ryan, Ose, Biggert, Sweeney, Terry, Green, Toomey, LaFalce, Vento, Kanjorski, Sanders, Watt, Bentsen, J. Maloney of Connecticut, Hooley, Weygand, Sherman, Meeks, Mascara, Inslee, Schakowsky, Moore, Gonzalez, Jones, and Capuano.

    Chairman LEACH. The hearing will come to order.

    During our opening hearing, we heard from a number of parts of the financial services industry, and pretty solid support was voiced for banking modernization. And, in addition, we heard from other parties that have indicated very constructive alternatives that may be part of the consideration process.

    Today, we're going to hear from the distinguished Chairman of the Federal Reserve Board, as well as from a panel of State financial service regulators and a group of consumer representatives.
 Page 203       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We're honored to begin with Mr. Greenspan, and I would ask the panel's deference in one circumstance. The Chairman has just returned from an overseas trip, and I think if he's like me, is suffering from a bit of jet lag. And so we hope we won't keep you too long, Mr. Chairman.

    Mr. GREENSPAN. I'm worried I'll be inordinately clear as a consequence.


    Chairman LEACH. Well, the perspective of 36,000 feet is sometimes better than the perspective of those of us that are earthbound. In any regard, we're honored you're with us. And please proceed. Without objection, a full statement will be placed in the record, and you may summarize or read as you see fit. Mr. Chairman.


    Mr. GREENSPAN. Thank you very much, Mr. Chairman. It's a pleasure, as always, to appear before this committee, especially to present the views of the Federal Reserve on the need for legislation to modernize the U.S. financial system, because this is an issue which, as you are aware, we have talked about to a great extent, and the reason we have is that it is a very important issue confronting this Nation.

 Page 204       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    The Federal Reserve continues to support strongly the enactment of such legislation and believes that H.R. 10 contains the fundamental principles that should be included in such legislation. I commend the committee for taking up this vital matter so promptly in this session.

    U.S. financial institutions are today among the most innovative and efficient providers of financial services in the world. They compete, however, in a marketplace that is undergoing major and fundamental change driven by a revolution in technology, by dramatic innovations in the capital markets, and by globalization of the financial markets and the financial services industry.

    For these reasons, we support removal of the legislative barriers against the integration of banking insurance, and securities activities. There is virtual unanimity among all concerned, private and public alike, that these barriers should be removed. Technologically driven proliferation of new financial products that enable risk unbundling have been increasingly combining the characteristics of banking, insurance, and securities products into single financial instruments. These changes, which are occurring all over the world, have also dramatically altered the way financial services providers operate and the way they deliver their products.

    In the United States, our financial institutions have been required to take elaborate steps to develop and deliver new financial products and services in a manner that is consistent with our outdated laws. The costs of these efforts are becoming increasingly burdensome and serve no useful public purpose. Unless soon repealed, the archaic statutory barriers to efficiency could undermine the global dominance of American finance, as well as the continued competitiveness of our financial institutions and their ability to innovate and to provide the best and broadest possible services to U.S. consumers.
 Page 205       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We believe that it is important that the rules of our financial services industry be set by the Congress rather than, as too often has been the case, by banking regulators dealing with our outdated laws. Only Congress has the ability to fashion rules that are comprehensive and equitable to all participants and that guard the public interest.

    The market will continue to force change whether or not Congress acts. Ad hoc administrative responses to these market forces lead to inefficiencies and inconsistencies, expansion of the Federal safety net, potentially increased risk exposure to the Federal deposit insurance funds, and a system that will undermine the competitiveness and innovative edge of major segments of our financial services industry.

    H.R. 10 also recognizes another dimension of the changing nature of banking and financial markets: that financial modernization means more than authorizing new powers and affiliations. Not only are we experiencing a revolution in financial products and their delivery, the U.S. is also at a historic crossroads in financial services regulation. It is becoming increasingly evident that the dramatic advances in computer and telecommunications technologies of the past decade have so significantly altered the structure of domestic, indeed, global finance as to render our existing modes of supervision and regulation of financial institutions increasingly obsolescent.

    The volume, sophistication, and rapidity of financial dealings will inevitably lead to supervisory emphasis on oversight of risk management of financial institutions and a marked scaling back of outmoded loan file and balance sheet surveillance. Moreover, affiliation with banks need not, indeed, should not, create bank-like regulation of affiliates of banks.
 Page 206       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    This shift in supervisory mode, which is already underway, is market driven. It is not the result of some potentially reversible ideology. Such an approach is captured in H.R. 10 in many of the so-called ''Fed-light'' provisions, and we at the Fed strongly support this approach.

    H.R. 10 also, in our judgment, has chosen the appropriate structure to combine banking, securities, and insurance firms using financial service holding companies. While we enthusiastically support the new powers granted to financial service holding companies, we just as strongly believe that they should be financed by the marketplace, not by instruments backed by the sovereign credit of the United States. The requirement that the new powers be conducted through holding company affiliates minimizes the expansion of the use of the subsidies arising from a safety net backed by the U.S. taxpayer.

    The rejection of expanded powers for subsidiaries of commercial banks, at least those conducted as principal, is a decision that will inhibit the widespread employment of Federal subsidies over a new range of activities. These activities, if conducted in bank subsidiaries, would accord banking organizations an unfair competitive advantage over comparable insurance and securities firms operating independently or as bank holding company subsidiaries. By fostering a level playing field within the financial services industry, we contribute to full, open, and fair competition as we enter the next century.

    Even more important, to inject the substantial new subsidies that would accrue to operating subsidiaries of banks into the currently mushrooming domestic and international financial system could distort capital markets and the efficient allocation of both financial and real resources that have been so central to America's current prosperity. The choice of requiring the new powers to be harbored in affiliates of holding companies, not in so-called op-subs of their banks, will significantly fashion the underlying structure of 21st Century finance.
 Page 207       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    This choice of the holding company structure is also critical to the way in which financial services industry will develop because it provides better protection for and promotes the safety, soundness, and stability of our banking and financial system without damaging the national or State bank charters or limiting in any way the benefits of financial modernization. The other route toward full powered commercial bank operating subsidiaries and universal banking would, in our judgment, lead to greater risks for the deposit insurance funds and the taxpayer. It is for these reasons that the Federal Reserve, Securities and Exchange Commission, many State functional regulators, and many in the affected industries have supported the holding company framework and have opposed the universal bank approach.

    Another 21st Century issue is whether we should move beyond affiliations among financial service providers and allow the full integration of banking and commerce. As technology increasingly blurs the distinction among various financial products, it is already beginning to blur the distinctions between predominately commercial and banking firms. But how the underlying subsidies of deposit insurance, discount window access, and guaranteed final settlement through Fedwire, are folded into a commercial firm, should the latter purchase a bank, is crucially important to the systemic stability of our financial system.

    It seems to us wise to move first toward the integration of banking, insurance, and securities as envisaged in H.R. 10 and employ the lessons we learn from that important step before we consider whether and under what conditions it would be desirable to move to the second stage of full integration of commerce and banking. Nothing is lost, in my judgment, by making this a two stage process. Indeed, there is much to be gained. The Asian crisis last year highlighted some of the risks that can arise if relationships between banks and commercial firms are too close, and make caution at this stage prudent in our judgment. In line with these considerations, the Federal Reserve Board continues to support elimination of the unitary thrift loophole, which currently allows any type of commercial firm to control a federally-insured depository institution.
 Page 208       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    These principles, which we see as fundamental to financial modernization, are embodied in H.R. 10. As in all such major legislation, there are and will be numerous provisions only indirectly associated with the legislation's core principles that often foster disagreements. These surrounding details are doubtless important, but not so important that they should be allowed to defeat the consensus that has developed around the key principles embodied in H.R. 10. It would be a disservice to the public and the Nation if, in the fruitless search for a bill that pleases everybody in every detail, the benefits of this vital consensus are lost or further delayed.

    In virtually every other industry, Congress would not be asked to address issues such as these, which are associated with technological and market developments; the market would force the necessary institutional adjustments. Arguably, this difference reflects the painful experience that has taught us that developments in our banking system can have profound effects on the stability of our whole economy, rather than the limited impact we perceive from difficulties in most other industries.

    While financial modernization represents much needed reform, we should not forget that this modernization will, by itself, introduce dramatic changes in our financial services industry. We feel confident that the risks of this type of reform are manageable within the holding company framework set out in H.R. 10.

    There is a final point I want to make since it appears to have driven Treasury's opposition to last year's version of H.R. 10. H.R. 10 would not diminish the ability of the Executive Branch to continue to play its meaningful role in the development of banking or economic policy. Currently, the Executive Branch influences such policy primarily through its supervision of national banks and Federal savings associations. H.R. 10 would not alter the Executive Branch's supervisory authority for national banks or Federal savings associations, nor would it result in any reduction in the predominate and growing share of this Nation's banking assets controlled by national banks and Federal savings associations. Indeed, as of September 1998, nearly 58 percent of all banking assets were under the supervision of the Comptroller of the Currency, up from 55.2 percent at the end of 1996.
 Page 209       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Furthermore, Congress for sound public policy reasons, has purposefully apportioned responsibility for this Nation's financial institutions among the elected Executive Branch and the independent regulatory agencies. Action to alter this balance would be contrary to the deliberate steps that Congress has taken to ensure a proper balance in the regulation of this Nation's dual banking system.

    Mr. Chairman, the markets are demanding that we change outdated statutory limitations that stand in the way of more efficiently and effectively delivering financial services to the public. The Federal Reserve agrees and urges prompt enactment of the Financial Modernization contained in H.R. 10.

    Thank you very much.

    Chairman LEACH. Well, thank you, Mr. Chairman, for your very thoughtful statement. I have just one observation and query that, as you know and partly as indicated by the testimony yesterday, there does appear to be greater consensus than has ever existed before within and between industrial groupings on bank modernization in terms of the construct.

    There's a second issue, which relates to regulation and where the principal regulatory focus should be. You've given a very strong view of the Fed's perspective, one that I respect very much. You've also implied that the Treasury may differ. And so the question I have, and it was reflected yesterday by several of our witnesses, relates to the fact that while there does appear to be consensus on industrial construct, there is still some difference on regulatory division of authority. And so my query is to the degree those differences still are maintained between, particularly, but not exclusively the Fed and the Treasury, is the Federal Reserve open to discussing these issues with the Treasury with the prospect of perhaps coming forward with a common front or do you think that is a frail option and that the Congress will just have to make these decisions on our own recognizing that differences between the Fed and the Treasury will remain?
 Page 210       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, Mr. Chairman, I think we have always been open to try to find a vehicle which will essentially satisfy Treasury. Let me try to indicate to you where the differences are and why they exist, and where the potential for a solution, in our judgment, lays. We both agree, apparently, that if new powers are put into the subsidiaries of the commercial banks, that it will be in the interests of the bank holding companies or banking organizations, or anybody else for that matter, to move the powers into the subs of the banks. The reason I say that is that is not the case. If, for example, they're very rarely used, then the issue of additional powers going to the OCC would not exist.

    It implies in their concern about increased powers that their view of what will happen if the Congress gives the powers to the operating subs is the same as ours. And our view is that the consequence of doing that is so thoroughly negative to the issue of the financial structure of both our domestic and international interfaces of American banking and finance, that that is much too high a price to pay for an issue, which in our judgment, probably could be resolved by different means. By that I mean, we fully support the view that the Administration and the Treasury, the Executive Branch, should have very significant powers in the area of policy and supervision on banking and finance. We believe they do that and, indeed, we even supported, as you well know, very strongly interstate banking. And we did so knowing full well that it would create an improved national charter vis-a-vis the State charter which is the base of where our supervision lays.

    That's the reason, incidentally, why the share of assets under the OCC in the last couple of years, last three years I guess, two years, has risen from 55 to 58 percent. And, indeed, the banks have increased. In other words, there's been a very significant increase in the last couple of years, 1996? It's the end of 1996, it's really the end of 1996 and the end of 1998, there's been a very dramatic increase in the amount of assets and control under the OCC. And we think that's perfectly appropriate. We have no concern about that. We think that it was important that there be a substantial shift toward national banking and being able to branch across State borders; and we fully were aware that that would diminish the State charter in the process. We didn't particularly like that, but we thought the values were there so that the issue was not Federal Reserve turf.
 Page 211       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We would like to find a way in which Treasury would feel satisfied that it had the types of controls that it thought were necessary. We are only concerned that it not be done through this particular vehicle because this particular vehicle has very adverse, presumably unintended, consequences on the structure of finance in this country that leads me to conclude that it is far too high of a price in inefficiencies and potential systemic risks to pay in order to get a proper balance of supervision and regulation.

    Mr. Chairman, in that context, we are more than willing to sit down with anybody and find a way to increase as much as they think it is appropriate for them, where their powers lay, and if it comes out of the turf of the Federal Reserve, so be it. We don't care particularly much about that. We do care and we care very strongly that the structure of the financial system, and the regulation which is embodied around it, be sound and not create the type of systemic problems that concern us as our major responsibility.

    Chairman LEACH. I appreciate that. My time has expired, but I do want a one word answer to a question I'm going to be putting to Secretary Rubin as well. At the end of the last Congress there was enormous reluctance from both the Treasury and the Fed to meet. If at the end of this hearing process issues of a given nature are not resolved on the regulatory front, will you commit to meeting with appropriate representatives of the Hill and with Secretary Rubin to try to work out a compromise?

    Mr. GREENSPAN. By all means, Mr. Chairman.

    Chairman LEACH. Thank you.
 Page 212       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. LaFalce.

    Mr. LAFALCE. Thank you very, very much, Mr. Chairman and Chairman Greenspan. Chairman Leach and I, and I think you and Secretary Rubin are very, very close, and we just need to reach for that final compromise.

    The House Banking Committee did report out a bill last year, or two years ago, I'm sorry, the last Congress, which included an operating subsidiary provision. And both Mr. Leach and I voted for passage of the committee print out of committee, in any event. That was deleted from the product that went to the House floor.

    In my conversations with Treasury, I, along with Mr. Vento and Mr. Bentsen, offered an amendment that did not go as far as they wanted at that time. It did not include insurance underwriting, but it did go further than the committee print. It included merchant banking. And that was defeated. Treasury did not say they supported it at that time because they wanted more in it. I've had a lot of conversations with them, and now they've agreed that they would forego additional powers, such as an insurance underwriting.

    And we also included a number of provisions in the bill that I introduced yesterday, along with the support of a good many other Democrats of this committee and Republicans, either on the committee or in the full House. The bank would have to remain very well capitalized and well-managed and would take sanctions if it failed to do so.

    Second, a capital deduction would apply and, thus, every dollar of a bank's equity investment in the subsidiary would be deducted from the bank's capital.
 Page 213       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Third, restrictions under Sections 23(a) and 23(b) of the Federal Reserve Act would apply.

    Fourth, the bank could not make an equity investment in a subsidiary that would exceed the amount that the bank could pay as a dividend.

    Now, the next two are especially important because we've prevailed upon Treasury in an attempt to show tremendous compromise with you, and this is very new. The activities of the operating subsidiary would be subject to joint rulemaking by both the Federal Reserve and the Treasury.

    And, finally, with respect to merchant banking, it's the Fed that would have the rulemaking authority with respect to those activities of the op-sub.

    I just wanted to make sure you were aware of that because that's a tremendous outreach to the Fed, above and beyond anything. Now, I posit that to you, and in conjunction with that, I point out to you that you, and I approve of what you've done, have approved eighteen requests by foreign banks to have operating subsidiaries in the United States that engage in securities underwriting activities in the United States, properly referred to as Section 20's. I think U.S. banks are at a competitive disadvantage.

    What is of interest to me is the reasoning that I believe the Board used in making these eighteen approvals and allowing these op-sub activities for foreign banks. You said a capital deduction would be required, as we do. Strong regulatory restrictions would be required, and we permit you to either have co-equal authority or exclusive authority with respect to those regulatory restrictions. And I believe the rationale of the Fed in making those approvals was that with those regulatory restrictions in place, you believe there would be no conflicts of interests or unsound banking practices.
 Page 214       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    What's your comment about that tremendous outreach effort, regulatory approach, and the juxtaposition of those outreach efforts, and what you've done with respect to foreign bank op-subs?

    Mr. GREENSPAN. Yes, first of all, let me just say that the issue for us is not our authority over the operating subs. In other words, you could give us all the authority over everything with respect to operating subs, and we would oppose putting the powers in there. It's not a turf question. It's an issue of structure. In other words, the issue of the Treasury giving us, as you put it: ''all of that power'' is not relevant to this issue. You could give us full authority over operating subs, and we would very strongly recommend that that be rejected. It's the issue of the question of subsidized equity going from the bank down to the sub, which creates the problem, the unlevel playing field.

    Mr. LAFALCE. But didn't you address that issue with respect to foreign banks?

    Mr. GREENSPAN. Well, I'll get, that's a side——

    Mr. LAFALCE. And then also there's another consideration too, and that's the coverage of the CRA, which is very important to a good many Members.

    Mr. GREENSPAN. Why don't I answer the first?

    Mr. LAFALCE. Sure.
 Page 215       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. And then we can get to the next question. With respect to foreign banks, for which we are required to create so-called ''national treatment,'' there is a difficulty because foreign banks do not have holding companies. And what we have done is we have chosen to presume that the universal bank is the holding company and the subsidiary is like an affiliate of the holding company, and we supervise and regulate it in precisely the same manner that we do our domestic affiliates, so-called ''Section 20 affiliates.'' We would never allow an issue of foreign bank structure to effectively determine how our system functions.

    Mr. LAFALCE. The solution, if you could presume that operating subsidiaries of foreign banks are affiliates, why don't you presume that operating subsidiaries are affiliates? And we would accept your presumption.

    Mr. GREENSPAN. No, because basically the issue is the question of our system versus theirs. They do have universal banks, say in Europe. And they do, indeed, subsidize them. And their operating subs do, in fact, have all the characteristics which concern us. I submit to you that the universal bank system, by the way it functions with cross-subsidization of various different elements, has clearly turned out to be an inferior means of banking structure. And we, that is, the United States, have exhibited skills in banking and structure and the capability of putting forward services which have out-competed all of them.

    So are you asking me are the universal banks that we allow in here to have Section 20's subsidized by their foreign governments? The answer is yes, they are. Do we allow that to have a competitive edge within the United States? We do everything we can under national treatment to prevent that from happening, and I think we succeed.
 Page 216       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. LAFALCE. Didn't your internal discussions say that this subsidy was so date de minimis to be of no real world consequence?

    Mr. GREENSPAN. When?

    Mr. LAFALCE. That's my understanding.

    Mr. GREENSPAN. No, the de minimis part is when you use agency. The size of the subsidy is directly related to the amount of equity capital that moves from the subsidized entity, the bank, to the sub. We believe that agency functions, powers, have de minimis subsidization because the amount of capital that is required for most, in fact, virtually all, agency activities is exceptionally small. And we can scarcely argue that if it's the size of the equity which carries the subsidy, that there really is any to speak of in agency activities. We have never said that the issue of moving capital into the sub of a bank is de minimis so far as subsidies are concerned.

    Chairman LEACH. Thank you.

    Mr. McCollum.

    Mr. MCCOLLUM. Thank you very much, Mr. Chairman. It's been reported that Senate Banking Chairman Phil Gramm has said that you and Secretary Rubin are very close to reaching an agreement to allow operating subsidiaries in banks of assets under a billion dollars, is that accurate?
 Page 217       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. From our point of view, the issue of the amount of subsidy that is likely to occur from a small community type bank is not all that much different from the issue of agencies. That is, I cannot—I don't like the idea of doing it—but I cannot argue, on the basis of the principles which I have been expounding, that a small amount of subsidy does any systemic damage.

    The problem basically, however, is that the safety and soundness issues with respect to using the subs are independent of the size of the operation. I, in earlier testimony before this committee, didn't want to press the issue of safety and soundness because I didn't think it was a terribly important question. The more I thought about it, frankly, the more I've been pounded on by some of the people in my organization, the more I suspect they are more right than I. And they used a very interesting example. They said that consider the case, and I won't use names, but back in 1987, we had the sub of a major bank lose all its capital in hours. This was during the stock market crash. And that had a very significant impact on the bank. And that creates a safety and soundness problem for the bank.

    Now, if you ask me from the subsidy point of view, would I be terribly concerned about a billion dollar limit? I couldn't argue that strenuously. Safety and soundness I can. To my knowledge, however, Secretary Rubin cannot accept a number which is a billion dollars.

    Mr. MCCOLLUM. Well, thank you for clarifying that because that has been batted around quite a bit.

    Mr. GREENSPAN. I don't want to speak for Secretary Rubin, it's just my understanding of where he stands on these issues.
 Page 218       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. MCCOLLUM. Right, but it certainly clarifies whether you're close to some agreement with him, which has been reported on this point. And I appreciate your clarifying that, that it sounds like you're not.

    With respect to the question of commerce and banking, I read into what you said to us today that you do believe that in the long-run that an integration, a full integration of commerce and banking is something that is probably desirable or is likely to take place. It's just a question of two stages, as you put it. Is that a fair interpretation of your thoughts?

    Mr. GREENSPAN. Well, Congressman, let me suggest what the nature of the problem is. As technology changes and as the nature of how we produce goods and services changes, especially in the financial area, the dividing lines between different types of financial products and different types of institutions gets increasingly blurred. And while it's not yet readily the case in a lot of areas, it's beginning to also blur between commerce and banking. If there were no subsidy issue with respect to the bank, if we didn't have the safety net, deposit insurance, the discount window, and Fedwire, then, in my judgment, there should be no reason to even discuss the question of whether a commercial institution can buy a financial institution. There are no subsidies. There's no reason why they shouldn't.

    Mr. MCCOLLUM. Well, let me ask a clarification right there. Can you tell me how does a holding company benefit from the subsidy if it buys a bank?

    Mr. GREENSPAN. You mean a financial services holding?

 Page 219       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. MCCOLLUM. Yes? Well, yes, the bigger company? Presumably, it's a financial services holding company that has a commerce face?

    Mr. GREENSPAN. Yes, if I'm a holding company and I buy a commercial bank, the market value of the bank capitalizes the subsidy in the bank. Therefore, to the extent that I own, as a holding company, the commercial bank, the market value of the financial services holding company is higher. So in that regard, there is some spillover that occurs from the subsidy into the holding company. It is very small and very well contained and has not created, in our judgment, anything even close to systemic problems. And, therefore, we have not considered it an issue.

    The moving of the subsidy into financing these new powers—whether it's in the bank or in the sub doesn't matter—financing with the sovereign credit of the United States matters. It has a significant impact. And it creates the type of financial structure which is, in my judgment, potentially unstable.

    Mr. MCCOLLUM. Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you.

    Mr. Vento.

    Mr. VENTO. Thanks, Mr. Chairman. And welcome, Chairman Greenspan. Just an observation on commerce and banking, I think that the issue today is, I mean I think most of us would like to be cautious. I think putting a recognition of it into the legislation, rather than leaving it really to be defined by yourself and others, is I think an invitation to some problems.
 Page 220       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    I think, too, that the end-product that we had on the floor in the Senate was a 15-year grandfather for securities and insurance and no provision for banks. And my only judgment is that in an electronic age that that 15-year difference with structure would create a different type of symmetry than would be the case if, in fact, we recognized it within the law. And, of course, these are the practices of securitization and the reason we have them trotted before us. And I think almost, well, I say nine out of ten witnesses yesterday at least were friendly to the idea and the recognition of the way the market works. So I think that while I don't know that we need to—I think we need the type of safeguards and concerns, I mean I agree with that, but we ought to be cautious in this area. But I think not to recognize it is to invite some convoluted type of symmetry. Obviously, you spoke effectively here with regards to unitary thrifts and the problem that represents, but we've got CEBAs in this bill. We've got, obviously, the U.S. banks operating abroad that have these relationships. Plus we have, of course, the whole range of State regulated institutions, which are under a different set of guidance with regard to this.

    And that brings me back to your suggestion about the sovereign credit being used. And, of course, I understand that there is a difference here today in the sense that the subsidiaries don't have the merchant banking power. We've limited that, of course, in the legislation that Congress and Mr. LaFalce and the amendments that we've offered, and now has been endorsed pretty much by the Administration, this merchant banking, which is substantial, which is I think the core of what the powers are. But insofar as the sovereign credit exists within States, it exists within U.S. banks operating abroad, the sovereign credit then do you agree is pass the affiliates that are operating in those instances? And what guidance, a brief answer, Mr. Chairman.

 Page 221       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. GREENSPAN. It is certainly the case that we have edge corporations, which are constructed by the Congress for purposes of meeting the competitive structures of American banking institutions abroad. As I mentioned earlier, they do subsidize their commercial banks and their whole system. What we do through edge corporations is effectively replicate the type of structure that they have abroad. Those institutions are subsidized. And the reason that we have chosen to do that is to maintain a level, competitive playing field between American institutions and foreign institutions, say in Germany or France or elsewhere. It's precisely that principle which is the reason why we do not recommend subsidization here because in order to maintain the level playing field abroad, you need the subsidization. To maintain the level playing field in the United States, you should not have it.

    Mr. VENTO. Well, we do have it apparently in the context of State regulated institutions that are insured by the FDIC?

    Mr. GREENSPAN. Well, if you're referring to the subsidiaries, the subs of the banks, the truth of the matter is that there is very little of that. There are almost no securities operations even though they are legally authorized in State institutions. There is indeed very little in the way of subsidies flowing from mainly smaller institutions into their subs. Theoretically, I agree with you. It could become or could have become a problem. The fact of the matter is it has not.

    Mr. VENTO. Well, the FDIC, of course, has to approve all the activities. And so in instances where we have had that problem, obviously there was some problems with regard to thrifts during the 1980's when we thought giving them more powers would somehow magically work them out of their problems. But in this legislation we have, we limit the amount of capital. And, of course, in this instance, the sub has to be well-capitalized. And the parent institution has to also.
 Page 222       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Now, in the example you gave with regards a certain trading bank that had an affiliate that was doing some trading in stock, I remember I think the same instance. The fact was—the question is whether the bank is well-capitalized. If it isn't, that's a problem, and, of course, it's a regulatory problem beyond that. I mean the same could probably be said with regards to an affiliate structure if it's not capitalized, in my judgment. I realize you might differ with that.

    But you are aware there's a 10 percent limit in terms of the capital that can be invested, it can be no greater than the dividends that are paid. So there are a number of other procedural safeguards in here. And, of course, as you know, the FDIC former chairman, none of which all agree that this is equal and do not agree that there's any subsidies, so there is—and no sovereign credit being used here. I mean we could probably go through this around and around and say that the Fed window and some of the other activities represent sovereign credit.

    Mr. GREENSPAN. Well, the answer is the Fed window does. That's precisely the problem. But we can only lend to commercial banks by law. That's what the issue is.

    Look, I can conceive of a situation in which you can create an operating sub of a commercial bank and give them all of these powers, but then proceed to find every form of restriction to make sure that they can't really use them. I will submit to you that no one is going to want that structure. The reason why there is such a strong support for the issue by the banking community originally for operating subs, is, indeed, it is a terrific advantage for the banks. In other words, I will suggest to you that if I were a CEO of a banking organization and given the opportunity to have an op-sub with these powers, and I didn't move the powers from the affiliate of the holding company to the sub of the bank where it is subsidized, I would presume the shareholders would kick me out for misusing the funds of the banking organization. And what I'm saying is the fact that if you tie the sub up in such a manner as it effectively doesn't function, no one is going to want it.
 Page 223       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. VENTO. We're trying to answer the responses that you have, and so that's the fear though. I would say that will we be able to submit written questions, Mr. Chairman.

    Chairman LEACH. Absolutely.

    Mr. VENTO. Yes, thank you. I have one on insurance, thank you.

    Chairman LEACH. Mrs. Roukema.

    Mrs. ROUKEMA. Thank you, Mr. Chairman.

    Chairman Greenspan, I am particularly happy that you have repeated yet again for our newer Members, who haven't been here and had this long history of the fact that we have not been able to get statutory changes and the law passed for financial modernization. And so you made a strong case that if we don't do it now, we will have lost the opportunity for the indefinite future. And we'll continue, not only in an ad hoc basis, to have the regulators and the courts, because we're abrogating our Constitutional responsibility. The regulators and the courts will be taking over our responsibility. That will be a great detriment, not only to the country and to financial institutions, but to the reputation of the Congress. And I thank you for stressing that again.

    But I am also encouraged today by what you've said on the subject of finding, if not a compromise, a way of dealing with the holding company and the op-sub question. There is a division between yourself and the Treasury. I agree with you.
 Page 224       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And I am especially happy that you have responded, and I think it was Mr. LaFalce's question, that you took the opportunity to respond to the question that I was going to ask. The question is can't you put your position on why the operating subsidiaries is not the way to go, as not just turf. Whether you know it or not, there's an awful lot of people around this town and Members that are saying, ''Oh, this argument is just about turf. There's no substance to it.'' But I want to congratulate you. If you want to say anything more on that subject I'd appreciate hearing it, but I think you've really addressed the substance of the issue here. And I hope we've all heard it. These are substantive concerns, and not just turf. And, hopefully, from what I read in The Washington Post, Mr. Rubin is ready to discuss these substantive issues with you, and we'll be asking him that tomorrow. So if you want to talk about that again, I would be happy to hear what you have to say.

    But I did want to get to this question of commerce, and I won't use that dirty—it's become a dirty word, ''commercial basket,'' you know I'm committed to a basket, but it's not a word that we use in polite company evidently these days. But I like a basket, whether it's a 10 percent or 5 percent, but it looks now as though there's serious conversation and discussion about complementary activities. And I think you addressed it in some respect with Mr. Leach and another questioner. But my concern, and I hope you address your comments to this, is that it sounds good, but would it be too convoluted to really be workable? Can you address what my concerns might be? Any compromise language where we're using ''complementary activities'' as the statement? And from what I've heard, and I haven't studied it, there's nothing specific to study yet, but it sounds too convoluted from a regulatory perspective to be effective in my opinion.

    Mr. GREENSPAN. Well, maybe not. I think starting with the premise that we are all aware that there's a gradual blurring and increasing blurring between banking and commerce and that at some point down the road, we're going to have to be addressing that because if we don't address it, it's going to happen automatically. And, as I said earlier, the problem is the safety net. If you didn't have the subsidized safety net, this issue would not arise.
 Page 225       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And so it's a question, how do you minimize the use of subsidies in the system as you begin to blur this particular area? I would suspect that if you grant to the banking regulators and others the ability to interpret that term in a manner which is consonant with the goal of gradually endeavoring to move in the direction recognizing the changes in technology, but trying in the process to significantly minimize any spillover from the subsidies out of the banks, I think we should be able to do that.

    Mrs. ROUKEMA. In a timely manner or we going to be months or years through regulatory interpretation?

    Mr. GREENSPAN. I would say it's likely to occur gradually as it should because there's no urgency at this particular point. And the main issue, as I've said, is to see what happens with financial services holding companies and we'll learn about how to go to the next step, if it's even decided to go to the next step.

    Mrs. ROUKEMA. Would it be done on a comprehensive basis or case by case basis, an individual application basis?

    Mr. GREENSPAN. I suspect it's probably likely to start off case by case.

    Mrs. ROUKEMA. Like Citicorp and Travelers?

    Mr. GREENSPAN. It could be, yes.
 Page 226       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mrs. ROUKEMA. All right. Thank you. I don't know what conclusion I've come to on that, but I do hope that we can work together on it and pursue it. In any event, we must pass legislation this year. And we appreciate your continued leadership.

    Mr. GREENSPAN. Thank you.

    Chairman LEACH. Thank you, Mrs. Roukema.

    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you very much, Mr. Chairman.

    Mr. Greenspan, I do not want to paraphrase your testimony, but as I understand it when you are talking about the mixture of commerce and banking, it should be thought of as a two-stage process. That is, we can first do modernization and free up some powers for banks. But, we do not necessarily have to allow them to have any portion of a basket or anything in commerce until, somewhere down the road, after we understand the experiences of what is happening domestically and also have had an opportunity to analyze Japan, Germany, and some of the other banking crises that exist in the world. Is that substantially what you are saying? We should make no compromise, and keep the firewall until we have a better knowledge?

    Mr. GREENSPAN. Yes, sir.

    Mr. KANJORSKI. In that light, it is still worthwhile to have modernization. Not mixing commerce and banking does not take away modernization. There are other powers out there that are worthwhile. But one other question, has anyone given thought to the possibility of establishing a super bank charter? If, in fact, these banks are not seeking subsidies, why not allow them to engage in commerce and banking, but take the open window, take the FDIC away from them, and take the Fedwire? And if we took those three subsidies away from them, do you think there would be a rush for a super bank charter?
 Page 227       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. I doubt it.

    Mr. KANJORSKI. So, it really is that attempt in some way to gain a subsidy and pass it on into a commerce business? Now, retiring from all of that, do you have any good sense as to whether the Japanese crisis and the German crisis, have subsided to the level that we should not have to worry about it too much? Or is it worthwhile for you to give us an indication about how long a period of time is needed to see what is the effect over there of their structures?

    Mr. GREENSPAN. Well, we don't have to look beyond what we've seen because we've learned a great deal. One of the things that is beginning to evolve, Congressman, is an awareness that there's something unusual about the fact that we in the United States, say last August after the Russian default, did not sense a significant impact. And the reason appears to be that even though part of our intermediation of savings and investments froze up, we couldn't, for example, for a period of time even get a market in fairly high-grade bonds. You couldn't sell them. The thing seized up. But the commercial banks then took over. We had sort of two means to intermediate savings and investment.

    The same thing happened to us back in 1990 with the savings and loan crisis. That is, the depository institutions froze up, but the securities markets solved the problem, so to speak.

    One of the things that appears to be the case is in East Asia where universal banking is the only means they have, is that it worked fine so long as the economy was growing. As soon as they ran into trouble, they had great difficulties. It's like the person without health insurance. He isn't concerned about it. Everything is going fine, but when he's ill, it's a problem. Well, in a sense, they didn't have any health insurance. We did.
 Page 228       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And that shows up in Japan as well, where they have the vast proportion of their intermediation between savings and investment in commercial banking. Commercial banking serves a far greater proportion of their activity than ours. And when their banks ran into trouble, their whole economy ran into trouble.

    So in that sense, we've already learned enough. And in Europe we can see the process by which, as I mentioned earlier, the cross-subsidization, which takes place within these general universal banks or, in fact, in the keiretsus in Japan, that process does not work well in a crisis. Ours apparently is sufficiently flexible that it does.

    So I don't think we have to await what is happening on the financial part to make judgments about holding companies or universal banks now. But what I was saying is that the experience that we will get in the United States from seeing how the subsidy is contained in the financial services holding company will give us insights on how to go the next step successfully if the Congress chooses to make that judgment to move in that direction.

    Mr. KANJORSKI. It sounds as if, in your judgment, the second stage should not come for a long time because our system seems to have greater flexibility in these stressful times, is that correct?

    Mr. GREENSPAN. I don't think we know how long the second stage would be. That's going to be determined more by technology than by regulation or even markets. If the technology moves very dramatically to blur the lines between say a financial services holding company and commerce, then I think the Congress is going to have to address that issue fairly expeditiously. If it is moving slowly, I think there's may be a considerable amount of time before that issue needs to be effectively addressed.
 Page 229       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. KANJORSKI. Thank you very much.

    Chairman LEACH. Mr. Bereuter.

    Mr. BEREUTER. Thank you, Mr. Chairman.

    And, Mr. Chairman, thank you for your testimony. I'm particularly interested in the subject that you and Mr. Kanjorski were pursuing. I also liked the reiteration of what you said several years ago in your statement today about the caution you raised on early movement to integration of commerce and banking. It seems to me that we would be absolutely foolish if we ignored the examples of what has happened in Asia. When the Japanese economy was moving ahead quite strongly, the assets of the banks, of course, increased. But now they've been in a slump for seven years and when they need a strong banking system to help spin them out of that recession, they don't have it. And whether you call it a basket or some other euphemism, I think it is a dirty word at this stage. I would hope that my colleagues, and particularly the interests here, understand that it should be a dead letter issue at this point.

    If we have to strike it out on the floor again, I will lead the effort to strike it out. It is such a serious blunder, that it should not impede our effort to go ahead with banking modernization.

    Now, Mr. Chairman, I do have a question, two actually. In your testimony, you stated that principal activities are conducted in bank subsidiaries. Those subsidiaries will have an unfair competitive advantage over independent insurance and securities firms, or even over an affiliate. Could you give us a little more detail on that? And, relatedly, could you explain how allowing operating subsidiaries could distort ''the efficient allocation of both financial and real resources that have been so central to America's current prosperity''?
 Page 230       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. First of all, let me just say that there's very substantial evidence on this issue of the fact that there is a subsidy in the bank. One of the many indications is the fact that if you take a look at the ratings of issues of debentures of banks on the one hand, by themselves, and all other unrelated institutions, insurance companies, investment houses and the like. At the same rating, the bank will have significantly less capital, meaning far more leverage, than will the other institutions. The sole exception to that are a few of the large investment institutions which have very large what we call ''matched books,'' meaning very large amounts of U.S. Treasuries or other safe instruments on their assets side, which don't require any capital. So that distorts the picture.

    But there are a whole series of other measures which unequivocally support the notion that there is a subsidy in the bank. Every banker knows that. When I was in private business and consulting with a lot of banks, it was a given that you moved every power you could into the bank where the cost of capital is the least. It was never even a debatable issue. I never even heard it debated until I arrived here. It struck me as there are certain truisms around the world.

    The problem essentially is that that then means that a banking institution, having a lower cost of capital, is able to compete unfairly and on an unlevel playing field with those institutions who don't have access to the safety net. What occurs is that the allocation of capital is distorted. Ideally, we say that capital is appropriately allocated when the pricing system reflects the value preferences of consumers, because that will induce the type of physical assets that are produced and the type of goods and services that are produced that consumers want. You distort the system through subsidies, and you will unbalance that system. And it's the reason why so many economies, which are heavily subsidized, work so poorly.
 Page 231       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. Thank you, Mr. Bereuter.

    The gentleman from Vermont, Mr. Sanders.

    Mr. SANDERS. Thank you, Mr. Chairman.

    And, welcome, Mr. Greenspan. Mr. Chairman, let me begin my remarks with a brief quote from a gentleman I think we're going to hear later this afternoon. He's a good friend of mine, Ralph Nader, and he says, ''H.R. 10 is not a bill for consumers. It is a bill designed to create new profit centers for a relative handful of banking and financial service corporations that will form combinations which will dominate the delivery of financial products and fuel the already alarming trend toward megamergers and the concentration of economic power.''

    Mr. Chairman, in recent years we have witnessed what I consider to be a very, very dangerous trend in this country. And I'll be asking Mr. Greenspan about this in a moment, and that is that there has been merger after merger in industry after industry, the result being that fewer and fewer extremely wealthy and powerful individuals own and control more and more of our economy. On an individual basis, we now have the most uneven distribution of wealth in the industrialized world, with the wealthiest 1 percent of the population now owning more wealth than the bottom 90 percent. We have one individual owning more wealth than the bottom 40 percent of our population.

    From the point of view of our economy and the international economy, we have seen extraordinary mergers in the media and telecommunications and banking and manufacturing, agriculture, and in almost every area of our lives. The bottom line of all of that is that a relatively few extraordinarily wealthy and powerful individuals now control a significant part of our economy and the lives and well-being of tens and tens of millions of Americans and people throughout the world.
 Page 232       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Now, Mr. Greenspan, I believe will remember that the last time he visited with us, he was here to defend the Fed's action with regard to the Long Term Capital Management fund, a hedge fund which created a major international financial crisis because of the irresponsible investments of more or less one man, Mr. John Meriweather, the so-called ''master of the universe,'' as I guess he was referred to on Wall Street. And this is one guy who made some bad investments which caused Mr. Greenspan and his colleagues to move rapidly because they were worried, I think the word you used was a financial ''meltdown.'' One man.

    My concern is that if we continue the trend toward fewer and fewer large financial institutions, we are going to raise the crisis of the too-big-to-fail doctrine. And if it is already scary where we are right now through the savings and loan failure to what happened to Long Term Capital, I wonder what happens when you can have fewer and fewer financial institutions who, if in dangerous financial situation, are going to call upon the United States Government and the taxpayers of this country to bail them out. We're not going to have the resources to do that.

    So my question for Mr. Greenspan is, are you concerned about this growing concentration of economic power? Do you believe that the problems that we have seen in Asia and in Russia, where American companies have invested huge sums of money, and in some cases, lost large sums of money, precipitating serious problems at home, should give us some reason to be concerned about moving forward in the direction of H.R. 10?

    Mr. GREENSPAN. Well, let me first say that it is certainly true that the dispersion of wealth has increased quite substantially. And it is indeed true that there are some extraordinarily wealthy billionaires that were not billionaires earlier. As best I can judge, almost none of this is the result of mergers. Indeed, a number of the mergers that I have observed have not worked all that well. The major reason why there has been a significant increase in wealth in that regard is that stock prices have gone up very substantially. And the reason they have gone up is that the markets have presumed that the capital efficiency of the American economy has improved in a very significant manner. And, indeed, the consequences of that are all around us. We have an economy which is the envy of the world. We have an economy which is functioning exceptionally well, even granted all of the numbers which I will immediately agree remain a problem, namely, a distribution of income, not to mention wealth.
 Page 233       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. SANDERS. I understand. Are you concerned about the increased concentration of economic power?

    Mr. GREENSPAN. The answer is no. And the reason I am not is I think that what is happening in this economy is a major increase in competitive pressures throughout this economy, and that, indeed, the issues that appear before the Antitrust Division are very interesting in the sense that they are no longer the huge conglomerate types of problems which were perceived to be hobbling the underlying efficiency of the American economy. This is an economy which is an extraordinarily competitive one, and the reason is that technology has moved so dramatically.

    Am I concerned that some of these mergers are not going to work? Yes, I am concerned. I think some of them are not going to work and are going to create very significant problems for their shareholders and I hope few others.

    Mr. SANDERS. Not the taxpayers?

    Mr. GREENSPAN. But I'm not worried about the broader question that you raise.

    Mr. SANDERS. You're not worried about the taxpayers having to bail to out these institutions?

    Mr. GREENSPAN. I should certainly hope not.
 Page 234       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. SANDERS. ''Hope'' is a word that concerns me.

    Mr. GREENSPAN. Well, let me put it this way. The LTCM, the Long Term Capital Management, as you know, had nothing to do with taxpayer funds.

    Mr. SANDERS. I am aware of that.

    Chairman LEACH. Mr. Baker.

    Mr. BAKER. Thank you, Mr. Chairman.

    Good morning, Mr. Chairman. For the purposes of my question, would like to put the debate about subsidy on the shelf just for the moment and turn more to structure questions as to operating subsidiary versus affiliate structure. I find it of some interest that under the provisions of the Bank Holding Company Act, under the Fed's regulation, a domestic U.S. bank may invest up to 24.9 percent in a United States corporation. And under similar provisions of that Holding Company Act, under Fed supervision, a U.S. bank may own up to 40 percent of a foreign corporation.

    One might well ask the policy question, why is it safer for a U.S. bank to invest in a foreign corporation than it is in an American corporation even at a higher investment ownership? It's not my question; it's just the point that equity investment, in a commercial enterprise, is now an activity permissible under the Bank Holding Company Act. So it would appear commerce and finance, as a matter of economic policy is not something that should be prohibited.
 Page 235       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Merchant banking, as I understand it, would simply allow U.S. banks to take equity positions in corporations in perhaps an operating subsidiary. So structure becomes the issue. Do you do it through the Bank Holding Act, under the affiliate, or do you do in the operating subsidiary? Not the issue of is it permissible or advisable?

    But I understand that the Fed's position on merchant banking in the operating subsidiary is that of opposition. It would appear that the argument being made is one of structural distance, that the further away from the bank one engages, in either underwriting securities or merchant banking, one can then assume that it is inherently safer for the taxpayer?

    Mr. GREENSPAN. Not the taxpayer, the structure of the system as a whole.

    Mr. BAKER. Systemic risk. So let's make that assumption and then proceed to suggest a new format, that we do not allow securities underwriting in the op-sub. In fact, for the sake of this question, let's not allow it in the holding company. Let's not allow banks to participate in the securities business at all except by traditional commercial lending activities. And don't even make it in the neighborhood. Let's make it some far-off place like Connecticut.

    Now, one would assume that that would be a very safe and sound transaction, if structure is truly our defense. My point here is that market experience tells us otherwise thankfully. The Fed did get involved in resolution appropriately due to concerns of systemic risks. And it leads me to the conclusion that structure in itself is not the safety net for the system, that it is regulatory capability and multiple regulators. Your point. If you were to allow these activities to occur in an operating subsidiary, not only would the Fed have direct jurisdiction over that operating subsidiary if concerns were raised about the safety and soundness of the bank, Treasury would also from a different perspective have jurisdictional interest in that operating subsidiary's activities.
 Page 236       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And that would mean additional regulators, not additional structure. It means more efficiency in handling those transactions, which you already allow under Section 20 affiliates for securities. The Fed approves and allows securities investment by banks, through Section 20; approves and allows merchant banking, although it's called ''equity investment'' through the Bank Holding Company Act. So we're not disputing these activities are appropriate. We're only arguing as to the structure being the appropriate safety gauge for the system and the taxpayer. And recent history tells us that structure is not the protector that we all hope would be. It has to be competent regulators in that bank and, in my view, multiple regulators. And that's what the operating subsidiary structure would give us.

    Can you comment, please?

    Mr. GREENSPAN. Well, first of all, if there were no subsidies within the bank, then the structure would be wholly an issue of management convenience. You would still raise the issue with respect to the cross-subsidization that exists in a universal bank which history now suggests to us.

    Mr. BAKER. I agree with your point. And I'm not disputing that. The only thing I said at the outset is that we could put subsidy on the side for the moment.

    Mr. GREENSPAN. But that is, in my judgment, begging the question. If the subsidy did not exist, I would say that the Government should have no function here whatsoever.

 Page 237       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. BAKER. All I'm trying to raise for my colleagues is that you are opposed to the structure because of the subsidy, not because inherently commerce and finance or underwriting of securities or merchant banking or those activities in themselves present a problem to do it within a bank structure other than your concern as to subsidy?

    Mr. GREENSPAN. That is correct.

    Mr. BAKER. Thank you.

    Mr. GREENSPAN. Except with one caveat.

    Mr. BAKER. Yes, sir?

    Mr. GREENSPAN. The caveat is the safety and soundness question which relates to the bank itself, that what we have observed in the past is that if you have a subsidiary of a bank, which loses all its capital very quickly, then it has a major impact on the bank itself. And to the extent that banks are a crucial aspect of our intermediary process, if you get a number of those types of problems, then you undermine the banking system. That is not an issue of subsidies per se. Subsidies are the crucial issue. But it is not as though it's irrelevant where one keeps the particular powers because if I were corporate management, I would be very careful where I kept my particular powers. If it were not for the subsidies, I would tend very much to keep them in the holding company affiliates where liability was limited and did not undercut the crucial issue of the bank.

    Mr. BAKER. I don't have a further question, just a comment with regard to the holding company structure and regulators' ability to force liquidity down to the bank in the case of difficulty. I'm told a recent court decision is now requiring the FDIC to reimburse to the rate of $120 million to debtors of the holding company where the regulators forced the holding company to downstream capital to a troubled financial institution. And the courts have found that to be an inappropriate activity of the FDIC.
 Page 238       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, I think that's a legitimate problem.

    Mr. BAKER. And getting the money downstream from the holding company to the bank is far more difficult than getting it from the op-sub up to the bank is my point.

    Thank you for your courtesy, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Chairman.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Chairman Greenspan, in your testimony you talked about an obsolescent mode of regulation and that bank regulations was mired in 19th Century structures. What if we dropped the idea of the op-sub and instead said that the Fed should concentrate on monetary policy, the clearinghouse, the Fedwire, Reserve requirements and liquidity, Fed funds; and moved the bank regulatory powers to the OCC, including the bank holding company structure and State banks, would you agree with that?

    Mr. GREENSPAN. Well, we've discussed——

    Mr. BENTSEN. I think I know the answer.
 Page 239       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Yes, we've discussed that at length in previous discussions. It depends on whether you think that the lender of last resort function is enhanced by having hands-on supervisory authorities and knowledge of the details of the banking system. And, as I mentioned the last time we talked about this thing, so far as the Fed is concerned, as you know, we have got the holding company structure, which gives us insights into a lot of the major banking corporations. We have onsite supervisory activities in some of the larger State member banks. And a modest amount of smaller banks which enables us to understand what's going on in the banking system in general. It's been our experience that to have a detailed knowledge and be able to deal with individual banks and bankers when the crises arise, has been a very important issue with respect to our ability to maintain our role as the protectors of the system as a whole. It's not just necessarily true in theory, I'm just merely saying as a practical matter, that's what evolved over the decades. And I think that the judgments that people in our institution are making on that, as best I can see, are correct.

    Mr. BENTSEN. Well, it's a long no. But I understand that. Let me ask you this. You talked about the idea of subsidized equity capital from the bank to a subsidiary. And we've talked about the subsidy before. In fact, last year or two years ago, I can't remember when we talked about this issue, your concern was purely the subsidy and, in fact, you stated that you didn't think there was a safety and soundness issue. You've since revised that opinion, fair enough.

    But, again, how is there a difference in subsidy capital or subsidized equity capital that runs from the bank to the subsidiary versus subsidized equity capital that runs from the bank through the holding company to the affiliate? I mean use an example, J.P. Morgan sets up a Section 20. Now they either do that with excess capital within Morgan Guaranty or they go into the market and raise capital which some would argue also has some subsidy attached to it because of the fact that J.P. Morgan has some access to the sovereign capital. What is the difference, and is it a quantifiable difference between that and going to an operating subsidiary? And has the Fed, at least over the last two years, been able to quantify that difference because nobody else has apparently?
 Page 240       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, let me suggest to you what we know about this issue. One of the interesting aspects of the individual holding companies is that the dividends, which are paid from the bank to the holding company, say from Morgan Guaranty to J.P. Morgan, tend to be related to the total amount of dividends that are paid from J.P. Morgan to the shareholders or from J.P. Morgan to debenture holders. In other words, the subsidy moves out of the system back into individual shareholders directly.

    What is most interesting about this whole process is one would ask the obvious question why are they not moving a far greater proportion of the dividends from Morgan Guaranty to the affiliates of J.P. Morgan and use the subsidized capital as such? The answer is that if you take dividends out of the bank, you are lowering the capital. And all bankers' experiences are that that would increase the cost of funds for the bank. And, as a consequence of that, they tend not to do it. Not only is that true in the Morgan structure, and I speak from personal experience having been on both boards, it's true of all of the bank holding companies that we see.

    Mr. BENTSEN. But with the Chairman's indulgence, wouldn't the same be true if you had to separately capitalize a subsidiary, you would be reducing the net capital within the Morgan Guaranty structure to the extent you move dividends or separate capital, excess capital down into the subsidiary?

    Mr. GREENSPAN. I'm sorry, repeat that again?

    Mr. BENTSEN. Well, I think if I understand your argument. You're saying the reason why not all the subsidized capital is moved to the affiliates is not to reduce the net capital of the Morgan Guaranty structure, right?
 Page 241       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Of the bank, that's correct.

    Mr. BENTSEN. Of the bank. Why would not the same apply in the case between Morgan Guaranty, the bank, and its subsidiary? Again, Morgan Guaranty, the bank, would be concerned about its capital, the size of its excess capital, whether it was moving dividends to an affiliate or moving excess capital to the subsidiary?

    Mr. GREENSPAN. Yes, because it turns out that the funding costs to the bank as the bank consolidated, that is, the evidence that we have, or the evidence the bankers have, is that all subsidiaries of the bank and their capital, that is the capital of the subsidiaries, are perceived as consolidated into the bank itself, which indeed is what the accounting does. And the funding costs are a function of a consolidated bank, not of the bank less its' subsidiaries.

    Mr. BENTSEN. And the asset of a subsidiary would be a considered an asset, a good asset, of the consolidated balance sheet of the bank and, thus, would enhance the funding capability of the bank itself?

    Mr. GREENSPAN. Well, the point is, obviously, the extent to which the bank is profitable and builds up equity in the system, the answer is yes, it does. It reduces the cost. But the point I am making is that the issue of the undesirability or the unwillingness to move the capital out of the bank through the holding company into the affiliates is the type of practice which from the banking consolidated system as a whole, sub-optimizes profit capabilities.
 Page 242       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Bachus.

    Mr. BACHUS. Thank you.

    Chairman Greenspan, I think there's a real consensus now between the financial industries as to what they want in H.R. 10. I think more than we've ever had. And we seem to have more of a consensus that CRA will not be a stumbling block, that we'll consider CRA later. And then the issue of commerce and banking, you propose that they be dealt with in a sort of step two process and perhaps that the unitary thrift issue could be considered at that time.

    Regardless, I don't see that as a killer for this bill. But I will tell you that I see the Fed and the Treasury being diametrically opposed on whether to have holding companies or subsidiaries and that that is the major obstacle today to probably a bill moving. Do you appreciate that?

    Mr. GREENSPAN. Oh, indeed. We have over the years had innumerable joint bills with Treasury in which we all agreed about the appropriate structure being a holding company. It's only in this most recent run through that this issue has ever come up.

    Mr. BACHUS. Well, now, last year my recollection that the Administration threatened to veto H.R. 10 if it curbed these operating subsidiaries. So it came up then.
 Page 243       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Oh, no, I'm saying, what I meant by that, I meant prior to H.R. 10.

    Mr. BACHUS. OK.

    Mr. GREENSPAN. The issue never came up because Treasury agreed with us with respect to the appropriateness of using the holding company affiliate structure as distinct from universal bank structure.

    Mr. BACHUS. Did they agree with you or ever say in writing or orally to your knowledge or ever have the position that creating these subsidies could undermine the Federal Insurance Depository fund?

    Mr. GREENSPAN. I'm sorry, you mean in earlier years?

    Mr. BACHUS. Yes, you have said that the subsidiary system could actually undermine the Federal Deposit Insurance fund, which I think is the big red flag.

    Mr. GREENSPAN. Yes, absolutely. The answer is yes, it can. It's not my most important objection to it. My most important objection is that employing a structure for financial services institutions, whatever you want to call them, employing the op-sub, so-called commercial bank subsidiary type of organization, as distinct from affiliates of holding companies, creates some very significant distortions in the system, which is the main reason why I've been concerned. But I certainly don't deny that there is also a threat to the bank from the safety and soundness issue and, hence, the FDIC and the taxpayer. I admit that that is a problem. I just want to make a point that I don't consider that the main issue.
 Page 244       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. BACHUS. You can see where some of us, as long as you're saying that that as a threat, with many of us that would be the main issue, and that that's really the cornerstone of the safety net under the whole banking system?

    Mr. GREENSPAN. Yes.

    Mr. BACHUS. Do you see any way where new powers could be given to the Federal Reserve and yet it could be set up using subsidiaries? And I say that because many of the small banks are saying they already have a competitive disadvantage. I think we all realize that. And they are saying, they are agreeing with Secretary Rubin that the holding company system might be rather cumbersome to them and that it may actually put them at an even greater disadvantage in competing with the larger banks?

    Mr. GREENSPAN. Well, remember that most of the smaller banks are doing agency type of activities and they don't have a holding company, they don't need them. They would if they were to engage in merchant banking or insurance underwriting, or securities underwriting. But I submit to you that there are very, very few community banks, in my judgment, who have any interest in that whatsoever. And if that were a crucial issue, I think that could be very easily handled. I mean I agree with you to the extent that they think being burdened with a holding company when you're a small company and have to deal with that, that seems silly to me. And I can't see why legislation can't be very readily constructed to solve that particular problem.

    Mr. BACHUS. OK. I appreciate your response.
 Page 245       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. Thank you.

    Ms. Hooley.

    Ms. HOOLEY. Yes, Mr. Chairman, it's nice to know, having read The Washington Post this morning, that you and Secretary Rubin are a little closer together. And you talked this morning about being willing to talk to the Treasury.

    I agree with the last speaker that the two of you being able to come together is going to be critical in passing this bill this time, so I hope that happens. My question is, what do you see as the obstacles to overcome to coming to some agreement between the two of you?

    Mr. GREENSPAN. He has one view and I have another.


    Let me put it this way: He and I work very closely together on virtually everything so that the fact that we have been unable to come out with the same agreement in this area is not, one, from lack of trying or from a lack of collegiality. We have both. There are just deep-seated differences which I regret, and I wish we could find a way to resolve them. And both of us I think believe that financial modernization is terribly important. That the Glass-Steagall Act is obsolete. It's creating burdensome costs that seem silly at this particular point. And I would be delighted if we could find a resolution of this, and we have tried on several occasions. And, as the Secretary put it, ''Let's agree to disagree.''
 Page 246       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Ms. HOOLEY. But are you willing to sit down and work with the Treasury to find some consensus or do you think that's going to be impossible?

    Mr. GREENSPAN. I'm willing to do whatever is required because I think this is a terribly important issue. And anybody who can find a way to bring us together and resolve this issue, I think will do a great service.

    Ms. HOOLEY. Thank you.

    Chairman LEACH. Thank you.

    Mrs. Kelly.

    Mrs. KELLY. Thank you, Mr. Chairman. I have a couple of questions for Mr. Greenspan, but first there is an issue that I would like to bring up that perhaps, really Mr. LaFalce is not here, so I really can't ask him and it does involve his mark. I'm curious about who is going to enforce Section 23(a), and who's going to interpret it? And I hope we're going to be able to figure out from what he's written how that's going to apply to the op-subs, how that enforcement will apply to the op-subs.

    And, Mr. Greenspan, I'm not going to ask you that question because I don't know that you are that familiar with Mr. LaFalce's——

    Mr. GREENSPAN. I haven't seen his mark, so I couldn't make a judgment.
 Page 247       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mrs. KELLY. A couple of things I would like to ask you. Would you support the merchant banking activities in the op-sub if we required joint rulemaking on what new activities are allowed in the op-sub under broader definitions that would be done between the Fed and the Treasury, and allow the Fed sole regulatory authority over any merchant banking activities out of the op-sub?

    Mr. GREENSPAN. Mrs. Kelly, I answered that question I hope somewhat indirectly earlier. So just let me repeat.

    Mrs. KELLY. I think you did. I'm just trying to clarify.

    Mr. GREENSPAN. Yes, let's assume you gave all of the power to the Federal Reserve to handle it in any way we saw fit, I would still say it's bad legislation. It's got nothing to do with how you supervise it, who does, and what form. It's really got to do with the basic question as to whether, in fact, there is a subsidy coming from the bank into the op-sub. And it strikes me that if you gave us that power, I would be terribly concerned. I think it would be an abuse, which I would strongly recommend against. So it's got nothing to do with dividing the power, because even if you gave it all to us, we would still object.

    Mrs. KELLY. Thank you very much. I want to switch gears for a minute and talk about the basket. Are you comfortable with the 15 percent, or as Senator Gramm favors, the 25 percent commercial basket? What size of a basket are you comfortable with, larger, smaller? And I'm going to ask a second question because I don't know how time is going to roll here.
 Page 248       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, I'll answer the first one very quickly. The answer to the first question is zero.

    Mrs. KELLY. OK, no basket?

    Mr. GREENSPAN. Yes.

    Mrs. KELLY. Would you be comfortable with a reverse basket?

    Mr. GREENSPAN. What is a reverse basket?

    Mrs. KELLY. Well, we can talk with Mrs. Roukema, but I see Mr. LaFalce came back, could I just ask you, Mr. LaFalce, what I was saying before? I'm interested, under your mark, who would enforce and interpret Section 23(a) as it would apply to an op-sub? And maybe, I hate to take my time, but we'll let Mr. Greenspan off the hook here. If you don't mind answering that question, I would like to hear it from you.

    Mr. LAFALCE. The Comptroller of the Currency would have supervisory authority over national banks and operating subsidiaries. But with respect to the operating subsidiaries, there would be concurrent jurisdiction with respect to its powers except with respect to merchant banking, for which the Federal Reserve Board would have the powers. This is a work in process though, of course. We're trying to find a formula that the various parties could agree upon. I also am very concerned——

 Page 249       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mrs. KELLY. Well, perhaps we can work together on something there.

    Mr. LAFALCE. Absolutely, of course. There is no——

    Mrs. KELLY. I'm just going to reclaim my time here.

    Mr. LAFALCE. Oh, I'm sorry.

    Mrs. KELLY. ——Because I'm going to run out. And, Mr. Chairman, will let you go ahead with that. Thank you. I'm returning my time.

    Chairman LEACH. Well, thank you. If the gentlelady would yield for a second?

    Mrs. KELLY. Yes.

    Chairman LEACH. She has provided the Chairman an opportunity he never thought he would be provided in his life, and that is to define an economic term that the Chairman of the Federal Reserve Board doesn't know.


    A ''reverse basket,'' Mr. Chairman, is a precept that emanated from some in this committee that was intended to be a balancing. A basket implies the right of a commercial entity—excuse me, of a bank—to purchase a commercial entity up to a percentage of the bank's assets. A reverse basket is the precept that a commercial entity may use a percentage to buy financial assets. Both precepts, in this gentleman's mind, are flawed, but that is the definition. And if the Chairman of the Federal Reserve Board wants further help in understanding the economic dictionary, I'm available at any time.
 Page 250       PREV PAGE       TOP OF DOC    Segment 2 Of 3  


    Mrs. ROUKEMA. Would the gentleman yield? I just want to say, not that I'm being critical of Mrs. Kelly, but she referenced my name I suppose because you think I know it all. But in any case, I don't want the Fed Chairman to interpret that as meaning that I am an advocate of reverse baskets. I am not.

    Mr. GREENSPAN. Not knowing what they were, I appreciate the definition, Mr. Chairman.

    Chairman LEACH. But I would tell the Chairman that——

    Mr. GREENSPAN. I'm most appreciative, Mr. Chairman.

    Chairman LEACH.——This is political economics rather than abstract economics where the gentleman has some expertise. You did have a second more, I'm sorry.

    Mrs. KELLY. Thank you, Mr. Chairman. No, I appreciate your picking up on that, and I thank you very much and yield back my time.

    Chairman LEACH. Thank you, Mrs. Kelly.

    The gentleman from California.
 Page 251       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. SHERMAN. In a world that I didn't think I would see where a brokerage buys a bank that buys an insurance company. Clearly, we need financial modernization. At some point, we may even need to see a merger of various financial regulators at the State and Federal level, but I think we ought to leave that to the next millennia.

    And I can understand, Mr. Chairman, that your focus and greatest expertise is in the area of how we can regulate the financial institutions, what agencies should do that, and how those institutions should be structured. But I would like to move to an area that is I think far more important to my constituents, even if you have somewhat less interest or it really wasn't the focus of your statement, because in my district nobody really knows the difference between a bank affiliate and a bank subsidiary or very few. But they remember Charles Keating. And they remember people walking in to a savings institution, seeing the emblem of Federal insurance on the door, and all the hallmarks, the physical hallmarks, that for 50 years we have conditioned people, who previously may have remembered the bank closures of the Depression, to associate with security. They walked into the new accounts desk and they were walked over to the investment desk where perhaps oral statements were or were not made. But ultimately they ended up holding securities of the bank, in this case subordinated debentures, rather than federally insured deposits.

    And I would like to review with you some of the things that could be put in this bill to try to learn from that lesson to see whether you think they would be helpful. And this would relate only to the activities that take place within the hallowed walls of the financial institution. And, yes, I know that one model is the day trader on the Internet, but my focus is protecting 80- and 90-year-old widows who do not invest over the Internet, and have had 50 years of experience with federally insured institutions.
 Page 252       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    The first of these would be at least within that structure to prohibit the sale of the bank's own securities, excluding, of course, its insurance products. And I wonder if you think that would be helpful?

    Mr. GREENSPAN. Well, just to anticipate a lot of the questions you're about to ask, I would certainly agree that it is terribly important to make it unquestionably clear that there is no Government backing. And that whatever is deemed reasonable to assure that, we certainly are strongly supportive of. That's an issue which exists now, wholly independently of H.R. 10. And we have worked very assiduously to find ways to resolve this issue. We have not been fully successful. I mean it's very difficult to expunge that view that if you're in a bank, it's insured. And the Securities and Exchange Commission is concerned about it. We are. The Comptroller is concerned. The FDIC is concerned. And I think that we all are looking for ways to find improvement in our capacity to make certain that people understand where risks are.

    Mr. SHERMAN. I would point out that one idea that there would be a separate building or office, but that's rejected because there are small banks. There are requirements of the new accounts officer, that person that you see behind the new accounts desk, not then walk over to the investments desk and be your investment counselor. But that's rejected because certain banks have small numbers of people. Then there's the possibility of a very strong warning. Something like saying, ''This is a risky investment.'' And that is called ''pejorative.''

    So in every area there is a wane of consumer protection against other interests. And I'll simply tell you the last time I was in a depository institution was walked from one desk to the other. I realized that if I was my 85-year-old grandmother, I would not have understood the difference.
 Page 253       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And I would point out that a prohibition on selling the bank's own securities would be a good additional prophylactic and perhaps we would also want too, and I just want you to comment on this, to say that perhaps within a bank you sell insurance, you could sell a diversified mutual fund, but within that structure, should we allow the sale of any stocks? And somebody walks in in that structure, if they want to do it over the phone, the Internet, that's fine, but in that structure, walk out with their entire life's savings in one particular penny stock?

    Mr. GREENSPAN. Yes, Congressman, I don't know how to organize it, but I certainly don't disagree with the general purposes you are projecting. If we can find ways to effectively do that, I, as the supervisor, unless my lawyers tell me it can't be done, would certainly think that would be the appropriate direction in which to go.

    Mr. SHERMAN. Well, it's not working all that well now.

    Mr. GREENSPAN. I agree with that. That's true.

    Mr. SHERMAN. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much.

    Dr. Paul.

    Dr. PAUL. Thank you, Mr. Chairman.
 Page 254       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. Greenspan, in the past you have spoken eloquently about the cost of regulations and the difficulty with it. There's been some proposed regulations by the Federal Reserve, the regulations about ''know your customer.'' And there's been a lot of comments made about this, and I was just wondering if you're considering withdrawing these regulations, this proposal?

    Mr. GREENSPAN. Well, Dr. Paul, we're in the process of going through, as I understand it, a fairly standard rulemaking procedure. And one of the purposes of a rulemaking procedure is the purpose of getting people's opinions as to whether a specific rule, which remember comes from a statute of some form that the Congress passes, is a reasonable rule. And when all of those answers that we've requested from all the various different parties come in, then we'll go through a formal rulemaking process.

    Dr. PAUL. Of course, the authority for this comes from an old law, an old law of 1974.

    Mr. GREENSPAN. Well, laws are laws.

    Dr. PAUL. Yes, right. And you have spoken out also about laws and regulations, I think very favorably for the free market and in a way advice for us that sunseting rules and laws might be a good idea. And you have said this many times, even including the Federal Reserve Act. So if this is the case, would you support some type of an amendment to a bill like H.R. 10 to make sure that everything that we can apply within the limitation of the bill to sunset what we're trying to do here?
 Page 255       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. I wouldn't sunset H.R. 10 by itself. But, as I've said earlier to the issue to which you are alluding, I think a general sunseting provision is a highly desirable thing to do in this system. That if a statute cannot muster 51 percent of both Houses and the signature of the President, it's dubious whether it should continue to be the law of the land.

    Dr. PAUL. But if it's legislatively permissible to do it under H.R. 10, why shouldn't we try if it's a good idea?

    Mr. GREENSPAN. Well, the only reason I would be uncomfortable with that is that why do it in this particular legislation, which is obvious from all the discussions we've had, is a very tough thing to bring——

    Dr. PAUL. Because we might not get another chance. And also——

    Mr. GREENSPAN. Well, let me put it this way: I certainly approve of sunseting in general, including H.R. 10. I would hate to find out that there was a consensus on passing H.R. 10 and it failed because somebody filibustered it over in the other——

    Dr. PAUL. Well, I see that as passing the buck because we're not likely to do it separately. What if we would have written a sunset law in the Glass-Steagall, maybe we wouldn't be here today and we wouldn't have been here for six years discussing this. And on the Glass-Steagall, since that's part of the problem, if not the entire problem, why couldn't we simplify this a little bit and just write a one page bill and say repeal Glass-Steagall? I quite frankly admit that I get confused on some of this stuff. I don't know if anybody else does, but I wouldn't get confused on repeal of Glass-Steagall. What would be wrong with that type of an approach?
 Page 256       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Nothing.

    Dr. PAUL. Good, maybe I'll introduce that bill rather rapidly then. And get your support. We'll have you over here and say, ''This is the way to go.'' Thank you.

    Mr. GREENSPAN. I'm not sure I——

    Chairman LEACH. Would the gentleman yield briefly?

    Dr. PAUL. Yes, I'll be glad to yield.

    Mr. GREENSPAN. You carry a vote, Dr. Paul, and I don't.

    Dr. PAUL. But you carry some weight down here.

    Chairman LEACH. In terms of a modest compromise.


    Chairman LEACH. There's been a lot of discussion informally on this ''know your customer'' rule, and I think there is a growing consensus that, as well intended as it certainly was, that there is a view that it might in the final measure undercut, rather than bolster, the banking system if for no other reason because of the perceptions out there that bankers are expected to turn on their customers, as false as that perception may or may not be. It would appear that this is one rule where the general comments coming in should be looked at very seriously by the regulators with an open mind to revising prior judgments.
 Page 257       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. I hope we do that all the time, Mr. Chairman.

    Dr. PAUL. Mr. Chairman, may I just add I appreciate your comments because I think the banks are really put in the middle because they are dependent on their charters, they're dependent on their credit, they're dependent on their insurance. It's very difficult for them to protect the liberties of the individuals which we are responsible for. And I thank the Chairman.

    Chairman LEACH. Yield to the gentleman from New York.

    Mr. LAFALCE. Just 15 seconds.

    Dr. Greenspan, Tuesday evening when fielding a very, very difficult question from a constituent, my 17-year-old son, who apprised me that in his Government class that day, this ''know your customer'' regulation issue was discussed. And he asked, ''Dad, the teacher wanted to know how come the regulators could promulgate such a crazy regulation?'' And I'm wondering if you could give me a written response so that I could provide the class with an explanation?

    Mr. GREENSPAN. I would suggest you tell him to wait until the regulators have a chance to do what they are statutorily required to do.

    Mr. LAFALCE. OK.

 Page 258       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. GREENSPAN. And then we'll all be free to answer that question.

    Mr. LAFALCE. All right, and I thank you.

    Chairman LEACH. I think the implication is, the hint is that change is in the wind. And I think it's welcome.

    Let me see, is it the Democratic side? Yes. The gentlelady, I think you're next up.

    Ms. SCHAKOWSKY. Thank you, Mr. Chairman.

    Chairman Greenspan, let me introduce myself to you. I'm Jan Schakowsky and I'm a new Member from Illinois. I've been here one month, and every day I experience things that prove to me just how awesome this new job is, but none as dramatic as this, my opportunity to actually ask you questions.

    Throughout the many years of debate, I know that there have been considerations of how various parts of the industry are affected, and I know that—I'm sure that consumers and communities were also considered. But I feel it's my particular mission to represent those constituencies and to ask a couple of questions in that regard.

    I know that the Woodstock Institute did a study and looked at some banks in Chicago, and found that the five banks that have had the highest number and percentage of small business loans to lower-income communities were banks with assets under a billion dollars. And that bank holding companies with more than $10 billion in assets made a relatively small proportion of their loans in those communities. I'm wondering if we need to be worried about that kind of trend, which was further documented by the Independent Business Association of America that says that small banks with less than $300 million in assets account for close to 50 percent of small business loans under $250,000. Are we at risk of losing this kind of contribution to the community?
 Page 259       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. I don't think so, Congresswoman. I think that by their very nature, a small bank can only make small loans. It can't obviously compete in the big loan market and they remain profitable and viable largely because big banks can't compete with them for the certain type of personal loan which they have a capacity to engage in. And a small bank will have a loan officer who is probably the vice president or maybe even the president of the bank, he knows everybody in the neighborhood and he knows a good credit risk when he sees one. And so that type of service and the ability to deal with it is inherent in the small bank and it's inherent in the way small business is effectively financed.

    If it were to turn out that a lot of the community banks would sort of fade or be absorbed into large institutions, I personally would be concerned. I think that the community banks in this country, not only in Chicago, but around the country are really a major resource of our economy and our society.

    From what we can judge, if it turns out that smaller banks are not funding smaller businesses, the larger ones tend to do it because then it becomes a profitable activity for them and they will move in.

    We do have a regular survey, which comes out of the National Federation of Independent Business, which they have a question every month with respect to availability of funds, availability of credit generally. And we would be able to spot, I think fairly quickly, that a problem was emerging. At the moment, things seem to be working reasonably well. Our banking system seems to be working reasonably well. And small business is being financed in a particularly useful manner.
 Page 260       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    What's missing in small business is equity financing. In other words, that's tough to get. But when you're up to a certain size, remember that very small business to a large extent gets financed by relatives or credit cards or other things. You have to actually be an established institution to be able to go to even the smallest banks to get loans. But in my judgment with all of the problems that I think we're all aware of, the system works reasonably well. I don't think that at the moment we have a problem. But should it turn out at some point that we do, I think it would be terribly important for the Congress and the supervisors to take what action is appropriate to make sure that that issue gets addressed.

    Ms. SCHAKOWSKY. Can I finish?

    Chairman LEACH. Briefly, briefly.

    Ms. SCHAKOWSKY. OK. Well, given our need then to monitor that, I'm wondering that since you in the past have had a hesitancy to require banks to collect data regarding race, gender, and other information relative to the record of making small business loans, do you think that you ought to reconsider that position? And that we ought to have that information in order to monitor that carefully?

    Mr. GREENSPAN. Well, that issue, as you are probably aware, is under very considerable discussion amongst the supervisory agencies and between the regulatory agencies, the banks, and the community groups. And we'll get it resolved one way or the other.

    Ms. SCHAKOWSKY. Thank you.
 Page 261       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. Mr. Cook.

    Mr. COOK. Well, thank you, Mr. Chairman. And I certainly want to thank you, Chairman Greenspan, for being with us to answer some of our questions and provide this testimony on a very, very important matter.

    Going to the step two process that you have talked about. You've testified that we should, Congress should go ahead and take step one, which is to eliminate the Glass-Steagall barriers between banking, securities, and insurance. And we should go that way. But you said that we should allow some time to lapse before we really consider step two and that's addressing the banking and commerce issues. H.R. 10 does address that to some extent by giving the Fed the authority to permit commercial activity that is either incidental or complimentary to banking. And I wanted to ask you, in light of your testimony, are you totally comfortable with being charged with the duty to define what those permissible commercial activities would be under H.R. 10?

    Mr. GREENSPAN. Well, my personal view is I much prefer that the Congress make those judgments because I think it's important for the supervisory structure not to have a great deal of potentially arbitrary judgments. If the Congress, in whatever form the legislation takes place, requires us to make those judgments, we will do so, whether we're comfortable or not. Obviously, the vaguer the particular statute, the more difficult it is for us. I don't know whether it's an issue of being comfortable or not comfortable. If Congress asks us to do it, we do it.

 Page 262       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. COOK. Well, sort of following up on that, to what extent or what are the main ways that the role of the Federal Reserve or the role of the Executive Branch, Treasury, the regulators, how is that role, those roles, what are the main ways that those roles will be changing under H.R. 10?

    Mr. GREENSPAN. Well, at the moment, it's changing hardly at all under H.R. 10. The major area where the Treasury perceives as a significant issue is in what H.R. 10 as currently structured would do to the OCC's authority with respect to granting powers not now available now to national banks to the subsidiaries of the banks. That is a disputable power. We at the Federal Reserve in a comment letter have indicated that we read the statute differently. We don't believe that that power exists. But if the OCC and the Treasury believe it exists, and H.R. 10 then prohibits such activity, then they perceive that there is a cutting back of Executive Branch authority. In our judgment, nothing has been cut back because we never believed, at least from a legal point of view, that such authority does exist.

    In the broader sense, we consider the operating sub affiliate question of such great significance, that we would be very concerned if that were left to the courts to make a decision on, because on an issue as profoundly important to the structure of finance in the United States in the 21st Century, it is an issue that Congress needs to address and should not be resolved on technical legal grounds through our legal structure. I think that would be most inappropriate, irrespective of whether the reading of existing statutes by the OCC or ourselves is the correct one.

    Mr. COOK. And then as a final question what are the consequences if Congress does not pass H.R. 10? Who is it that stands to lose the most?
 Page 263       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, I think the financial system basically loses the most because there's an inordinately large amount of costs that is expended fruitlessly, in my judgment, and it undercuts some of the efficiencies that our system has. We are, even with all of these restrictions, exceptionally efficient. So I'm not saying that we'll all of sudden run into very serious trouble, but it will be a serious problem. And, indeed, the unitary thrift loophole is not addressed and the issue of so-called Part 5, the OCC's endeavor to put new powers in the subs of the banks, will be adjudicated by the courts rather than the Congress and I think that is, as I said before, an inappropriate way to resolve so crucial an issue.

    Mr. COOK. Thank you.

    Chairman LEACH. Thank you very much, Mr. Cook.

    Mrs. Jones.

    Mrs. JONES. Mr. Chairman.

    Chairman Greenspan, I too am a new Member of Congress. The name is Stephanie Tubbs Jones. I'm the successor to Lewis Stokes.

    As a newcomer to this area, it is my impression that all interests in this area want financial modernization and are willing to accept most any change that would facilitate that modernization. If you take my impression as truth, what role will you, as the Federal Reserve, play in maintaining a level playing field within the financial market? And, second, how do we protect the interests of the consumer?
 Page 264       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, I think the most protective protection of interests of consumers is primarily to make sure that we have competitive institutions, that we have one or more institutions, one or more branches, the various different types of organizations which vie with one another to try to turn out products. And I think we try to do that. And I think that that's embodied in a lot of the types of supervision and regulation that we are involved in.

    So far as the Fed is concerned, we have got a pretty good financial system. It's not perfect. It doesn't do everything everyone would like. But it's not bad. It's very significantly improved over what, for example, existed 30 or 40 years ago. In fact, hugely different from what say existed 50 years ago when you couldn't get mortgage loans, you couldn't get consumer credit. There was just very little interaction between the average consumer and the banking system.

    So I would say, in general, that the major areas of concern are those which I think the Congress has got to make judgments on. And having done so, and giving us effectively a charter from which to work, we and the Comptroller and the FDIC endeavor to get together and make certain that the consumer is served in a manner which is low-cost, effective, and hopefully has the type of protection that your colleague was raising earlier about the issue of how do you make sure that consumers are fully informed about what's going on.

    Mrs. JONES. OK, I have two more areas and I know I don't have a lot of time. What is the thinking, seeing as every time you speak, everyone seems to listen, Mr. Greenspan, what is your thinking with regard to the effectiveness and efficiency of the Community Reinvestment Act and the need to continue its implementation?
 Page 265       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, Congresswoman, I've always argued that it's very important for commercial banks to serve their community and basically not to, as bankers like to say, ''Leave money on the table,'' meaning that there is a significant amount of profitable lending all throughout communities which in the past clearly have not been addressed. And the basic thrust, as we see the Community Investment Act, is to be sure that there is no discrimination in the extension of credit throughout the community. That's what we view as the fundamental issue.

    In general, it's worked fairly well. It's got a lot of holes in it, it's got a lot of problems in it, but it's very significantly increased the amount of credit that's available in the communities. And from the looks of the detailed statistics, some of the changes have really been quite profound. I think there's more that has to be done, but everyone is working on it.

    Mrs. JONES. I know my last question is going to go over a little bit, Mr. Chairman, if you would permit me that opportunity, I would be much appreciative. My last question is, as a district attorney previously, on behalf of my county, I sued some financial institution investors under what we called the ''know your customer'' rule. And our allegation was that the investment companies did not adequately notice our agencies of what they were investing in, the long term possibilities or long term detriment to the county standing. And I'm asking, seeing how everyone is asking about this ''know your customer'' rule, is that the same ''know your customer'' rule, which these others are speaking to?

    Mr. GREENSPAN. The ''know your customer'' rule that is being discussed here is an extension of a money laundering issue and an endeavor to try to inhibit the types of transactions which have been clearly inappropriate and illegal. I think the issue that you're raising is more a question of the nature of fraud, that it's an issue of appropriate disclosure with respect to any form of transaction because, clearly, if you misrepresent what it is you're selling, that's called fraud and that's illegal. And I think that there are differences here between these two types of concepts, which are related.
 Page 266       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mrs. JONES. I raise that with you because to me it's very important that even if we are talking about the inappropriate drugs, laundering, so forth and so on, that know the customer in the sense that I speak to you is a very important concept, not only for governmental agencies, but for the consumers who we—or at least I—speak for from my particular district. And I would hope that the Reserve is on board with the ''know your customer'' rule that I'm speaking to.

    Mr. GREENSPAN. Let me put it this way. Any bank which doesn't know its customer, isn't going to be around very long. I mean that's how you make money.

    Mrs. JONES. I would hope so. Thank you very much for your responses.

    Thank you, Mr. Chairman.

    Chairman LEACH. And I thank you. And I'm listening to the tail end of your discussion. There is a distinct possibility that the law you brought your lawsuit under related to the securities industry where they have suitability rules that are also called ''know your customer'' rules. So it may not be exactly a banking issue, but it could be as well.

    Mrs. JONES. But based on what we're talking about, however, financial modernization, it could well become a banking issue, correct? Because we're all going to go to securities, and financial institutions, and everything else coming together.
 Page 267       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. Without doubt. The only slight distinction was that I think Dr. Paul was referring to a money laundering circumstance rather than an investor circumstance.

    Mrs. JONES. Understood.

    Chairman LEACH. But you were thoroughly correct. We're in the same ballpark of language.

    Mrs. JONES. Thank you.

    Chairman LEACH. Mr. Hill.

    Mr. HILL. Thank you, Mr. Chairman.

    And thank you, Chairman Greenspan, for being here. I always learn a great deal when you're here.

    In the past you've made some strong statements with regard to deference to regulators, that is if it's a securities issue in this new world, that should be deferred—the securities—to the SEC. What I want to ask you about is the issue of insurance. Ironically and interestingly, in H.R. 10 we kind of resolve the deference of regulation to the SEC. The battleground is whether or not securities activities will occur in operating subsidiaries. The opposite is true in insurance. Everybody I think agrees that we shouldn't have insurance underwriting in operating subsidiaries. The question is deference of regulation to the State regulators.
 Page 268       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    I found it interesting you said that the Fed, and the Comptroller, and the FDIC meet to discuss consumer protections. But, as you know, most insurance protections are at the State level. And the insurance commissioners are going to testify later today that H.R. 10, in its current form, substantially preempts, in fact actually totally preempts, their authority to regulate. And then grants them back limited authority, which takes away their authority to safeguard premiums, monitor the financial stability of insurance companies, and assure fair sales and claims processes. Is that an authority that you want to take over?

    Mr. GREENSPAN. No.

    Mr. HILL. Well, who will then, if we preempt it and don't give that authority back to the States?

    Mr. GREENSPAN. Well, let me say this, as I indicated in my prepared remarks, there are invariably an extraordinarily large number of the details which follow on from repeal of Glass-Steagall. In other words, Dr. Paul was raising the question of how about repealing Glass-Steagall. Well, the answer is, yes. But the trouble, unfortunately, is that Glass-Steagall is so intertwined in so many subsequent pieces of legislation that to unwind the whole thing is not an easy task, and this is one of them. I don't think that——

    Mr. HILL. No fair coaching.

    Mr. GREENSPAN. Well, no, I'm fine. But I'm trying to figure out what the coach is saying.
 Page 269       PREV PAGE       TOP OF DOC    Segment 2 Of 3  


    I figure I'm in the red zone or something, and I'm on the wrong team. Let me just see whether my legal counsel can say something. I have a terrific general counsel. Why don't I let him comment? He's better than I am on legal issues.

    Chairman LEACH. The committee would recognize Virgil Mattingly for a representation on behalf of the Chairman. Use a separate microphone, Virgil.

    Mr. MATTINGLY. Mr. Congressman, I believe H.R. 10 leaves those kinds of decisions to the State regulator. This bill does not take away the authority, in my opinion, of the States to regulate the activities of the insurance company that you——

    Mr. HILL. They don't agree with that. They're going to testify later today the opposite of that. Have you consulted with them about that?

    Mr. MATTINGLY. We certainly have. We've tried to. I understand that there are some things that the insurance commissioners do today that would not be permissible under H.R. 10. For example, change in control. Right now if someone wants to buy an insurance company, they have to run it by the State. And I think that that would be changed. You would only have to get approval from the Federal Reserve.

    Mr. HILL. That's one of the recommended changes.

 Page 270       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. MATTINGLY. Yes, but the kinds of things that you talked about, about premiums and claims processes and things like that, they are things that are in the insurance company itself and there's no authority given to the Fed to deal with that.

    Mr. HILL. But they are preempted and then given back in a restrictive fashion. Before my time expires, I do have one other question for you, Mr. Chairman, and that is that you have made some strong statements with regard to the President's plan to invest part of Social Security in the stock market. One of the questions that has arisen is, as I understand the President's plan, the proposal is to invest about 85 percent of that in U.S. Treasuries. And actually be marketable and trade in those U.S. Treasuries. I've seen some projections that indicate that that would amount to about $5 trillion at the peak.

    The question I want to ask is that the Treasury and the Fed have not always agreed on interest rate strategies in the past in this country. And I presume in the future they wouldn't. Would the Treasury, having the power to trade in $5 trillion in U.S. Treasuries impact the Fed's ability to use Treasury transactions as a mechanism for impacting interest rates and liquidity? Or is that an insignificant amount of money, $5 trillion?


    Mr. GREENSPAN. By the time it gets to that level, it will be insignificant.

    Congressman, at the moment, we have a contingent liability in the Social Security system, which is the unfunded liability of about—depending on what type of interest rates you use—in the area of $10 trillion. And the issue of going effectively to full funding of the Social Security system, which is one of the issues that I raised, would invariably mean at some point that the Social Security Trust Fund would be exceptionally large. However, it is an issue of relationships. What would happen is that the debt held by the public would be down very substantially. In other words, it's a shift of Treasury debt from the public to the Social Security Trust Fund. Indeed, the President was arguing that, as you may recall, the debt held by the public went down to an extraordinarily low level. Well, what that was was that the debt was moved from the public, where it now exists, into the hands of the Social Security Trust Fund.
 Page 271       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    So in answer to your question, the answer is no, it would not affect monetary policy. Indeed, the issue of creating additional savings for the purpose of creating new capital assets to fund the retirement of the baby-boomers is something which we very strongly support. And as a consequence of that, we believe the economy would be most efficiently served if there were a very dramatic increase in the national savings.

    Mr. HILL. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Meeks.

    Mr. MEEKS. Thank you, Mr. Chairman.

    Chairman Greenspan, sorry I wasn't here to hear your testimony, but we have other committee meetings going on, but I had a question and I hope that it had not been already covered. Recent studies have shown that bank fees are steadily rising and are at their highest at the biggest banks. And I'm a Member from New York. And many of areas of my district are served by the country's largest banks, such as Chase, and CitiGroup, and Fleet. Annual fees on checking accounts can run as high as $350 to $400 a year. And a number individuals, poor, low-income individuals in my district have come and asked questions in reference to the affordability of checking accounts and banking accounts for them.

    So I'm wondering, as banks get bigger through mergers and acquisitions, and I'm concerned that they will be so directed at attracting the bigger customers, that they will find small customers extremely unattractive and give them higher costs and less personal services. What do you see as the trend in service to small customers and how can we make certain that they can afford bank services in the future?
 Page 272       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, this is a very important question, Mr. Meeks. I think that it's an issue that we have been struggling with for quite a while. It's really an issue which would exist with or without H.R. 10 and whether you pass it or not.

    First of all, I think that the major source of personal customer relations comes from the smaller banks or the branches of large banks which try to behave like smaller banks. And to the extent that they are successful, they act like small banks.

    It's hard for me to make judgments in individual cases with respect to whether fees are too high or too low. We, as you are probably aware, make an annual survey of all the various different fees and we publish them and try to understand what's going on. It's an ongoing issue. I don't think there's a full solution that will be—we'll never get to the point where we'll say, ''Terrific, we've got everything solved.'' It's an ongoing process to try to make sure that the increased technologies begin to help in the consumer area. And I think that consumer finance, the availability of various different products, the costs of those products, the services, are all just continuously improving. Perhaps not at the pace that a lot of people would like. And invariably, when you get involved with a lot of technical problems, that there are numbers of things that probably should have been done differently.

    But all I can say to you is that the particular concern of the regulators is to make sure that banks maintain appropriate services to their communities.

    Chairman LEACH. Well, thank you very much, Mr. Meeks.

 Page 273       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. Ose.

    Mr. OSE. Thank you, Mr. Chairman. I have to say this is intimidating five weeks into my career here to be speaking to the Chairman of the Federal Reserve. As my colleague suggested, that ''When the Chairman of the Fed speaks, people listen.'' I've heard that somewhere in an advertisement.

    Mr. GREENSPAN. Sometimes they understand me. Most of the time, I don't understand myself.


    Mr. OSE. I have to say I've sat through a number of these hearings and listened to a number of the panels, and for the first time, I think I finally understood somebody today. So my compliments.

    My concern is the efficient allocation of capital and the effect H.R. 10 has here. And while I have interest in the value of the subsidy that you referred to earlier with respect to our current system, I have a little bit of a different tack and that is, as you have shared with us, I'm convinced that our system is pretty good right now. I'm concerned about H.R. 10 altering the system between the competing interest of the Fed, and Treasury, and Congress, and the market in such a way as to adversely impact that. If you can reassure me that H.R. 10 doesn't adversely affect that, it would go a long way toward giving me comfort. I don't want to get into a position where we have an inefficient allocation of capital by virtue of hamstringing the Fed.

 Page 274       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. GREENSPAN. Congressman, there are a lot of differences that exist between all of the various elements and the people who are coming before you to testify. But I don't think that there is any version that is generally acceptable by parts of the consensus or the whole of the consensus, which in any way significantly alters the underlying structure to the detriment of the system. I'm sure that there are individual provisions which are not all that helpful. But the only thing, in my judgment, which would significantly alter the whole balance of the system is moving from the holding company structure to operating subs. That's the only thing large enough in any of the provisions in H.R. 10 to have a really meaningful effect.

    Mr. OSE. Thank you.

    Chairman LEACH. Thank you, Mr. Ose.

    Mrs. Biggert.

    Mrs. BIGGERT. Thank you, Mr. Chairman. We seem to have a shortage of mikes around here. At least I'm not in the kid's table.


    Sorry, to my colleague.

    Chairman Greenspan, you stated in your testimony that dramatic advances in computer and telecommunication technologies of the past decade have so significantly altered the structure of domestic and global finance as to render our existing modes of supervision and regulation of finance increasingly obsolescent. How does this impact the U.S. position of financial leadership with regard to other countries? And are we in danger of increased competition for leadership by the unified European market?
 Page 275       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. There's no doubt that emergence of a single currency amongst the eleven so-called ''Euro-land States'' will create a currency which is more competitive against the dollar than the predecessor currencies of the euro. I happen to think that's good, not bad. I think that competition is always useful even though we don't like it. At the end of the day, it turns out to be quite helpful. So I should think that for a number of technical reasons, which have to do with eliminating some of the risks, such as exchange rate risks that are involved, we have different currencies and when you put them into one, you get a more efficient, more liquid, more effective currency; that is going to mean, as it already has, that a substantial amount of bonds that are sold in the international markets are denominated in the euro rather than dollars. And I don't know how long that is going to last, but what we clearly see on the horizon is a much greater degree of competition between the European currencies generally and the dollar. And I think we'll all benefit from that.

    Mrs. BIGGERT. Thank you. Then how does the financial modernization alter or improve our status with the international realm?

    Mr. GREENSPAN. If we maintain the holding company structure, it should not. In other words, it should basically enhance the already superior capability of the American financial system to compete with all other financial systems around the world. Provided that we can contain the subsidies which distort the allocation of capital and can undermine how we produce financial services, I see no reason why the United States should not continue as a very effective supplier of financial services, both in the United States and abroad.

    Mrs. BIGGERT. Thank you very much.
 Page 276       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mrs. Biggert.

    Mr. Green.

    Mr. GREEN. Thank you, Mr. Chairman. And this is the kid's table. As you might have been able to gather, you are at the freshmen portion of the questioning, and my questions will reflect that. My questions I think are broader in scope, some of the things perhaps underlying some of the other questions and your comments.

    You stated publicly, orally and in writing, that you don't believe H.R. 10 will diminish the Executive Branch's regulatory ability. Could you, for those of us who are new to this process, briefly outline what you see as the role of the Fed today versus how it would be under H.R. 10, assuming H.R. 10 becomes law?

    Mr. GREENSPAN. The role of the Fed net on balance changes very little. We would obtain increased supervision of financial services holding companies when a securities firm, for example, buys a large bank or something of that nature. So that the scope would be broader, but the depth would be much less, because in H.R. 10 there are very material reductions in the authority of the Federal Reserve to supervise especially the new powers. We call that ''Fed-light,'' meaning that we cannot do a number of things that we used to do and which we think are more reflections of the old 19th Century philosophy. And so H.R. 10, as it now is drafted, would probably net, on balance, very little to the Fed's authority, but it would spread us over a broader range, but reduce the aggregate amount of supervision we are doing.
 Page 277       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And, frankly, our judgment is that as we move into the first part of the 21st Century, the old-fashioned techniques of supervision, which had examiners going into banks, looking at documents, looking at loan reports, are gradually fading as an effective means of doing anything. What we are trying increasingly to do is to have sort of broad oversight and recognize that the primary safety and soundness of financial institutions really is the result of individual banks or other financial institutions examining and understanding the counter-parties to whom they lend. It's their shareholders money which is at risk. And that is a very sobering environment in which to extend funds.

    What we are doing now increasingly, and probably will be doing far more in the future, is to oversee that process rather than second guess a lot of different individual documents or individual loans, which is what we used to do in the past.

    Mr. GREEN. Let me ask the same question as it pertains to the Executive Branch. How do you see that role changing and broadening?

    Mr. GREENSPAN. Well, the actual role of the Comptroller of the Currency and Office of Thrift Supervision doesn't change. As I mentioned earlier, the basic issue which the Executive Branch perceives as a loss of its authority is an issue under dispute. It's whether in fact they have an authority now to effectively create powers for subsidiaries of banks under existing statutes. They think they do, the Comptroller thinks they do. We think they do not. The courts ultimately, of course, will decide unless the Congress preempts the decision.

    So our view is that since we don't believe they have that authority, they're losing nothing. And in all other respects, there's literally no change of material importance. There's some pluses and some minuses, but that's not what concerns me. And there's some pluses and minuses, I might add, also for ourselves, but they're all very small technical issues of no great importance. The crucial question really gets down to whether or not you interpret the loss of an authority, which they have not yet invoked and tested in the courts, is a loss or not. And that is, I guess, a judgment which the courts will have to make or the Congress will effectively make a judgment on in presumably the final version of H.R. 10.
 Page 278       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREEN. Thank you, Chairman Greenspan.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Green.

    Mr. Inslee.

    Mr. INSLEE. Thank you, Mr. Chairman. Listening to your testimony, I recalled the book by Leonard Garment, an autobiography, and he made reference to a fellow named Alan Greenspan who played in a jazz band with him. And I would like to know if you're that Alan Greenspan? And, if so, what instrument did you play?

    Mr. GREENSPAN. Yes, I played saxophone, clarinet, and bass clarinet. And if I were a lot better, I probably would still be doing that at the moment.


    Mr. INSLEE. Well, I know there are those who believe your RIFs on the U.S. economy have deserved a little praise, so I'll add my voice to that choir.

    Your comments about your concern for the distorting impact of subsidization through the op-subs, as I understand it, are real interesting to me. And I would like to ask you is there any kind of analogous economic situation that you could describe that I could talk to my constituents about? Is there some analogous part of the economy that folks may understand back on Main Street, something that folks who have not been sitting through these hearings for six hours might understand?
 Page 279       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. It's tough, largely because it's a very technical issue which gets to the question of the structure of the total financial system. And every time you try to simplify something like that, you often get it wrong.

    Let me take a shot at it and drop you a note to see if I can get something which will capture that. Frankly, that's the toughest question I've got all day. It's a very tough thing to do without doing violence to reality. Let me see if I can take a shot at it, and I'll drop you a note.

    Mr. INSLEE. Thanks very much.
    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Inslee.

    Paul, are you ready or do you want me to go to Mr. Ryan?

    Mr. RYAN. Thank you, Mr. Chairman. I, too, have heard about your musical talents. I was a fan of the unedited Alan Greenspan when you wrote your articles in The Objectivist. I know you can't speak as frankly these days, but I would like to see if you could highlight a point in your testimony where you said that the European system was inferior to our system with respect to the subsidy exposure and the distortion in the marketplace? Could you in more detail highlight why that is an inferior system and why that taxpayer exposure is detrimental to our system?

 Page 280       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. GREENSPAN. Well, there are basically two reasons. First of all, the system is subsidized in Europe, which creates a mis-allocation of capital and invariably reduces the capital efficiency of the system. But that's got nothing to do with the structure because that would occur even if they had a holding company system. The problem basically is, as best we can judge having experienced this over the years, is that what a universal bank does when it has all the various elements inside the bank, is that losses in one segment of the bank affect every other aspect of the institution. And there is a tendency to what we call cross-subsidization, where you put funds from one part of the institution into another, and that means that if you have part of the organization, which is doing exceptionally poorly, you don't tend to scrap it, you don't tend to unwind it. In a holding company structure, if you have an affiliate which is doing poorly, it is not connected either legally or otherwise necessarily to the rest of thing and it's very easy to unwind it. And they do that.

    And so what has happened historically is it's turned out that the rates of return and the efficiencies that we see in these so-called ''universal banks'' have not been good. They clearly have not been up to the American model. That is, we have clearly out-competed them. And I think a goodly part of it is the structure issue.

    Mr. RYAN. So when you hear the argument that in order to compete on an even footing with universal foreign banks, you don't buy into the argument that we need the kinds of cross-subsidization in order to fairly compete with them? You're saying that the contrary is the case? That we are more nimble and more efficient with the holding company structure versus this inferior European model?

    Mr. GREENSPAN. Exactly.
 Page 281       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. RYAN. OK. Thank you very much. Thank you.

    Chairman LEACH. Thank you very much, Paul.

    Mr. Green—excuse me, Mr. Toomey.

    Mr. TOOMEY. Thank you, Mr. Chairman.

    Chairman Greenspan, a couple of questions. I would like to get back briefly to the issue of op-subs if I could. I know we've asked a lot of questions about this. As I understand it, your primary objection to allowing principal activities to occur at the op-sub level is the fact that they enjoy the benefit of a subsidy from the bank and, therefore, that creates an unfair competitive advantage and, thus, a misallocation of capital. But you've raised an additional concern. And that additional concern is one of perhaps systemic risk or at least risk to the individual bank in that in an event of a catastrophic capital loss in an operating subsidiary that that would threaten the bank.

    My question for you is how is that such a catastrophic loss of capital in the operating subsidiary poses a greater threat to the bank than that kind of catastrophic loss in an affiliate of the bank?

    Mr. GREENSPAN. The loss to an affiliate is not consolidated into the bank itself. It's into the holding company where there is no safety net structure. The loss in a subsidiary of a bank is automatically consolidated into the bank itself. And so you have two different types of effects. Because you have deposit insurance and the safety net generally in the bank, you have potentially a threat to the FDIC. The loss in an affiliate of the holding company is insulated from the bank and is charged only against the consolidated system. I don't know if that answers the question, addresses the question you're trying to get at.
 Page 282       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. TOOMEY. If I can ask a follow-up. It strikes me that the answer refers to the way financial reporting occurs, which I acknowledge. But does that change the fundamental economics of where the loss is?

    Mr. GREENSPAN. No, it's more than reporting, because it is the form of the legal ownership. As a practical matter, if commercial banks treated the subsidiary of a bank as a limited corporation which could be essentially cut off, then there would be no distinction in this regard. The difference essentially occurs because of the fact that the funding capability of a commercial bank is usually viewed in terms of the total system because no bank would allow its' sub to fail because in doing so, you would undercut the viability of the total consolidated bank and the cost of funding of the bank itself. It's not a legal issue. It is a banking issue. It's the way banks tend to operate.

    Mr. TOOMEY. And a bank would perceive its' ability to fund to be less effective by the failure of an affiliate?

    Mr. GREENSPAN. Correct. The funders of the bank may be concerned about an affiliate of the holding company being in difficulty, but its effect on the funding of the bank is very small.

    Mr. TOOMEY. OK. Thank you. One other unrelated question. When we look at one of the primary objectives of H.R. 10 is to allow different kinds of financial institutions to offer different financial services with fewer obstacles, fewer impediments imposed by the regulatory structure. To the extent that some version of H.R. 10 succeeds in accomplishing that, would you feel safe in saying that this will almost certainly benefit consumers in the long-run by lowering the cost to these institutions in providing these services?
 Page 283       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Oh, most certainly. In fact, at the end of the day, the whole purpose of the capitalist market system is effectively to help consumers.

    Mr. TOOMEY. Thank you very much.

    Chairman LEACH. Thank you very much. We have one more. Did you have a quick one?

    Mr. Sweeney.

    Mr. SWEENEY. Thank you, Mr. Chairman. And I apologize for my tardiness to both you and to our guest. I had to chair a competing hearing in a different room, and so I apologize if I've missed some of your testimony. As I understand it, in earlier statements, you had said that if we failed to pass our H.R. 10, or some form of H.R. 10, that it would be pretty much left to the courts and regulators to determine where we go from here and what the future is. In light of that, and knowing that the op-sub issue is such a key point of debate, as it relates to passage of this bill, I have a very simple question and that is would you prefer to forego financial modernization rather than enacting a bill that permitted an op-sub?

    Mr. GREENSPAN. I would, Congressman.

    Mr. SWEENEY. There's some who—let's assume that we are able to reach some agreements on that—there are some who advocate providing firms with the choice of regulatory structure, whether it be op-subs or the holding companies, could you give me a sense of that notion of choice and where you are? I know you probably have covered points of this, but I would like to get——
 Page 284       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. I didn't quite get the question, try me again.

    Mr. SWEENEY. There are some who have proposed the idea that we develop a choice between the op-sub process and regulatory process and holding companies, what's your sense of that?

    Mr. GREENSPAN. Congressman, if there were no subsidy in the bank, I see absolutely no reason why Government should be involved in making judgments as to whether an institution should put something in the subsidiary of one part of the organization or in another. The issue is solely the question of that this is not a choice in a sense that any profit maximizing banker does not consider that there is a choice between a holding company affiliate and a sub of a bank because one has low cost and the other has high cost, choose. I mean if he chooses the wrong one, he should be fired.

    Mr. SWEENEY. Thank you. Mr. Chairman, I yield my time.

    Chairman LEACH. Thank you.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman.

    Chairman Greenspan, I very much look forward to sitting down with you, Secretary Rubin, Chairman Leach, and other key parties in order to further discuss this issue because it obviously is a principal issue in contention. I also don't want to take a second round, but I have to tell you that I've been a bit confused because in some instances you refer to a subsidy as not a safety and soundness issue, but then when you're talking about loss to the insurance fund, it sounds like safety and soundness. When you're talking about the Asian difficulties, it sounds like safety and soundness as opposed to subsidy. And so you have confused me on that. And if it a loss to the insurance fund that's your concern, then I am curious why the chairman of the insurance fund, and all the past living chairmen of the insurance funds, think that they can deal with potential losses much better through an operating subsidiary? If it is a subsidy, I would like to see the papers which define the subsidy and quantify the subsidy because there's some debate. And you I think have said that that's one of the most difficult questions, trying to put the subsidy. If the subsidy is the insurance, is this not controllable through the concept that exists of risk-based premiums?
 Page 285       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. No, I understand why there's a confusion and I apologize for creating that. There are two different types of safety and soundness questions here. One is the issue of the system as a whole. Let me leave aside the question as to whether, in fact, there is any risk in the issue of putting powers into the sub of a bank. In fact, my original view of that was that that wasn't a big issue. And, indeed, my essential argument really rested almost wholly on the question of the issue of moving subsidized equity capital from a bank to a subsidiary and the impact of doing that on the financial structure because of the distortion of capital.

    There is a secondary question, which is really unrelated to that issue, and that's the question as to whether, in fact, not the system as a whole is being undercut by the issue of the subsidy, but whether the powers put into the individual sub of the bank potentially undercuts the viability of the bank itself. You can answer, ''Yes,'' to the first and ''No,'' to the second. Or ''No,'' and ''Yes.'' Those are not necessarily related.

    And I was saying, I don't remember whether or not I mentioned this when you were here, Mr. LaFalce, but the issue which changed my mind about the second question was something I had known about but hadn't thought about it, and my colleagues brought it to my attention; and the more I thought about it, the more I realized that they are right. And that is the question of when you are in a financial crisis, you can lose a lot of money very quickly. And there was a subsidiary of a bank, First Options was a subsidiary of Continental Illinois, and it in one day, that was October the 19th, 1987, I think lost everything. That was charged against the bank. There was nothing the regulators could do. And, indeed, there was a problem of in fact activities which Continental had done with respect to that sub on that day, which we had lots of questions about. What I'm saying is——
 Page 286       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. LAFALCE. Was that a State-chartered bank?

    Mr. GREENSPAN. I'm sorry?

    Mr. LAFALCE. Was that a State-chartered bank?

    Mr. GREENSPAN. A national bank. That experience reflects the fact that with all of the controls you can put on an individual bank, in a crisis environment it is quite feasible for the sub to be wiped out before any of the controls can be employed. Now I say that that is an issue relevant to the safety and soundness of the bank, it's not an issue of systemic risks. Those are two separate things, and I apologize because I think you're quite right. I tended not to draw the distinctions as cleanly as I should have.

    Mr. LAFALCE. And the activities of that op-sub were activities that could have been performed within the bank itself?

    Mr. GREENSPAN. As far as I understand it. In fact, that legally had to be the case, yes.

    Mr. LAFALCE. Thank you.

    Chairman LEACH. Thank you, Mr. LaFalce. And we want to thank you, sir. And let me express some information——

 Page 287       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mrs. JONES. Mr. Chairman.

    Chairman LEACH. Yes?

    Mrs. JONES. Could I just ask one last question? I promise it will be short.

    Chairman LEACH. If it's very brief, Mrs. Jones.

    Mrs. JONES. It's real short. It's real short. Thank you, Mr. Chairman.

    Chairman Greenspan, in the law we talk about creating legal fictions in order to accomplish a goal. Are you suggesting that within the world because we have not had financial modernization that they are—or bankers, or financial institutions, are creating financial fictions in order to accomplish what they want to accomplish under H.R. 10 or financial or legal fiction?

    Mr. GREENSPAN. I'm not sure I know how to answer that. Can you give me an example so I can?

    Mrs. JONES. For example, you might have a corporation that wants to accomplish something and because they cannot accomplish something under one corporate structure, they create a separate corporate structure in order to accomplish the same goal with the same incorporators. Is that what is happening in the financial world in order to do what they can't do without H.R. 10?
 Page 288       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. GREENSPAN. Well, I think they do that all the time, Congresswoman. I mean that's standard procedure, which I think gives considerable business to lawyers.


    Mrs. JONES. So by passing H.R. 10, we get over the financial fiction?

    Mr. GREENSPAN. I would think you rationalize the system in a manner which would be helpful to the effectiveness of the total structure, yes.

    Mrs. JONES. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mrs. Jones.

    Mr. Royce.

    Mr. ROYCE. Well, thank you, Mr. Chairman. I'm sorry I missed the meeting. I was chairing another subcommittee meeting, but I understand that all my questions have been answered. So I'll find those answers in the record. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Royce. Let me just thank the Chairman and explain that since this hearing has begun, the market has gone up 100 points.
 Page 289       PREV PAGE       TOP OF DOC    Segment 2 Of 3  


    Now there are two explanations for it. And I think only two. One is the possibility that support for H.R. 10 is extraordinary.


    The other possible explanation is that the market is awfully persuaded that the Chairman of the Federal Reserve Board is capable not only of answering multiple choice questions but devising them himself.

    Mr. LAFALCE. There's an alternative, Mr. Chairman. I understand that Chairman Greenspan gave his wife for Valentine's Day a little bull rather than a bear.


    Mr. ROYCE. Mr. Chairman, I just want to thank you for leaking the advance copy of the testimony here.

    Chairman LEACH. Well, in any regard, the committee stands bullishly desirous of continuing, but asking Mr. Greenspan or suggesting to Mr. Greenspan he can step down, and thanking him despite the jet lag for spending so much time with us. Thank you.

 Page 290       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. GREENSPAN. Thank you very much, Mr. Chairman.

    Chairman LEACH. Our second panel is composed of Mr. Thomas J. Curry, Commissioner of Banks for the Commonwealth of Massachusetts, on behalf of the Conference of State Bank Supervisors; Mr. Thomas E. Geyer, Commissioner of the Ohio Division of Securities, on behalf of the North American Securities Administrators Association; Mr. George M. Reider, Jr., who is the Connecticut Commissioner of Insurance, and President of the National Association of Insurance Commissioners.

    I thank each of you and we'll proceed in the order in which you've been introduced unless you've made an arrangement to the contrary.

    Mr. Curry, please proceed.


    Mr. CURRY. Good morning, Chairman Leach, Representative LaFalce, and Members of the committee. I'm Tom Curry, the Massachusetts Commissioner of Banks. I'm also Vice Chairman of the Conference of State Bank Supervisors and a member of FFIEC State Liaison Committee. I'm very pleased to be here today.

    Mr. Chairman and Representative LaFalce, we applaud your longstanding support for the dual banking system and greatly appreciate this committee's continuing efforts to defeat State bank examination fees. We also commend your efforts to modernize our financial system.
 Page 291       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    CSBS supports expanded bank activities that provide a broader range of choices to the consumer, enhance competition, and do not jeopardize safety and soundness. CSBS believes that any changes to our current system must preserve safety, soundness, and public confidence.

    Regulation should not drive new products and services or new delivery systems, rather, the market should drive changes in the industry and regulation in a market-driven environment can promote safe and sound behavior by supplying incentives for well-managed institutions.

    Many provisions in H.R. 10 advance these goals. Under our dual system of banking, States and the Federal Government independently charter and regulate financial institutions. Over 70 percent of all banks are State-chartered. These State-chartered banks have long conducted many non-banking activities, as authorized by the State legislatures, and have done so within the bounds of safety and soundness.

    State initiatives have spurred most advances in U.S. bank products and services. And, for example, the NOW account came out of my own State of Massachusetts. When new activities emerge one State at a time, systemic risk is minimized.

    When changing Federal law, we must preserve the State's ability to experiment independently with new products and services, new structures, and new delivery methods.

    One concern we have with H.R. 10 is its rollback of State-chartered banks' securities underwriting activities. State-chartered banks should continue to have the option of conducting securities activities in bank subsidiaries, as currently allowed, as well as holding company affiliates.
 Page 292       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    As we all learned too well during the savings and loan crisis of the 1980's, the key to expanding powers is effective supervision. Therefore, our State and Federal banking agencies must supervise any banking organization that engages in additional activities from the top down and from the bottom up.

    CSBS is pleased that H.R. 10 recognizes this regulatory principle. We believe that the Federal Reserve, with its joint responsibilities of protecting bank safety and soundness and promoting economic stability and growth, is well-suited to serve as the umbrella regulator to the new qualified bank holding companies.

    We are not comfortable with the functional regulation model that disregards the banking regulator's responsibilities for the overall safety and soundness of the organization. However, functional regulation may play an important role especially in the area of consumer protection.

    Successful functional regulation requires the cooperation and coordination of all regulators involved. Towards this goal, we have created joint task forces with the National Association of Insurance Commissioners and the North American Securities Association. These task forces are intended to facilitate data information sharing and the coordination of supervision. We also strongly support H.R. 10's provision to repeal Section 3(f) of the Bank Holding Company Act, as it is no longer needed.

    CSBS does have reservations about the course that financial modernization will take without congressional action. Congress has an obligation to create an appropriate regulatory structure for the new financial organization already emerging in the marketplace. However, we believe that any legislative proposal addressing concerns about the Thrift Charter should be forward-looking and enable competitive opportunities for all financial institutions.
 Page 293       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Additionally, we strongly support the provision in H.R. 10 calling for publication in the Federal Register of any preemption of State law by the Office of Thrift Supervision. This provision, which does not in any way affect an agency's preemption authority, is clearly consistent with Congress' continuing pursuit of a Government in the sunshine.

    State bank supervisors are an integral part of the Nation's banking system. Preserving the authority of each State to decide the bank structure, product, and services that best suit its business needs, strengthens the entire system. H.R. 10 is a good beginning for the modernization of our Federal Banking System. It recognizes that the lines between traditional banking and other financial services are disappearing. It provides for a system of comprehensive oversight.

    We look forward to working with you to adapt our banking system for the 21st Century. I would be happy to answer any questions that you may have.

    Chairman LEACH. Thank you, Mr. Curry.

    Mr. Geyer.


    Mr. GEYER. Thank you, Mr. Chairman. I am Tom Geyer, the commissioner of the Ohio Division of Securities, and I am honored to have the opportunity to discuss some issues regarding H.R. 10 on behalf of the North American Securities Administrators Association, known by the acronym NASAA.
 Page 294       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We applaud your determination to hold hearings early in the session to make financial services modernization a priority, and we fully concur with the testimony you heard yesterday indicating, first, that now is the time for comprehensive, congressionally directed, financial service modernization, and, second, that such modernization must be based on true functional regulation.

    Mr. Chairman, I urge you and the committee to keep in mind that sweeping financial services reform will profoundly affect millions of individual investors across the United States. While I testify today on behalf of NASAA, I also represent individual investors, like my wife who invests in her law firm's 401(K) plan; my father, a schoolteacher who invests through his individual retirement account; my Aunt Pam, a single mother of two who invests to provide for college expenses, and my grandfather, a retired veterinarian who seeks to preserve his retirement income.

    We have moved from a Nation of savers to a Nation of investors as witnessed by the fact that Americans now put more money in mutual funds than they do in insured bank deposits. So, as we debate financial services modernization, NASAA's main message is that we support and advocate reform based on true functional regulation, which means that oversight must be identical, not simply comparable or similar. In other words, there must be a level playing field where securities firms, banks, insurance companies, and mutual funds are subject to the same complimentary State/Federal securities regulatory system.

    In this regard, we strongly echo the words that the Securities Industry Association expressed to you yesterday, and I quote, ''The SEC, the Securities self-regulatory organization, and the State securities agencies should regulate securities activities regardless of what entities perform those services.'' This position is based on the premise that investors must receive the same disclosures and enjoy the same protections regardless of where securities products are purchased. Similarly, the people who sell securities products must be subject to the same licensing qualifications and oversight.
 Page 295       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Our securities industry has thrived as a result of this shared oversight system, and I respectfully suggest that we have the most successful securities markets in the world because of this complimentary State/Federal system, not in spite of it. Consequently, we believe that true functional regulation is a key ingredient of any reform effort.

    H.R. 10 would fundamentally impact this system. Specifically, Section 104(b) calls for wholesale preemption of State securities laws. We believe that this is inconsistent with functional regulation. One aspect of this regulation will be to eliminate State licensure with individual stockbrokers with respect to bank activity.

    On the issue of State licensing, a recent SEC report stated, ''Licensing authority enables States to identify and prevent those individuals who present a serious risk to their citizens from entering or remaining in the industry. Anti-fraud authority by itself does not give regulators the tools they need to detect and deter sales practice abuse and fraud.''

    The Federal laws that are left in place after preemption of State law are further limited by provisions in Title II which exempt from Federal law significant amounts of bank securities activity that will occur on a daily basis between banks and retail investors. We fear that dysfunctional regulation rather than functional regulation will result. Under the proposed act, financial service providers would be operating on an unlevel playing field and the degree of investor protection would depend on where the securities transactions took place.

    Briefly, please allow me to read excerpts from a handwritten letter recently received by the Ohio Division of Securities, and I have changed the names to preserve the confidentiality. ''On March 6, 1998, I went to X Bank with over $20,000 in $100 bills I had saved for a few years. I told the bank representative I just wanted it in the bank. Then she started pushing this Y stock on me. She asked me to sign a few times, and that was that. I opened one yesterday and showed it to my dad; he said I got ripped. I wonder if you can help me with this. I wasn't wise to the stock business.''
 Page 296       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    The materials accompanying this letter reveal that this gentleman is unemployed and receives $6,000 annually from Medicare. The bank representative put over $10,000 into a growth and income mutual fund, which is an appropriate investment for many people, but clearly unsuitable for this individual. In fact, the account statements showed that the mutual fund had lost almost 15 percent of its value during the first six months.

    These are the stories that we see everyday on the front line of securities regulation, and under the proposed structure of H.R. 10, these are the types of transactions that would fall outside the existing securities framework.

    In conclusion, again, we believe that the modernization effort must be based on functional regulation. I do want to reiterate our strong support for congressionally directed financial services reform, and as the process moves forward, we urge you to give additional thought to these issues: the absolute need to base the reform on true functional regulation, the far-reaching effects of preempting State laws, and the bill's enormous impact on individual investors. We stand ready to work with you with any technical assistance you may need.

    Again, I appreciate the opportunity to testify and would respectfully request that my written testimony be included in the record. Thank you.

    Chairman LEACH. Thank you.

    Mr. Reider.

 Page 297       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. REIDER. Thank you. My name is George Reider. I serve as Commissioner of Insurance in Connecticut and President of the NAIC. I am testifying today on behalf of the NAIC's Special Committee on Financial Services Modernization.

    Before I begin, I would like to thank you, Chairman Leach, and the committee for the invitation to testify. We very much appreciate the hard work you are doing on legislation to modernize Federal laws dealing with financial services integration.

    While we strongly support your goal and want to work with you in every way possible, we must state up front that H.R. 10 is seriously flawed in a number of areas with respect to insurance regulation. I will briefly explain the NAIC's position by making four key points.

    My first point: as presently written, H.R. 10 will harm insurance consumers and insurance regulations in the United States. In the name of giving banks and insurers a level playing field, the bill directly preempts large chunks of the general consumer protection authority given to us by State legislatures. These important laws do not discriminate against banks. They are applied equally across the board to every company that chooses to offer insurance products to the public.

    For example, my home State of Connecticut was involved last year in the regulatory approval process for the merger between Travelers Insurance Company and Citibank. As commissioner, I reviewed the proposed business plan and a complete filing of financial and operating data before making a final decision that the merger should be approved. I met my responsibility to fully review the merger on behalf of the public, and the matter was handled expeditiously with no complaints from the companies making the applications. Under H.R. 10, however, I would be automatically prevented from conducting a proper regulatory review of such a large and influential merger affecting insurance consumers in my State.
 Page 298       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    On a broader level, there is a chart attached to our prepared statement showing the preemption problem with H.R. 10. That chart identifies more than 50 NAIC model laws that are the basis for most State statutes covering such critical areas as examination, audit, reinsurance, capitalization, valuation, investments, liquidations, guarantee funds, agency licensing, and holding company supervision. Nearly all of them will be subject to preemption if H.R. 10 is not amended to preserve State authority.

    My second point: H.R. 10 threatens the substantial progress now being made by State insurance regulators using our existing authority. State insurance departments are working through the NAIC to accomplish much greater uniformity and efficiency among themselves. New technology is being used to allow constant communication and updated data sharing on key licensing, enforcement, and rate filing requirements. State departments are also signing reciprocity agreements dealing with agent licenses to eliminate needless redundancy.

    The NAIC is currently working with the Office of Thrift Supervision, the Comptroller of the Currency, and the Conference of State Bank Supervisors to develop and implement mutual cooperation agreements covering regulatory and enforcement matters. We have also conducted a series of meetings with OTS and the Federal Reserve Board to educate each other about specific supervision methods used to monitor and control the industry under our respective jurisdictions. These efforts will continue during 1999; in fact, they will increase.

    My third point: State governments ought to be equal partners with the Federal Government in assuring that financial integration of banking, insurance, and security products is handled prudently. We are the primary regulators of insurance in the United States. If the Federal Government prevents the States from supervising insurance adequately, this vital consumer protection function will not get done at all. Most importantly, the cost of failing to supervise insurance properly will fall on State governments and their citizens through State-guarantee programs and unpaid claims. There is no federally sponsored guarantee program to cover insolvency or to reimburse consumers for their insurance losses.
 Page 299       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We ask that Congress be very careful about the impact on States when rewriting Federal banking laws. Overly broad language and imprecise drafting can easily undermine the safety and soundness of laws that apply to all insurance providers, not just banks.

    My last point: The insurance regulation problems in H.R. 10 can be fixed using a few straightforward amendments prepared by the NAIC. Furthermore, the bill can be fixed without compromising the consumer and the business benefits which the bill sponsors hope to achieve. Today, we pledge our strong commitment and assistance to you to do just that.

    In conclusion, preemption of State consumer protection statutes by changing Federal banking laws will inject needless confusion into the insurance regulatory system at the very least. The extent of insurance authority, which is now pretty clear, will surely be questioned, not only by banks and their affiliates, but possibly even by traditional insurers which have been complied with the present laws for many years.

    As insurance regulators, we take pride in our work, our record of accomplishments, and our ongoing efforts to keep abreast of changes in the marketplace. Yet, H.R. 10 seriously threatens our ability to do the job expected of us by our consumers. It makes no sense to undercut a State regulatory system that has worked very well. Please fix H.R. 10 to preserve State insurance authority over insurance providers including banks as financial modernization moves forward, and, again, we stand ready to work with you in every possible way. Thank you.

    Chairman LEACH. Well, I thank you. As you know, there are an awful lot of compromises in this bill. There are compromises between and within industrial groups. There are compromises between and within regulatory structures. All I can say is the general thrust of this bill is toward functional regulation. There are judgments that each of the regulators wish would go a little bit more their direction, and that is national versus Federal; that is inter-group versus other group, and I think that what we have heard today are some of the concerns coming from a very specific direction. But I will tell you the general thrust is toward functional regulation and preserving a significant role for the States.
 Page 300       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    I have one question for Mr. Curry. H.R. 10 contains a provision that the Office of Thrift Supervision will be required to publish notice and comment when preempting State laws with regard to consumer protection. The Trade Association for Unitary Thrifts testified yesterday, and I quote, ''This additional procedure would have a chilling effect on the Federal thrift operations and for the further development of a nationally competitive financial service marketplace in increased costs and reduced convenience for consumers.'' What would your reaction be to that perspective?

    Mr. CURRY. I think that comment probably goes, Mr. Chairman, to whether the whole concept of preemption should be curtailed. That is not our position; we fully respect Congress' ability to legislate and regulate in this entire field. What we are simply saying—and I can say this from my own personal experience—that it is very frustrating as a State official to learn, usually through a third party, that the OTS has taken interpretive action to their preemption powers to actually strike down or limit the application of a State law to a particular institution and to all OTS charter institutions. What we are simply saying is that by supporting the public notice and comment division is that it benefits both the State regulators and the OTS that there is an opportunity for State regulators, in particular, to provide an official view of what the State law means or has been enforced to mean at the State level rather than having this done really without any input and the States to have to deal with the final result.

    Chairman LEACH. But isn't it true that the other Federal regulator you deal with in a comparable basis, the Comptroller's office, has this procedure, and so OTS has a privileged procedure relative to the Comptroller's office?
 Page 301       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. CURRY. That is correct, and Riegle-Neal required the OCC to engage in the publication in the Federal Register. Also, that was actually useful to the Massachusetts legislature when it was debating the repealing or anti-affiliation laws with insurance sales that we were able to see at least what the issues were legally in terms of whether some of the provisions being considered by the legislature might be subject to a preemption challenge. That helped our legislature invariably in deciding whether or not to pursue a particular protection or other licensing requirement when they opened up bank insurance sales.

    Chairman LEACH. I am going to turn to Mrs. Roukema. Before doing it, I would like you to know we have about two or three minutes before we have to recess for a vote.

    Mrs. ROUKEMA. Mr. Chairman, I thank you, and I don't want to unduly delay this panel, and we recognize that we have to be over there, so I am just going to say—with apologies to the fact that I wasn't here initially for Mr. Curry and most of Mr. Geyer's statements—I will say that I am particularly sensitive to this question about the SEC and Mr. Levitt's concerns. I will go over your testimony, and I will go back over with staff and with you, Mr. Chairman, the history of how we have arrived at some, I believe, far more tenable position with our bill, but that was reversed in the Senate or we went through the process, and it was not sustained.

    But I won't take the time today; I will look into that and see—I certainly don't want it to be dysfunctional regulation, but there has got to be a way of dealing with this in the interest of safety and soundness and true functional regulation, but I won't hold up the group. I don't have with precision a question for either of the people here, but I think we will be able to accommodate it to your concerns.
 Page 302       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. Mrs. Kelly.

    Mrs. KELLY. Mr. Chairman, I do have some very precise questions that I would like to ask the panel, and time is short. May I run through a few of them quickly and then, perhaps——

    Chairman LEACH. You may do that or do you want us to return? You tell me what is best for your timeframe.

    Mrs. KELLY. I would like to ask my questions.

    Chairman LEACH. Please, go right ahead.

    Mrs. KELLY. But——

    Chairman LEACH. Please, do that, do that.

    Mrs. KELLY. If I can get fast answers, I would appreciate it.

    Mr. Reider, I just want to tell you I am very disappointed in your testimony. I have had my staff reach out to you on the NARAB provision and ask you for any suggestions you might have to make NARAB better, and we have not heard from you, and I don't think that is helpful. In your testimony, you completely neglect to mention that it would be the NAIC that would control NARAB even if it came into existence. That only if it comes into existence—if your group, the NAIC, determines in three years that 26 States have not adopted non-discriminatory licensing practices, so I would like you to tell me how many years the NAIC has been working to streamline the multi-State licensing issue?
 Page 303       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. REIDER. I would say that we do have a concern with that, we are committed, and we are working very diligently to achieve what you are attempting to do with NARAB, and I think that I can say with confidence that we will be there.

    Mrs. KELLY. Your office has not been working with us, sir. Can you give me an answer, yes or no, to a couple of other questions? Have you gotten any States to drop their counter signature laws? Just give me a yes or a no.

    Mr. REIDER. Yes.

    Mrs. KELLY. I am going to follow up with that, because I would like a written answer to that one.

    Mr. REIDER. Sure.

    Mrs. KELLY. Do you agree that it is a very real problem with the multi-State licensing of insurance agents?

    Mr. REIDER. I think that we are making substantial progress in commonality, and——

    Mrs. KELLY. Just give me a yes or a no. Do you agree with the intent of NARAB on that point?

 Page 304       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. REIDER. We agree that things have to be done more efficiently and with more commonality.

    Mrs. KELLY. That is a yes, is that correct?

    Mr. REIDER. That is my answer.

    Mrs. KELLY. Is it possible for an insurance agent registered in all 50 States for the sale of two lines of insurance today to be in compliance with all of the standards that he or she must meet without hiring staff just to work exclusively on that year-round? Yes or no?

    Mr. REIDER. I am not clear on the question. I would be glad to respond to that if you could——

    Mrs. KELLY. OK, an insurance agent that is registered in all 50 States just for the sale for a couple of lines of insurance has to be in compliance with all of the standards—they have to meet all of that. It requires, from what I understand, a great deal of staff time to meet the responses that all 50 States ask for. I am asking you if you know whether or not people can do that without having to hire extra staff? Just give me a yes or a no.

    Mr. REIDER. I would answer by simply saying that, again, we are working very hard to arrive at the point where there is commonality.

    Chairman LEACH. If the gentlelady would yield.
 Page 305       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mrs. KELLY. Yes, I am sorry.

    Chairman LEACH. I apologize. We have about three minutes.

    Mrs. KELLY. I know, we have got to go.

    Chairman LEACH. So, does she want to come back, because I will give her as much time as she——

    Mrs. KELLY. If we can come back—I am sorry, I would like to ask my questions, because then I can ask them a little more coherently.

    Chairman LEACH. Sure. Then, let me just say that we will recess until two o'clock


    Chairman LEACH. The hearing will reconvene. When we left off, Mrs. Kelly had the floor. Please proceed as you see fit.

    Mrs. KELLY. Thank you, Mr. Chairman. I want to go back—I was talking with Mr. Reider, and, Mr. Reider, we were talking about whether or not you had gotten the States to drop their counter signature law, and you said, what? Yes or no?

 Page 306       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. REIDER. My understanding was that we have.

    Mrs. KELLY. You have.

    Mr. REIDER. There are States that have the counter signature, but there are some that have dropped.

    Mrs. KELLY. As a result of your efforts?

    Mr. REIDER. As a result of attempting to move forward with what we just spoke about.

    Mrs. KELLY. Will you please give me those names?

    Mr. REIDER. I will certainly provide those. I will have our staff do that this afternoon or tomorrow morning.

    Mrs. Kelly, may I just make a comment, if I may? You had indicated that we have not been cooperative and I want to share something: I am not here as an obstructionist; I am here to work and try to bring resolution, because we believe it is important to move this, but I would say that we are fully prepared, and, in fact, I had extended personally an invitation to you to attend the commissioner's meeting which we held last week. We spent Saturday and Sunday here in Washington for a full day and talked about these issues, and we are coming back in March for our meeting here, our quarterly meeting, and I would extend to you—and I will do it by letter—an invitation to come and visit with us and talk with us.
 Page 307       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mrs. KELLY. Mr. Reider, I represent a district in New York. I don't spend my weekends in Washington, but I will be glad to try to make that possible in March. I just definitely did not get that invitation in time to cancel——

    Mr. REIDER. My point is that we are trying to reach out, and I know it is difficult at times for all of us, but I want to assure you and everyone that we stand ready, and I personally would be available to work at any point to be sure that at least there is communication.

    Mrs. KELLY. Good. I would hope that that would be the case.

    My district, as you perhaps know, borders the State of Connecticut, and you are the Commissioner of Insurance for Connecticut, is that correct?

    Mr. REIDER. That is correct.

    Mrs. KELLY. I do know that one of my insurance agents that I represent was required by the State of Connecticut to change the name of his agency to include the words ''of New York.'' He had to change his agency name when he applied to sell policies in Connecticut. It is that kind of picky thing where I think that NARAB can be very, very helpful to agents.

    Is it true that you do require that sort of thing from out-of-State agents?
 Page 308       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. REIDER. I don't know the specifics of that, and I am sure there are situations——

    Mrs. KELLY. Well, it is not a specific question. My question is, it is not about this particular agent, but is it true that your State requires people to change names, because I know other States do?

    Mr. REIDER. I am not aware of that, but I would share with you that if there are issues like that, and it is not expeditious in getting commerce—we are trying to work to eliminate those types of things. If you are asking me do we have a perfect system, no. But that is why we are working so diligently to avoid those things and to try to get where you want to be and where we want to be.

    Mrs. KELLY. I don't see that it serves any possible benefit to require insurance agents from one State to change their agency name if they are going—just to identify something as simple as ''of New York'' across State lines.

    Mr. REIDER. I am not aware of it, but I will certainly review it.

    Mrs. KELLY. OK, I understand that some States require fingerprints; others, some counter signatures. Wouldn't it just save a lot all the way along—I have heard stories of places where agents have to go and take a course in a particular State before they can be licensed in that State. I can understand that to a certain extent, but wouldn't it save a lot of time all the way across the board for everybody if the NAIC ran a program that would license agents in as many States as needed; a standard that is higher for all those States?
 Page 309       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. REIDER. That is exactly what we are attempting to do right now and with some success.

    Mrs. KELLY. Well, Mr. Reider, I would like to hear some—I was hoping I could get some yes or no answer from you. I hope we can work together. I just want to ask one basic question for all of you again since I am running out of time here. I want to ask if there are any of your groups that would oppose financial modernization legislation because it lacks a mix of commerce and banking—the commercial basket is what I am talking about? I just want an answer, would oppose or not oppose.

    Mr. Curry.

    Mr. CURRY. We are supportive of H.R. 10 in its present form, but we are not opposed to the mixing of commerce as long as there are potential safeguards in place relative to that mix.

    Mrs. KELLY. Mr. Geyer.

    Mr. GEYER. I would concur completely with Mr. Curry's comments.

    Mrs. KELLY. Mr. Reider.

    Mr. REIDER. We would agree with what has been indicated, and we do support the holding company approach which was addressed this morning. One of our major concerns, to be sure, is that whatever is done does not adversely affect solvency or our ability to look after solvency, and again, I would suggest that the appropriate thing to do is to come and visit with you; sit down, and be sure that we are totally responsive to the questions that you have asked.
 Page 310       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mrs. KELLY. Good. I hope we can work together.

    Thank you very much, Mr. Chairman, for allowing me to continue with the questioning.

    Chairman LEACH. Thank you, Mrs. Kelly.

    Mr. Vento.

    Mr. VENTO. Was Mr. Watt here before me? I can——

    Mr. WATT. Mr. Chairman, I don't have any questions.

    Mr. VENTO. OK, well, I will just go ahead then.

    Mr. Curry, I believe it was your testimony I read some time ago, this morning, that pointed out that some of the State regulated institutions, financial institutions, banks, are limited to only, in fact, exercise certain powers through an operated subsidiary. Is that correct?

    Mr. CURRY. Representative, it does vary among States, but, generally, the States—mine, in particular—does authorize activities to be done through an operating subsidiary.

 Page 311       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. VENTO. I think your testimony was that some States only permit it to be done through an operating subsidiary. I guess that is right if it varies by State.

    Mr. CURRY. Yes, there is a variation in approach.

    Mr. VENTO. I mean there is—how many years has that been the case?

    Mr. CURRY. In the case of Massachusetts, it has been the ability to use an operating subsidiary is at least 20 years old.

    Mr. VENTO. Has there been any instance where there is a demonstration that there is some sort of subsidy with regards to that?

    Mr. CURRY. From a safety and soundness perspective, we have not run into any difficulties with those entities that use an operating subsidiary to engage in activities. We also take some solace in the fact activities in a State insurance subsidiary would be subject to the FDIC's review for any potential impacts to the FDIC insurance fund.

    Mr. VENTO. Well, we have been through that. In fact, I think you point out in FDIC—and I think the Chairman will recall that we wrote certain limitations on them—that they would have to match subsidiary activities that take place in a national bank. But the issue here, of course, is one different. Obviously, you are finding out that many of them are travel agencies, it is insurance, it is some municipal bond underwriting—I forget what the fourth one was that I read about. Obviously, it is, admittedly, merchant banking or securitization as we anticipated, and as the Treasury has endorsed that activity are not generally done today in the operating subsidiary, is that correct in Massachusetts?
 Page 312       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. CURRY. Not in Massachusetts, but I believe in some other States at least on a grandfathered basis it has occurred.

    Mr. VENTO. And does occur today.

    Mr. CURRY. Yes.

    Mr. VENTO. Well, and, of course, it is interesting, because in this case the Federal Reserve Board actually has a regulatory role in these instances, is that correct?

    Mr. CURRY. Yes, depending on the structure.

    Mr. VENTO. I noticed, Mr. Geyer, you are the insurance—no, you are the State bank regulator.

    Mr. GEYER. State securities.

    Mr. VENTO. Yes, State securities, and Mr. Reider is the insurance. In this bill, we have the umbrella regulator, and unlike the banks and the securities, you don't have a national regulator, so under the umbrella regulator when there is a bank affiliate and an insurance affiliate anticipated that the rules as to defining products would actually flow through the Fed with the consultation, I guess, of the State insurance regulator, and one of the—I think, Mr. Pope's testimony yesterday, if I remember right, this was the question I would have asked Mr. Greenspan this morning—Mr. Pope pointed out in his testimony that there is a little—that he would prefer more guidance with regards to the criteria that the Federal Reserve Board would use in terms of making an assessment as to the nature of those financial instruments. Do you share Mr. Pope's concern with regards to that and the fact that the States would not have the type of guidance in this particular instance in the bill?
 Page 313       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    I don't know how we can resolve this issue. I think, probably, it is necessary to actually deal with a decisionmaker at the Federal level. We had tried—as you know, when Bill left the committee two years ago, we had a financial counsel that would actually define these products, and so even at that point we were faced with the problem without a single insurance entity.

    Mr. Reider.

    Mr. REIDER. Yes, and we have the example in Connecticut of Citicorp and Travelers. That matter came to the department, and both companies provided all the information that we needed to make a determination. We consulted with the Federal Reserve; they came and spent a considerable amount of time with our office. We attended their hearings, so there was a great exchange of information back and forth in a very cooperative way, and we were able to bring our expertise to bear to be sure that the consumer was protected. That moved through the State of Connecticut and, I believe, a total of thirteen States in a very expeditious manner, and our responsibility of looking after the consumer at the time of that type of movement I think was fully done.

    So, our suggestion is that you have State insurance regulators in place to allow them to do the work from the insurance perspective when the primary concern is insurance, and so I suggest that we could work very well with the Federal people at a time of a change of control or on other matters.

    Mr. VENTO. Yes, I guess you are talking about control, and I guess that was the point Mr. Pope testified to. But I think he also—it seems to me, it also implied the definition of instruments was also inherent in that. I was more focused on that, but you are right, control is a factor.
 Page 314       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. REIDER. Yes, sir.

    Mr. VENTO. Pardon me?

    Mr. REIDER. Yes, as I said, in that whole discussion—and I participated last year in the discussion with various parties in an effort to try to be cooperative. Again, we are not trying to be obstructionists, but those matters are very, very critical, and we are simply saying that as State insurance regulators, we have 10,000 people across the country, and it is not contrary things, it is one of working in a cooperative fashion. And I think—as I said in my testimony—that that could be achieved very quickly. It is not that it is going to take forever, and we are prepared to sit down and look at that. But we think we can bring our expertise to bear, do the job that we have to do, and yet not get in the way of the other agencies where they are the primary regulator.

    Mr. VENTO. I think the issue here is rather what type of criteria or guidance. I guess you are talking about changing the governance, and I am talking about changing the—providing some criteria, additional verbiage in the bill. Not that we need the bill to grow, but I thought that was probably the better tack as opposed to changing the governing structure which, obviously, is not to your satisfaction.

    My time is expired, so I will yield—I hope I didn't repeat a question.

    Chairman LEACH. No, no problem at all. Thank you, Bruce.
 Page 315       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mrs. Roukema.

    Mr. Hill.

    Mr. HILL. I thank you, Mr. Chairman, and I want to welcome all the members of this panel. I wasn't here for the testimony although I did read all your testimony.

    Mr. Reider, I want to talk with you some about the insurance issues. I would like to just make a point with you—and I think Mrs. Kelly made the point—and that is that I am a friend of yours here and tried to work to strengthen the provisions of last year's bill and will hopefully on this one. But, frankly, I will suggest that your association has not actively engaged in trying to find constructive solutions to the dilemmas that we are dealing with here.

    Mr. REIDER. Well, I would—I am sorry.

    Mr. HILL. And you folks really do need to, I think, if we are going to protect State regulations insurance in a meaningful fashion.

    Mr. REIDER. Can I just comment on that?

    Mr. HILL. Sure.

    Mr. REIDER. First of all, I think that it is true that we have to be very active and proactive. We, I think, last year gave evidence of that. I personally participated in any number of meetings and talked with many, many people. My colleague, Mr. Nichols, who is with me, has chaired our committee on financial reforms is here today as well, and I can only tell you that we are prepared to work very, very diligently, and we should, and we want to do it in a cooperative fashion.
 Page 316       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. HILL. Well, what we are trying to do here is modernize the business of financial institutions, and there are some arcane provisions of insurance regulation, licensing, those sorts of things, that work against that approach of working toward it, and I think that we do need to work cooperatively.

    I want to go into the bill itself. In reading your testimony, I found it very interesting—if you were here earlier, I asked Chairman Greenspan about one of the questions that you raised with regard, in essence, whether or not H.R. 10, at this point, preempts State regulation of insurance and whether that is really going to have a meaningful impact on consumer protection. And in your testimony, I think you had attached a graph which is very, very helpful to me, outlining all the various State regulations, State laws, model acts that various States have that are intended to protect consumers, protect policyholders, deal with claims management, selling of policies, premium collection, a whole host of areas that you believe are non-discriminatory; I believe are non-discriminatory, but by virtue of H.R. 10, probably are preempted. And I would just ask if you would, for the purpose of the committee, provide more specifics with regard to individual laws and individual States and with respect to how that will undermine protections of consumers in those States. If you could do that, it would be helpful for us as we negotiate this bill.

    Mr. REIDER. Well, we listed the 50 items here, and, certainly, we are prepared to sit down and talk about that, and we are working very hard now to see what might be best reserved for the State and the national level. I gave you, I think, three or four bullet points that we thought were absolutely essential. They relate mainly to solvency and consumer protections that are now in place. And the concern is that—again, not a criticism, because we have worked well with the Federal Reserve and others—but if that is not protected, there is going to be a vacuum. I can tell you that the thousand people we have turn to the State insurance people up in Connecticut for assistance on consumer-related matters, and that every day we spend tremendous energy in our State on the solvency side, financial review of companies on-site and quarterly in our office——
 Page 317       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. HILL. And you do a good job of it.

    Mr. REIDER. I do believe that we work very diligently in that regard. So we are simply saying that, certainly, we have to do things more efficiently, and you mentioned licensing, and Mrs. Kelly mentioned it. That is a legitimate concern, and for us to suggest that it doesn't put people through unnecessary hoops wouldn't be being up front, but I can tell you that we are working hard to eliminate that, and we are committed along with you. And I think if you listen to Chairman Greenspan, he is saying that if you start this, it is going to evolve. All we are simply saying is don't put us to the side. Allow us to be there; allow us to be an effective regulator, and then see how this thing moves through.

    Mr. HILL. I would agree with that.

    I have question specific to Connecticut. Connecticut law prohibits State charter banks from acting as an agent for a number of kinds of insurance including title insurance.

    Mr. REIDER. Yes.

    Mr. HILL. And your State includes some consumer protection statutes, such as one that applies to producers of title insurance, such as mortgage lenders or real estate brokers or other parties. And I presume that you have that there, and it requires, for example, it is there for the purpose of prohibiting institutions from simply creating sham organizations or sale organizations for the purpose of receiving a fee that really don't provide any service in the transaction, which is one of my concerns about the current provisions of H.R. 10 with regard to title insurance. And I think in your State it requires that institutions that sell title insurance must get 80 percent of their business from the public rather than from their business.
 Page 318       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    H.R. 10 would cramp that is my understanding. Would you agree with that?

    Mr. REIDER. That, again, is a complex arena, but my understanding is that it would.

    Mr. HILL. Would you consider those laws discriminatory laws or do you think that those laws are there for the purpose of protecting consumers?

    Mr. REIDER. Well, I think that the laws that we have in Connecticut on that matter are designed to protect the consumer. It looks at the capital requirements to be sure there is money in place, and, again, in that matter or any, it is fluid in that we always have to take a look to be sure that it is relevant, but, certainly, what you just described I would agree with.

    Mr. HILL. And we have laws in a variety of different areas dealing with certain similar kinds of circumstances to make sure that people aren't discriminated against when they buy insurance or the treatment of their claims or the availability of insurance to them?

    Mr. REIDER. Well, I would just say this: that I have lived, I think, in seven different States with my family over the years. And I do know this as a State insurance commissioner now, there are certain situations in a given State that require certain considerations based on the environment, and I think we do have to be careful that is not preempted. That is not to suggest that we should have obstacles, but it does suggest it should be the ability to address unique situations that may need addressed because of the history of product or whatever else, and do that in a way that is open.
 Page 319       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    The point that I was just going to make earlier, if I may: I want everyone to understand, this is not that we are the enemy of anyone; that is not the case. I think that, for example, the Travelers and the Citicorp emphasizes and brings home the message that we can work together and accomplish what we want to accomplish and that this bill certainly offers many positive things that will enhance commerce and global competition that was spoken about.

    So, I just want to emphasize again what you and Mrs. Kelly have said: as an organization, if we have not been as active as we should—and I think at times we have been more active maybe than has been recognized—but, certainly, at times, like anyone else, everyone comes to the game at a different point, but we are totally committed to sit down, and we are very optimistic that all of these matters can be addressed, and I say that with every bit of sincereness.

    Mr. HILL. If you will indulge me, Mr. Chairman, one last point, and that is that you have suggested in your testimony that the negative preemption provision that is in there now be replaced with a positive preemption provision and deference provision. I would appreciate it if you folks would provide me with more details with respect to what you are suggesting.

    Mr. REIDER. We will, and I also would comment that we will provide you with State-by-State lists comparing the States, and we will do that promptly early next week.

    Mr. HILL. Thank you, Mr. Reider, and thank you, Mr. Chairman, for indulging me.
 Page 320       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. Thank you, Mr. Hill.

    Mr. Watt.

    Mr. WATT. No, I pass, Mr. Chairman, thank you.

    Chairman LEACH. Well, that being the last question, let me just stress again, we appreciate very much your appearance.

    I would also stress this whole effort of H.R. 10 is to have bank modernization under prudential regulation that involves functional regulation. There is not a single regulator at the State or Federal level that is altogether happy with all of the provisions. I just want to stress that. And, so what each of you has indicated is where you would like to see your particular province strengthened somewhat. At each point, there is a countervailing regulator who wants to see his province strengthened somewhat. So what we have here, for example, in banking is the OCC, the national regulator that may or may not be competitive with some of you, but is feeling that it has lost the most. And, so I just raise this relatively speaking. We are trying to come up with a product in which there is a fair degree of fairness and even-handedness, but no one gets exactly what he wants.

    Also, this panel I think has underscored what we have seen at the Federal level that just as there are differences between and within industrial groups, there are differences between regulatory bodies both at the State and Federal level, and I don't think we will ever get perfect consensus, but we are going to do our best.
 Page 321       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. REIDER. May I just make one comment.

    Chairman LEACH. Go ahead.

    Mr. REIDER. I think that over the past year as we have had the opportunity to work with the other Federal agencies—and I can't speak for them, but I think that they would share this thought as well—there has been a greater appreciation of what each of us do in our particular functions and that there are ways we can compliment one another. I think that has been a positive over the past year, certainly in the State of Connecticut with the Federal Reserve Board and the transaction I had mentioned. So, we again appreciate very much being here and assure you again that we want to participate and work with you.

    Chairman LEACH. With regard to your association, I want to express the appreciation of the committee on an unrelated matter and that is the hearings on the Nazi assets issue that your association has been very helpful in providing witnesses and demonstrating significant leadership at various points of the road. We appreciate that from your association. It has demonstrated solid competence in that particular area.

    In any regard, thank you all very much.

    Mr. GEYER. Thank you, Mr. Chairman.

    Chairman LEACH. Our final panel consists of Mary Griffin, who is the Insurance Counsel for Consumers Union; Mr. Edmund Mierzwinski, who is Consumer Program Director of the U.S. Public Interest Research Group; Mr. Ralph Nader, who is a consumer advocate; Mr. John Taylor, who is President and CEO of the National Community Reinvestment Coalition; Ms. Debby Goldberg, who is the Reinvestment Specialist for the Center for Community Change.
 Page 322       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We will begin with you Mary. Welcome back to the committee. And let me say if you all have larger statements, everything will be presented into the record, without objection. Proceed as you see fit, Ms. Griffin.


    Ms. GRIFFIN. Thank you, Chairman Leach. Consumers Union appreciates the opportunity to appear today to present the consumer perspective on the Financial Services Act of 1999.

    Over the past few years, we have supported efforts to modernize the financial services industry so long as such efforts move in the direction of the consumer, not just the financial services industry. We understand the challenges Congress faces in its endeavor to balance the interests of the industry regulators and consumers. While last year's efforts held potential to bring a more balanced approach to the restructuring of the market, we believe this bill represents a step backward for consumers.

    Congress must realize that financial modernization can only succeed if fair treatment of consumers goes hand in hand with the elimination of the walls that separate the industries. Opening up the financial services market has the potential to increase competition and choice for consumers, a laudable and desired goal. Unfortunately, consumers' experience of the changes that have already occurred show the great risk associated with your resolution.

 Page 323       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Though banks held one-stop shopping as a sort of financial nirvana, studies and reports show that consumers have been misled and deceived about the products banks sell and found themselves nickel and dimed to death with a host of fees. Financial firms have become masters of a marketing frenzy, invading consumers' mailboxes and telephone lines with abandon and almost no checks on their practices. If modernization is not done right, the problems for consumers will only get worse, and the opportunities for more real competition will be lost.

    Unlike other private industries, as Chairman Greenspan has pointed out in the past, the bank system is not a free market system. Depository institutions enjoy support from taxpayers in several forms. As such, they should be available for all consumers. But as banks have become full-service financial centers, they have targeted the more wealthy customers. As the Wall Street Journal recently reported: ''After years of casting a wide net to lure as many customers as possible, banks and many other industries are becoming increasingly selective limiting their hunt to profitable customers and doing away with loss-leaders. Banks are by far the biggest industry that marshals the state of conscientability. Already half of big banks use profit data to make customer decisions.''

    Technology has helped banks and others develop a multi-tiered structure where the wealthy get better access to services and better deals, and the middle and lower income customers are struggling to pay for access and basic services. This is starkly exemplified by First Union's red-yellow-green light system that weeds out the less profitable or red-lighted customers while giving better deals and fee waivers to the green-lighted customers. Banks can give good deals to their best customers; we have no problem with that, but why should 70 to 80 percent of the customer base get a raw deal from their federally backed banks?

 Page 324       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    While my written testimony is more extensive, we want to highlight three ways in which Congress can help all consumers get a fair deal. First, enact enforceable retail sales protection for one-stop shopping. When consumers walk into a bank, they need to know whether they are dealing with a bank as an insured depository institution, as an insurance agent or as a securities broker. Measures are needed to ensure that banks sell products that meet the needs of the particular customer, and don't force products on vulnerable loan applicants.

    We appreciate and support the inclusion in the bill of a package of retail sales protections, such as disclosure of whether products are FDIC-insured, modeled after last year's bill, which, Mr. LaFalce, we appreciate all the work that was done by you on that. However, the protections contained in this bill need to be strengthened. For example, the bill fails to include the suitability requirements that were in the bill approved by this committee last Congress.

    Second, low-cost deposit accounts. Most people need banks, but many cannot maintain the high minimum deposits required to avoid monthly charges. In addition to those 48 million households with $1,000 or less in their accounts who can be hard hit by fees, there are an estimated 12 million households that currently have no checking accounts at all. Low-cost deposit accounts with reasonable service fees and low or no minimum initial deposit or balance requirements are needed to lessen the financial burden on low- and moderate-income consumers. The Full House voted for a bill that included low-cost accounts last Congress. We urge you to reinstate this essential protection.

    Third, update privacy laws. As banks, insurance, and investment firms merge into huge money centers, the risk of confidential customer information being shared or sold without the consumers' knowledge or consent becomes great. The Fair Credit Reporting Act contains the only financial privacy protections for consumers, vis a vis the banks, and these are not enough in this mega-merger market.
 Page 325       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    For example, not only can Citicorp affiliates share financial information about their over 90 million customers to use for cross-marketing, in many cases without the customers' knowledge and consent, but they also can pool data and create their own databases without complying with the FCRA. That means that maybe the bank turns you down because their insurance affiliate told them you are in poor health, and you will never know. Congress needs to close off the loopholes in the FCRA; give consumers control over whether and what information is shared, and put an affirmative obligation on banks and other financial firms to protect the confidentiality of customers' financial and personal information. Legislation introduced by you, Congressman LaFalce, last session would help achieve some of these goals.

    In the area of safety and soundness, as you know, Mr. Chairman, we agree with you wholeheartedly that banks and commercial firms should be kept separate because of the potential to skew the availability of credit and relative concerns from expanding the Government safety net to other industries.

    As you continue to tackle financial services legislation this year, we urge you to ensure that as you break down the walls that separate banks from insurance and securities firms, you ensure the market serves the needs of all consumers and does not simply cater to the wealthiest. Thank you very much.

    Chairman LEACH. Thank you very much, Mary.

    Ed, please proceed.

 Page 326       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. MIERZWINSKI. Thank you, Mr. Chairman, Members of the committee. My name is Ed Mierzwinski, and I am the Consumer Program Director with the State Public Interest Research Groups. We are a non-profit, non-partisan watchdog consumer and environmental watchdog organization, with offices around the country.

    We are pleased to be here today to talk about the important issue of financial modernization. I just want to make a couple of points in my oral presentation, and I want to say that I concur with the testimony that my colleagues will be giving on the Community Reinvestment Act, and I also concur with the detailed testimony of Consumers Union on the retail sales provisions that should be embodied in H.R. 10 and that, in fact, in some cases are missing, particularly, the suitability requirements.

    I want to focus on three specific issues in my presentation today. First, it is critical that the Congress balance this bill, not only between the regulators and the special interest, but also in the public interest, and that means we have got to restore the low-cost, lifeline banking provision that we deleted from this year's mark even though it passed the House.

    Second, we have got to protect privacy. I know, Mr. Chairman, you have been a leader on privacy in this committee, and Mr. LaFalce has been a leader in developing privacy proposals. I am pleased that the big brother privacy proposal of ''know your customer'' is helping to shine a spotlight on privacy issues, but we believe that big business privacy invasions are more significant in many ways than are the big business privacy invasions of ''know your customer.'' And we would support strongly strong changes to this act.
 Page 327       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And, third, I will talk briefly just about the fact that we think that the preemption language in this bill, although it is much longer than last year's bill and much more complex to read, still doesn't make it clear that the States retain the authority to enforce consumer protection laws in other areas that the bill does not address. I will point out that part of my concern is that this is an ongoing problem that we have with the Comptroller of the Currency.

    Getting back to low-cost lifeline banking, as Congressman Leach pointed out in his question to Chairman Greenspan, big banks charge bigger fees. That is a finding both of the PIRG report and the Federal Reserve Board reports. It is our view that the 12 million American families who do not have bank accounts as documented by Treasury data do not have bank accounts primarily because they can't afford the high prices that banks charge. And the additional 48 million families, Mr. Chairman, have balances of less than $1,000 at any one time, and those individual families pay the brunt of the increase in bank fees—fees on bounced checks, fees on ATM use, fees for receiving somebody else's bounced check, service fees, this fee, that fee, fees for calling the computer, fees for talking to the human teller, and so forth. In addition, banks use or impose significant difficulties on new customers such as holding their checks for inordinate periods of time, and that is another reason people go to check cashers even though check cashers charge high fees as well. We think the low-cost basic banking requirement is extremely modest but will, again, help the balance of the bill. If industry wants to take advantage of this bill, they should not take advantage of the average American.

    Second, on protecting privacy, how much money do you have in the bank? What kinds of bank accounts do you have? What kinds of securities investments do you have? I would like that information, because I want to call you and offer you other products. Right now, banks are providing that information to their affiliates and much more information to their affiliates. Under a very, very weak opt-out provision that Acting Comptroller Williams criticized very strongly last year in our view all confidential financial information should ideally be subjected to an opt-in if it to be shared among affiliates, and consumers should have full, clear disclosure in something like the Schumer Box that was established by this committee ten years ago for the advertising of credit card solicitations, rather than the misleading and deceptive way that banks are currently providing people with the disclosure about their affiliate-sharing.
 Page 328       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    The third issue on preemption. Preemption rulings of the Comptroller have had a chilling effect on the States' attempts to protect their consumers better. In your State of Iowa, Mr. Chairman, even though no law in the Federal Government regulates ATM fees and even though the Electronic Funds Transfer Act is explicitly non-preemptive and even though in the Riegle-Neal Act Congress told the OCC to back off on its egregious and overly aggressive preemption determinations, the OCC has filed an amicus brief and supported Bank One's attempt to overturn Iowa's ATM surcharge ban. They filed a motion in Federal court in Connecticut in support of Fleet Banks attempt to overturn their administrative ban, and their actions have had a chilling effect on consideration of lifeline banking and other consumer protection laws around the country, and I would encourage you to rethink the preemption provision to make it clear that the States have the right to protect their consumers better except in the circumstances described in this bill.

    My testimony goes into greater detail on these and other issues before the committee. I want to thank you for the opportunity to testify today.

    Chairman LEACH. Thank you very much, Mr. Mierzwinski.

    Mr. Nader.


    Mr. NADER. Thank you, Mr. Chairman. Needless to say, we can use the old Reagan phrase, ''here we go again.'' It has been going on year after year. A charitable reading of H.R. 10, Mr. Chairman, would be that it is complicated incitement to consumer riot. There is almost nothing here for consumers, and I want to submit, with your permission, my entire testimony and then highlight a few points.
 Page 329       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We have had this discussion before on the need to recognize that consumers when they are held defenseless in a complex piece of legislation that they should be given a chance to protect themselves in the private sector. It is overwhelmingly documentable that the Federal banking system and Federal bank legislation is a massive guarantor, subsidizer, bail-outer of the banking system. We already have seen the S&L bail-out stretch out over some twenty years and with interest and principal amount to about $0.5 trillion because of the crooks and speculators and, not all, but a good many of the S&Ls.

    Now, we need to focus on a very modest provision which Congressman Schumer about ten years ago introduced, in which I had a conversation with you once over the telephone, and that is to require these banks to insert at no cost to themselves a postage paid envelope that opens up with a message that invites bank customers to ban together, State by State, Iowa, Nebraska, New York, Pennsylvania, into non-profit charters, financial consumers associations with full-time staff. It does not cost the taxpayer anything. It does not cost the banks anything. The insurance will be paid for by the money raised under the solicitation, and there is no extra postage, and it will be voluntary for consumers to join or not join.

    Our estimate is that after two years there will be at least 5 million consumers—at least 5 million consumers urbanized in State after State to provide a prudent balance to the increasing concentration of conglomerate banks displaying overwaning arrogance and indifference and proceeding with a systematic policy to stratify consumers leading to increasing indifference in proportion to the lack of profitability by each consumer account.

    And in my testimony, I cite the King Kong of this process, First Union Bank, which needs to be picketed all over the country. It now charges its customers 50 cents per deposit slip; $2 for every time you call a human being after twice a month, and other outrages, but, perhaps, the most outrageous one is stratifying consumers according to their means, and this is called, by First Union, an ''efficiency move.'' That is, according to the Wall Street Journal, it monitors each customer account; color codes the account in the bank's computer system. When a customer calls, the computer designates the profitability by showing a small block of color next to the customer's name—green for highly profitable, yellow for not so profitable, and red for customers who don't do all that much to the bank's bottom line. As might be expected, the bank personnel leap to attention in handling calls from the richer customers, but, as the Wall Street Journal noted, the bank employees ''rarely budge'' for a call from a less profitable customer, one where a red block pops up beside the name.
 Page 330       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    In my testimony, I show that this kind of insert that would produce these voluntary financial consumer associates, so consumers can develop a community intelligence; they can have consumer advocates accountable to them, funded by them that take on the banks when they abuse their anti-redlining obligations; when they overcharge, as Mr. Mierzwinski pointed out, with the bank charge profit centers; when they engage in other activity that affects the safety and soundness of the system, and when they can be fairly confident that the regulators scattered all over the United States are not going to have an idea, much less the will, to apply law and order to these global financial conglomerates.

    In Illinois where this insert was legislated by law around 1980 for the utility industry and utility customers, 200,000 residential utility customers—telephone, gas, and electric services—had banded together, and this group or this full-time staff has saved at least over $3 billion for consumers as well as including a $1.3 billion refund. Just very briefly—it is really amazing here—legislation for the ages—and we are reduced to soundbites.

    Very briefly, the one-stop shopping center invites the scrutiny of this committee. This is a tailor-made setup for coercion, for invasion of privacy, and for anti-competitive cross-marketing schemes. We have an economist who has studied this and would be very happy to consult with your staff.

    Second, as far as the safety and soundness and taxpayer rights, we have the usual problem of instead of strengthening and rationalizing the disjointed and overlapping financial regulatory system, the legislation makes the system worse by scattering regulation not only among six Federal agencies, but among agencies in the 50 States and the District of Columbia. Your committee and the Congress has been advised by prominent regulators, banking officials, financial analysts, and your own colleagues, as well as the General Accounting Office, who have pointed out the inefficiencies, conflicting interpretations of regulations, and the lack of accountability created by the current system. I have more detail in my testimony.
 Page 331       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Why the special treatment for insurance companies? In many of these holding companies, they are going to be the dominant factor as is true in the recent Travelers Group-Citicorp merger. Should they fall on bad times or fail, these insurance companies have the potential to drag down the entire holding company, including banks guaranteed by taxpayer-backed insurance funds. The Federal safety net, not Federal regulation, will be extended directly and indirectly to these insurance affiliates. Federal safety net means corporate welfare which I understand will be the subject of a forthcoming hearing by House Budget Committee Chair John Kasich either next month or the following month.

    I noticed that in Section 186, Mr. Chairman, there was little bit of foresight in the bill, because it requires the FDIC to conduct a study of how these mergers will affect the safety and soundness of the taxpayer-supported deposit insurance systems, and, elsewhere, the GAO is instructed to determine the impact of H.R. 10 on community banks and consumers, but only after legislation is enacted. What is this about the barn door metaphor?

    The dangers of the Federal Reserve as lead regulator almost qualifies for the Latin phrase, ''res ipsa locular.'' This is a massively indentured big bank agency. It isn't even financially accountable to the Congress. Time and time again, it has showed the distinct capacity of unwillingness to enforce the consumer protection laws under its aegis. It also faces frequent conflicts between its primary role as a money policy czar and its role as a bank regulator. Hard-nosed regulatory decisions that protect the safety and soundness of banks and the tax-supported deposit insurance funds don't always coincide with the central bank's concept of what promotes its whims on monetary and economic policy at any given moment. Indeed, these conflicts between monetary policy and bank regulatory policy are the reasons that many nations separate the two functions. They include Great Britain, Austria, Belgium, Canada, Denmark, Finland, Germany, Japan, Mexico, Norway, Sweden, and Switzerland.
 Page 332       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    An extended role for the Federal Reserve cannot be good news for the consumer and community groups, and I quote Dr. Kenneth Thomas of the Wharton School who has published detailed studies of Federal regulatory agencies who describes the Federal Reserve in this manner: ''The problem is that the Fed almost always takes a pro-banking rather than a pro-consumer view on major issues. Perhaps, this shouldn't be surprising considering the large number of banks, bank lawyers, and lobbyists who were former Fed employees or, conversely, the large number of Fed Board members, like Alan Greenspan, who are from Wall Street or financial districts instead of Main Street or low and moderate income neighborhoods.'' By the way, Mr. Chairman, I can assure you that Dr. Kenneth Thomas of the Wharton School does not read Karl Marx on his lunch break.

    As far as commerce and banking, this is one area I congratulate you on for your long but victorious move on the floor of the House last year for winning the battle against mixing banking and commerce. I take it you don't believe that General Electric should buy Citigroup or that Microsoft should buy Chase Manhattan. But the issue will be back before this committee, and the battle will have to be joined again, and we know that Senate Banking Chairman Phil Gramm is planning to introduce a version of H.R. 10 which includes a significant basket of banking and commerce.

    The great concern about mixing banking and commerce, obviously, is the potential for banks to make credit decisions on the basis of incestuous corporate relationships rather than on creditworthiness, and in my testimony, I do point out some concern about the grandfathering clauses, especially those extending a day or longer, have a habit of becoming permanent, and they also provide lobbying fodder for competitors who will be knocking on the doors of Congress demanding equal treatment and a level playing field.
 Page 333       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Let me just add a couple more words, and then I will be finished, Mr. Chairman. I think in a very fundamental and sober sense the Congress is out of touch with the people here. They are not only out of touch with the millions of people who can't afford bank accounts, they are out of touch with people who haven't been given the information to generalize from their personal experiences of being overcharged and subjected to indifference, not to mention the macro-allocation of financial resources that comes from excessive concentrations of too much power and too few global conglomerate hands.

    And I suggest there are two broader frameworks of reference that are needed. You need to have some town meetings back in your districts—Buffalo would be a good one for Congressman LaFalce—and we would help get some people out, real solid people who voted for you year after year, and who work hard and play by the rules and trudge down to their banks and get charged for bank deposit slips and everything but attrition on the rug or breathing.

    And, second, I would hope that the frame of reference for the promises inherent among the boosters of this bill will revert back to the promises made before airline deregulation, before telecommunications deregulation, before the Justice Department's pass on the HMO conglomerate mergers, and before other deregulation bills, because what has happened is there has occurred in the airline industry an even tighter oligopoly. It has gone from a broader oligopoly in the 1970's that was regulated to a tighter, fewer airline oligopoly that is unregulated, and without Southwest Airlines, the deregulation would have been truly a disaster. In telecommunications, nothing was a fire sale, a ghost signal from NASA conglomerate mergers and acquisitions.

 Page 334       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    And if all these other deregulations didn't empower consumers to ban together more easily so they could defend themselves and negotiate for themselves, watchdog the Government regulators, why should this be any different, Mr. Chairman, especially since the process of global conglomeratization is already well underway. Thank you very much.

    Chairman LEACH. Thank you for those modest words.


    Mr. Taylor.


    Mr. TAYLOR. Mr. Chairman, and thank you, Mr. Nader.

    Chairman LEACH. If I could hold you for a second.

    Mr. TAYLOR. Yes, sir.

    Chairman LEACH. We do have a vote on, so what I would like to do is adjourn pending the vote. Hopefully, we will back about 10 after or so. So, the hearing is in recess pending the vote.

 Page 335       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. The hearing will reconvene. We were just about to hear from our distinguished and wonderful friend, John Taylor.

    Mr. TAYLOR. Thank you, Chairman Leach.

    Chairman LEACH. John, you are going to have a long way to go to match Ralph's assessment.

    Mr. TAYLOR. Well, I was commenting about—I am glad there was a break actually. But, it is good to be here, Mr. Chairman, and thank you, Representative LaFalce, and other distinguished Members of the committee for providing me the opportunity to testify today.

    As the Chairman said, my name is John Taylor, and I am the President and CEO of the National Community Reinvestment Coalition, NCRC; that is the Nation's CRA trade association comprised of some 680 community organizations.

    Respectfully, sir, I believe this committee's efforts to reform the banking laws should begin and end with the query of what best serves the average working-class and/or middle-class American. Changes to the banking laws must pass through a prism that ensures that all hard working Americans benefit, and that their access to credit and capital is enhanced, not reduced.

    To alter banking laws simply because the laws are over 40 or 50 or 60 years old is to ignore past congressional wisdom. Congress should alter the banking laws, not because Wall Street or the big banks or securities firms or anyone else like that demands so, but because it believes that such changes will ensure the viability of the industry and increase consumer access to bank services and products.
 Page 336       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And this is where H.R. 10, as proposed, has several structural flaws and must be reconsidered. With H.R. 10, you are attempting to fix a banking system that is not broken. Our banking system is the envy of the world. You look at Canada and England and South Africa and Germany and so many other countries, you see five institutions in one country, or ten or fifteen or thirty-five institutions. In America, we have 9,000 financial institutions. This unique banking competition provides Americans with the most accessible and affordable banking services and products in the world.

    I have heard some bank reform proponents say that because we have so many banks we can't compete globally, but this is contrary to the fact. The United States banking industry has just experienced the five most profitable years in its history, and our ability to compete globally has never been stronger. H.R. 10 does little to promote the bank system's viability and strength, but rather will jeopardize it.

    Our banks are big enough and have been able to out-compete foreign banks, because our regulatory structure has limited undue risk-taking. Banks in countries such as Japan with less regulation have gone belly up, Mr. Chairman. We urge you to incrementally loosen restrictions on cross-industry ownership and regularly evaluate the results. That has been our Nation's banking policy for the last 60 years, and I think it has worked well.

    Your own comments, Chairman Leach, in the fall on the hedge funds provide us with a sober caution. We should not allow for aggressive bank entry into new activities until a regulatory apparatus has been developed that can effectively monitor and prevent excessive risk-taking. NCRC does not believe that the Federal bank regulatory agencies can foresee what will happen if we eliminate all restrictions on cross-industry ownership. Please go slow on changing the structure of the most profitable banking system in the world. The savings and loan bailout and the accompanying cost to taxpayers should remind us to move cautiously.
 Page 337       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Congress has watched somewhat idly as the bank regulatory agencies have used loopholes that have made a mockery of past congressional decisions which established firewalls that prohibited non-banking interests to enter the banking arena. Rather than being outraged that the congressional law and intent was being circumvented by these agencies and financial institutions, several Members of this esteemed body have been heard to suggest we should change the banking laws, because the industry has already de facto changed them for us.

    Is this the message we want to send to our electorate? Laws can be changed by simply ignoring them long enough or finding ways around them? Let us remember that these particular banking laws were designed to protect the safety and soundness of the financial industry and consumers' deposits.

    Now, some of you might be thinking I have a romantic notion of the financial industry; that consolidations and mergers are inevitable. Sadly, you might be right, but these structural changes should occur in a regulatory environment that protects communities and consumers. There is troubling evidence that mergers result in job losses, fewer loans, higher fees. Literally, hundreds of thousands of jobs have been lost in the banking industry alone in the last ten years due to mergers. As detailed in our written testimony, the Federal Reserve's own studies conclude that large banks, especially those who are involved in mergers, decreased their small business lending. The Federal Reserve survey of fees has reported year after year that large banks charge higher fees, not smaller ones as has been claimed by other folks. And, today, you heard Chairman Greenspan, himself, express some of his own concerns about what occurs as a result of these mergers.

 Page 338       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    H.R. 10 financial modernization legislation should form a financial industry that promotes the democratization of credit and capital especially in the era of mega-mergers. Democratization of credit and capital means that credit and capital ought to be made available not only safely and soundly—always safely and soundly, but in a color-, gender-, and class-blind manner as well, and I would argue that the right to pursue happiness for one's self and one's family is a fundamental American right, and central to the pursuit of happiness is one's ability to build their own individual and family wealth and, therein, to be treated fairly by financial institutions.

    It is not only the Federal Deposit Insurance that connects lenders to CRA and other fair lending laws, it is a more overarching constitutional reason. It is in our national interest and heritage that every American willing to abide by the laws, work hard, and aspire to a decent quality of life, ought to be able to accomplish that goal unimpeded by artificial or discriminatory practices. We do not guarantee that each of us will be successful in achieving that goal, but we do guarantee that people should be treated fairly and equitably in the pursuit of that goal. In this process, we recognize that access to credit capital is a basic American civil right. Republicans and Democrats, to a man and a woman, ought to embrace the concept that in this country every citizen can rely on our Government leaders to ensure that our financial system and institutions will always treat them in a fair and equitable fashion.

    Mr. Chairman, as you know, all people in this country are not treated in an equitable and fair fashion, and there is not equal access to credit, and H.R. 10 fails to expand and ensure that fair and equitable treatment by all lending institutions moves closer to reality. The reality is that lending to working-class and minority borrowers and communities is still not free from discrimination. For example, a recent study published by the National Bureau of Economic Research documents discriminations against African-American small business owners. H.R. 10, unwittingly, I hope, contains provisions that only do not address this disparate treatment, but rather misses several opportunities to correct such un-American activities.
 Page 339       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. Chairman, my written testimony supplies you with greater detail on where we see the weaknesses in H.R. 10, but I would like to end by very quickly highlighting four areas where NCRC's 680 member organizations have identified some of the most glaring shortcomings of the bill. It is in these areas that we believe H.R. 10's most glaring failures—contain most of the glaring failures to protect and expands all Americans' access to credit and capital.

    First, CRA obligations must be expanded to all affiliates and subsidiaries of banks. This includes insurance companies, securities firms, mortgage companies, credit unions, and other non-depository institutions. You heard from the Chairman Greenspan this morning the impact that CRA has had. I believe he used words like ''profound'' and ''astonishing'' in terms of its impact on getting credit and capital into low-income and minority hands. The problem is that all the institutions I just named, including the tax-free, depository-insured credit union industry have no obligations under CRA, and the record shows that they loan to a higher income as a group of people and to disparately fewer and fewer minorities than financial institutions, banks and thrifts that are covered by CRA. H.R. 10 ought to attempt to fix that and see to it that the new institutions that are created—and we commend you, Mr. Chairman, for suggesting that CRA ought to be applied to WFIs—but there are other institutions there that we think also need to have CRA applied to it.

    Second, critical to our whole effort on behalf of the public to try to make sure that lenders address credit needs has been the availability of data. The Homeowners Disclosure Act data drives this movement. Because the public and yourselves, as elected officials, have been able to really look and see what lenders have done and not done in certain areas to certain groups of people, the argument and discussion about whether lending is occurring in a fair and equitable fashion has moved from a sort of a morphous-grey, anecdotal discussion to one that really looks at hard data, and that has served all of us well. The problem is that data is not available for insurance companies. There is a real veil of secrecy of what is happening in the insurance industry as it relates to people of color and working-class Americans, and, furthermore, that data is not available for small business purposes, and I was very encouraged today when Congresswoman Schakowsky asked Chairman Greenspan about the idea of whether or not it made sense to expand data collection to small businesses. We heard a different answer than was given in the past, which in the past was he wants a colorblind society and doesn't think we should collect that data. I think he has given it a lot of thought, and I think his response saying that we are going to work on that, and we are going to come to a resolution, and we are going to fix that, was a very encouraging sign. And I would encourage this committee to lead the way and help the public and consumers be able to get small business lending data, and to compliment lenders who are doing a good job in loaning to all incomes and all races and to really address those who aren't and to be able to impact that situation.
 Page 340       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Let me also say that H.R. 10 contains a provision designed to expand access to the Federal Home Loan Bank advances for community banks for agriculture and small business lending. This is a logical step since the Federal Home Loan Banks are the main source of liquidity for many smaller institutions that serve every aspect of their community credit needs, not just housing. However, for this provision to be as effective as possible, further change is necessary.

    I am informed by the Federal Housing Finance Board that, as written, the provision would discriminate between the borrowers' abilities of QTL and non-QTL Federal Home Loan Bank members by requiring a significantly higher up-front capital investment for non-QTL members wanting access to the advanced window. Since there are many more non-QTL members in the rural areas, this would effectively suppress the benefits to those institutions and communities that this provision targets. I speak on this issue as a long-time advocate of what we have been calling the Affordable Business Program, or ABP, that would attract seed capital from private sources for focused economic development in underserved areas. The successes of the Federal Home Loan Banks community investment programs provides proof of such a programs merits. I would like to work with you to fashion such a program that can assist local economic development without increasing financial burdens on the Federal Home Loan Bank system.

    Finally, Mr. Chairman, of major concern to us is the question about whether or not application requirements that include public comment periods and CRA review. H.R. 10 would exempt mergers between banks and non-depository institutions that involve less than $40 billion from application requirements. And I believe, Mr. LaFalce, in legislation that he has been proposing corrects this, and I hope that H.R. 10, if there ever is a final form, will not have this exemption.
 Page 341       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Again, Mr. Chairman, you have been very patient. In the interest of fairness, I hope that one day we community representatives can start out in the morning and that the consumer and public perspective—wouldn't it be nice someday if the industry leaders had to wait until the afternoon and after lunch and that the public and the press get to hear the consumer perspective on these issues? But you are a very fair man, and I really appreciate your leadership on this and the opportunity to testify. Thank you.

    Chairman LEACH. Well, thank you, John. I put you on today instead of the end of the week for that reason.

    Mr. TAYLOR. We are getting closer.


    Chairman LEACH. Well, you are coming before the Secretary of the Treasury.


    Mr. TAYLOR. That is something.

    Chairman LEACH. Ms. Goldberg.

 Page 342       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Ms. GOLDBERG. Good afternoon, Mr. Chairman, Members of the committee. My name is Debby Goldberg, and I am with the Center for Community Change. I appreciate the opportunity to present the Center's views on the Financial Services Act of 1999, or H.R. 10. I know it has been a long day, so I am going to endeavor to stay within my time. I will see if I can do that.

    Mr. Chairman, we are very glad that you are holding these hearings on H.R. 10. It is very important that there be the opportunity for a broad range of views to be heard on legislation that will have as profound an impact as this bill will on the way that financial business is conducted in this country.

    Some, many of whom you have heard from already, argue that H.R. 10 is badly needed to set the ground rules for the industry restructuring that is already underway. Assuming that this is true, we believe that Congress must act at the same time to modernize the laws that protect the consumers and communities most vulnerable to the disinvestment forces this bill threatens to unleash. So far, this hasn't happened.

    We believe that H.R. 10, as it stands now, is fundamentally flawed and profoundly anti-consumer and anti-community in its impact. My written testimony goes into more detail, but I would like to highlight a few areas of concern.

    In particular, we believe that the bill would diminish the effectiveness of the Community Investment Act, or CRA, a law that has long since proven its worth, apparently, even to Chairman Greenspan. It will do this in several ways. First, the financial conglomerates envisioned by H.R. 10 may shift activities into holding company affiliates where CRA doesn't apply. This would further erode the financial assets under the act's scope accelerating a trend that is already a significant problem. Today, insured depositories control only about a half of the share of assets that they did when CRA was passed. And this shift has important consequences for CRA and the resources available to support community lending needs.
 Page 343       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Second, we feel that H.R. 10 will further fuel this shift through its treatment of national banks' operating subsidiaries. To the extent that it prevents these banks from conducting new activities through ops-subs and instead requires them to be conducted through holding company affiliates, it may have the effect of shrinking the CRA pie.

    Although we have concerns about what we understand to be some of the provisions in the bill introduced yesterday by Mr. LaFalce, and, in particular, the mixing of banking and commerce which we oppose, that bill's treatment of ops-subs appears to be preferable from a CRA standpoint.

    Third, the new wholesale financial institution, or WFI, created by H.R. 10, also causes us concern. We are glad to see that the bill extends CRA coverage to these institutions, however, wholesale banks simply do not have the same value to low- and moderate-income communities as retail does. For CRA purposes, they are subject to a less stringent standard of performance, and to the extent that they drain deposits from retail institutions, they contribute to H.R. 10's overall dampening on the availability of ordinary banking services in underserved communities.

    Another concern we have is the bill's elimination of all meaningful prior approval and public input requirements for cross-industry mergers. We believe such requirements are vital to ensure that the desires of financial industry giants are adequately balanced with the need to keep credit flowing to consumers and communities who may otherwise be shut out of the financial mainstream.

 Page 344       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Last year, this committee considered and rejected a number of amendments that would have helped alleviate these concerns. These include provisions to consider the lending activities of non-banking affiliates in determining the CRA record of holding company banks; to bar a bank holding company from cross-industry affiliations unless all of its affiliates are meeting community credit and consumer needs, and to require the collection of race, national origin, and gender data for insurance policies written by insurance companies affiliated with that holding company. I hope that these or similar amendments will be offered again this year and that they receive more favorable consideration.

    Let me conclude by saying that this debate over financial restructuring provides a rare and historic opportunity for a broader discussion about the type of financial systems that American families and communities need and want. I urge you to make sure that the system you design will work for the benefit of us all.

    Thank you, Mr. Chairman, that concludes my testimony.

    Chairman LEACH. Well, thank you very much. I think it is very important for the committee to hear some critical perspectives.

    But let me just go over some things that might be somewhat positive. Let me start with CRA. At the moment, CRA covers about 25 percent of the financial landscape. That landscape is shrinking dramatically. It is the belief of many professionals in the field of finance that unless you have banking modernization you will have the sector of American finance covered by CRA continue to shrink dramatically. And so, a head-in-the-sand approach is an approach which says those institutions covered by CRA will continue to shrink and shrink dramatically.
 Page 345       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Second, for those of you—and I think all of you have indicated certain concerns with banking and commerce. H.R. 10 doesn't authorize it, and that is the difference between that and some of the alternatives, but if you do nothing—and I would like to really stress this point—what is happening right now is the biggest breach in commerce and banking imaginable through the unitary loophole, and I think that will just expand dramatically, and so doing nothing is an advancement for those who favor breaching commerce and banking.

    Third, there are some small aspects of this that aren't trivial, and we put some sunlight into what is called the Office of Thrift Supervision, which is the least-known Federal regulator, but it happens to have oversight over unitaries which happen to be the breach of commerce and banking. Today, unlike the banking regulator, the OCC, the OTS, doesn't even have to publish its rules and regulations in the sunlight. So, we have applied comparable rules to the OTS, and I would hope that the consumer groups would recognize that as a plus. It is a sunlight circumstance; it is also a comparability circumstance.

    Let me mention the Federal Home Loan Banking provisions. Today, the Government-sponsored enterprises do not—I really repeat this as strongly as I can—do not have CRA. What this Federal Home Loan Bank provision does is pump a greater competitive amount through the banking system and the thrift system which is covered by CRA. And, so it expands CRA through using Federal Home Loan Banks to be tapped by financial institutions covered by CRA. Otherwise, all rural, significant, farm lending in the very near future will be done outside the institutions of finance that are covered by CRA. I personally think the WFI principal is one that is a very close call, and for the life of me I am not wedded to it or violently against it. I believe that if we have it, it ought to be covered by CRA. I would have thought I would get from Ms. Goldberg an appreciation that in the House of Representatives, a newly created institution will be covered by CRA. Instead, I have gotten a critique on that very issue which catches me off-guard, but I will tell you, Ms. Goldberg, as far as I am concerned, WFIs are a very, very incidental financial institution and have some disadvantages, as well as advantages, in the landscape, and I am not the least bit wedded to them.
 Page 346       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Ms. GOLDBERG. Can I respond to that?

    Chairman LEACH. Sure.

    Ms. GOLDBERG. We do acknowledge that you have taken the step of including CRA coverage for WFIs, and we appreciate that, and I know that you worked on that last year without support from some of the other parties that are interested in the bill, but our point is simply that the impact that WFIs have overall in moving resources out of institutions to work at the neighborhood level to make credit and banking services available has, aside from the CRA coverage issue, a negative impact, and that——

    Chairman LEACH. Well, but they are designed to——

    Ms. GOLDBERG. ——If you are not wed to them, we would be happy to have them out of the bill.

    Chairman LEACH. Well, but most people assume that WFIs will be established by securities firms that don't have CRA coverage at all at the moment. This will be the first movement of CRA coverage to the American securities industry. Now, maybe it shouldn't have happened. This committee, by the way, last year, passed out CRA on credit unions, and that was rejected by the Senate. I don't give you any great optimism that the Senate will hold a different position in this Congress. But I will tell you the bill that Congressman LaFalce and Congressman Vento and I helped craft had CRA on credit unions when it left the House of Representatives.
 Page 347       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Anyway, I recognize some of the things you are saying, but I would only stress what the non-legislation alternative is that, all of you are noting, that there is a certain combination occurring in finance that has gone on in a very rapid rate. And part of the reason to want to move legislatively is to put appropriate regulatory restraints and safety net circumstances on the new world of finance. It is happening anyway, and if we fail to do that, the Congress will be a bit derelict, and so we are trying to come up with the right construct.

    And, now, here, obviously, there is a difference in judgment on several issues, and I think there is a little difference in the panel. For example, I think I catch that Ms. Griffin is doubtful of empowering dramatically the operating affiliate subsidiary; Ms. Goldberg would rather empower the operating subsidiary, is that correct?

    Ms. GOLDBERG. My preference would be that all affiliates be covered by CRA-type legislation. In the absence of that, then we see some advantages to the ops-subs approach.

    Chairman LEACH. All I can say is all the critiques that each of you, the critique of doing nothing is a pretty devastating one too, and that is one of the dilemmas that we all have.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. I want to thank the panel for their valuable contributions, and I do want to say that I think you are the most important panel that we have or will hear, because you have one mission and that is consumer protection and promotion, and that is what the primary motivation of all our legislation should be. Albeit, reasonable people can differ as to how we achieve that end.
 Page 348       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. Taylor, first of all, congratulations on your article in this morning's paper.

    Mr. TAYLOR. What article is that, sir?


    I am just kidding.

    Mr. LAFALCE. I am very gullible.

    Mr. TAYLOR. I bring you greetings from one of my board members, Lee Beaulac, who is from your district.

    Mr. LAFALCE. Rural development, I believe we have mentioned in the—the organization is; yes, terrific, terrific, organization.

    I think what you meant was that you weren't so much interested whether you appeared on a Wednesday, Thursday or Friday, but you would prefer sometime if they could have the consumer panel be the 10 o'clock, the first panel, as opposed to the afternoon third panel when we have more people in attendance, and I hope that that can be arranged the next time we have an opportunity to have a range of panels testify on issues such as this. I concur with you.

    You mentioned rural development opportunities, and as long as you have mentioned one organization in my district, Mr. Nader suggested my meeting with others, and, of course, Mary Griffin is from my district and, Mr. Mierzwinski, you are a former Member of Congress, right, so you understand——
 Page 349       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. MIERZWINSKI. That is the wrong Mierzwinski.


    We have the office in Buffalo——

    Mr. LAFALCE. I know, I remember. Can somebody provide me with a list of all of the West New York organizations that would be, in your judgment, interested in these issues, please. Please provide me with a list, and I will follow up. Good.

    Let me start with you, if I may. In your testimony, you talked about the dangers of the Federal Reserve as lead regulator, and you mentioned that we are trying to repeal Depression-era legislations. We ought to look at pre-Depression-era legislations too. One thing you mentioned just intrigued me, and I am going to ask you to expand upon it. You say ''The conflicts between monetary policy and bank regulatory policy is the reason that many nations separate the two functions. These include Great Britain, Austria, Belgium, Canada, Denmark, Finland, Germany, Japan, Mexico, Norway, Sweden, and Switzerland.'' Would you care to expand upon that, because I think that that is—and I know the concerns you have of Long Term Management. I want to follow your comments on this question, the separation of the monetary policy and bank regulatory policy functions with another question on Continental Illinois too, but, first, would you expand upon your prepared testimony in that respect?

    Mr. NADER. Well, the Continental Illinois example is very instructive in the sense that——
 Page 350       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. LAFALCE. I think Chairman Greenspan may have misconstrued it a little bit or misrepresented it a bit this morning. I don't know if you are aware of it, but——

    Mr. NADER. I didn't hear his testimony, but——

    Mr. LAFALCE. Well, he characterized it as a situation, that Continental Illinois exceeded its lending limits on credit to its main government bond subsidiary and dealer first options. I believe that the Comptroller had told Continental to halt lending the first options; had issued a cease-and-desist order to that effect and that it was the Fed who told the holding company, which controlled Continental National Bank, to lend further money to first options. So, the loan was from the holding company owner of the bank, not the bank itself. That is my recollection.

    Mr. NADER. Well, that is right. I mean, the primary regulatory agencies for Continental OCC cited a violation and ordered the bank to cease-and-desist in further loans to the subsidiary, but the Fed moved in, worried about monetary policy and the stock market—remember, that was the first big bank that was shaky—decided its purposes were best served by propping up the affiliate, so it let the holding company parent, over which it had regulatory jurisdiction, extend more credit to first options and effectively negated what the Comptroller had decided was the proper move to enforce safety and soundness regulations.

    Now, this raises two points: one, the need to separate monetary policy from regulatory policy of this kind—you alluded to it—as other countries do, and the second is to the mish-mash of overlapping regulatory agencies, and my reply to Chairman Leach that if we do nothing, the trends are in the direction of greater breaching of commerce and banking, and so forth. My reply is that we need a rational regulatory structure that doesn't deregulate inadvertently by letting State insurance departments handle the insurance conglomerates here given their track record of poor regulation, and there are all kinds of studies from your own institutions—GAO and, otherwise, experts who you have had saying that you cannot operate a so-called modernization statute with this kind of diffusion at the Federal and State level of regulatory authorities having conflicting interests.
 Page 351       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    So, it comes back to the answer, yes, we if do nothing, the trends of the big guys will continue, but what we should do is highlight the regulatory consolidation in strengthening part of the bill rather than the way it always appears to the public, that it is a modernization bill.

    Mr. LAFALCE. Let me ask you to go into the question of CRA. Chairman Leach has expressed concern about the diminishing coverage of CRA under existing law. It is my concern that if this bill is passed and we mandate affiliate structures that are not covered by CRA by law, that that will exacerbate, worsen greatly, the tendency, whereas, if we are going to permit these affiliations, but at least permit an operator subsidiary coverage mode of operating covered by CRA, that we could expand CRA's coverage. Would you care to comment on that issue?

    Mr. NADER. I might just say, it is not so much a matter of structure as it is of regulatory confidence.

    Mr. LAFALCE. OK.

    Mr. NADER. And that is not a point that is often made.

    Mr. LAFALCE. Let me go back to—Mr. Leach in his version of H.R. 10 has a WFI provision. To his credit, he would extend CRA—some would have a WFI and not have any CRA; some would just have CRA to those portions that carry deposit insurance—but I am wondering if the rationale that permits extension of CRA to an institution primarily as a political tradeoff, because no deposit insurance is in existence, couldn't apply just as readily to an affiliate of a bank holding company.
 Page 352       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    What do you think about that, Ms. Goldberg?

    Ms. GOLDBERG. I am not sure I followed the first part of your question about the rationale, say that part again.

    Mr. LAFALCE. Well, if there is a rationale that permits CRA coverage to a WFI where there is no deposit insurance involved, wouldn't that same rationale allow coverage to an affiliate of a bank holding company where there is no deposit insurance involved?

    Ms. GOLDBERG. I think there are other rationales for extending CRA-type obligations to a whole range of financial institutions that exist out there; deposit insurance is one small piece of the pie. And certainly from the perspective of as we open the floodgates here for major changes in the way financial business gets done in this country, an important rationale for expanding CRA is to make sure that low- and moderate-income people, low- and moderate-income communities, the average consumer, who is generally not I think who these companies are looking to get into their one-stop shop, still have access to basic financial services that we all need to live our lives.

    Mr. LAFALCE. I am not suggesting that we could ever achieve that politically within the present congressional context, especially because Senator Gramm has a disposition very different from that of Senator D'Amato, much less Congressman Leach and myself. But I do think that if we have a rationale for one institution, it could be applicable across the board.

 Page 353       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Mr. Taylor.

    Mr. TAYLOR. Yes, thank you, I think we do have a rationale. It has to do with the comments I made earlier. Access to credit and capital has to be viewed as a basic American civil right, because if you can't access—CRA nor anyone else says that means the banks have to unsafely, unsoundly give grants or do anything like that. It simply says it has to be available, because without it—I mean there are a lot of things you can get along with in this country. If you don't want to buy wood because you don't like the lumber company, whatever, you can build your house out of steel. There are a lot of things you can do—buy other products and whatever, but, without capital, you do not succeed in a capitalist society, and it is a fundamental right for all Americans.

    It seems to me, Mr. Chairman, in your infinite apparent fairness—Mr. LaFalce said everything you have said previously—that we should all be in agreement that, OK, we are tweaking the banking laws; we are really changing the air; creating some new structures; setting this and that. OK, how do we guarantee that the right of consumers to have access to credit and capital is enhanced by this bill? And Mr. Leach has raised several issues about it, and I think they are accurate concerns about the shrinking CRA industry, but the only other option isn't what has been proposed in H.R. 10, it is some of what is in H.R. 10 or H.R. 656, but is also addressing the fact that there are a lot of industries that do play a role in providing or not providing access to credit and capital, from the insurance industry and credit unions and mutual funds and others.

    They wouldn't be necessarily direct retail establishments, but by applying CRA to them, they could put investments into intermediary organizations, like the Enterprise Foundation and LISC, and others, as loans; it doesn't have to be grants, but investments that would spur economic development in rural and urban America.
 Page 354       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And all through the spectrum of all the changes you make, if we were in agreement that fair and equal access to credit is something we want to accomplish and we don't to limit that, but rather need to expand it, because of the reasons you have articulated, Mr. Chairman and Mr. LaFalce, because of that, we are going throughout the spectrum of this bill to create provisions—and I think part of the problem is—and you said it in this congressional environment—is the quality of the dialogue is instead of talking about the real impact of CRA is, we had the Chairman of the Federal Reserve sit here himself and use words like ''profound'' and ''astonishing impact'' and ''it is good law'' and ''discrimination exists.''

    Study after study has shown the impact of what CRA has meant and that it is not about bad lending; it is not about forcing the bank to open the vault and throw the money out in the streets. Time and time again, we hear this evidence, and what is the discussion? In this House and in the Senate, it is about whether there are bank extortionists. And I think it is incumbent upon the leadership in this House and in both parties to raise the quality of the dialogue to start talking about why CRA is about something more than just depository insurance, but rather is simply a fundamental American right that all hard-working Americans and, frankly, everyone of your relatives and ancestors benefited from, not from CRA, but from the ability of being able to access credit and capital in one form or another, and if they didn't, many of you wouldn't be here. And it just seems to me that if we can change the quality of the dialogue at least from this committee, from this day, and from this House, we begin to talk in terms of access to credit and capital as something that is just the right thing to do for all Americans, not Democrats or Republicans or poor or white or black, but simply for all Americans, and that we are going to design legislation that modernizes banking so that we ensure that this is expanded and enhanced, not reduced. And, frankly, with all due respect, Mr. Chairman, your legislation just doesn't do that.
 Page 355       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And on the ops-sub—I have got to get in very quickly on the ops-sub issue—let me just tell you, there is a big difference between whether we end up with the affiliate structure or the ops-sub structure. The Secretary of the Treasury, the Comptroller of the Currency have put in writing and made it very clear that for purposes of CRA, operating subsidies would be counted as part of the asset base of the institution and their ability to do lending in low-income and moderate neighborhoods. The Federal Reserve has made it very clear that they would not count it; two fundamental differences and the FRB alternative would really hurt low- and moderate-income consumers, those two very different perspectives.

    Furthermore, the Federal Reserve—you might not like this one—but the Federal Reserve was designed—and I think rightfully so—to be extremely insulated from public pressure, and, presumably, so that they would not have the sort of public pressure of the day to affect their monetary policy work. But what it also insulates them from is even from Congresspeople being able to impact them for CRA purposes. This is not the case——

    Chairman LEACH. You would rather have the Chairman of the Senate Banking Committee influence?


    Mr. TAYLOR. I would rather have someone be able to stand up and encourage—whether they are a Republican in the White House or Republican appointment in the Treasury by a Republican or a Democrat—I would rather be able to have a conversation and have some ability to be able to influence them to enforce the fair lending laws, because, frankly—and I think Chairman Greenspan is a heck of a guy, and he is charming, and he is hard not to like, and you saw some of the freshman Congresspeople drooling as they sat in front of him—but the reality is this—and he said good things about CRA; I don't begrudge that—but the reality is this is so far down on his radar screen of the important things that he thinks he needs to do, that it really has had a very negative impact.
 Page 356       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    I can tell you from the 680 organizations that I represent, the experience with the examiners from the Federal Reserve and the lack of the import they place on this is very different than what you get from the OCC. Gene Ludwig and now Jerry Hawke are people who, at least publicly and at least through their examinations, really talk about this stuff being something that is important to them. We still have a lot of criticism; we have a lot of problems, and I think we have a way to go, but there is substantive differences in terms of the two institutional approaches of the enforcement of this particular fair lending law.

    Mr. NADER. Let me just make a comment on your critical question of reciprocity. Now, obviously, the first enablement for a reciprocity argument on CRA is FDIC. By the way, you know the FDIC has less in its reserves now than any one of 10 banking failures could draw on, because they are not assessing the banks at a time of record profits; that is when you develop a rainy day fund. But the argument is that the rationale to extend to CRA-like responsibility is FDIC.

    Now, look at the reality. The safety net is expanding to any affiliates that can jeopardize the banking system, whether it is insurance or whether it is security firms. There is really unbridled discretion here under Federal law. In fact, I was trying to get some law reviews to write an article on the meta-law system that operates in this area, the really unbridled discretion, the meta-law—in other words, meta; the unbridled discretion that you saw operating in the Mexican bailout, as it is popularly called by Rubin, with the close association of Mr. Greenspan. But in this section, does anybody doubt that if Citigroup gets in trouble because of its insurance affiliate, that the Federal Government will not extend the safety net either by Executive discretion or by legislation?
 Page 357       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And, so the rationale that you are inquiring into is not just FDIC, it is a penumbra of realistic and unbridled discretion that the Federal Government will do whatever is necessary to save these conglomerates. And an example—and the not most egregious one is Long Term Capital Management. Have you ever seen a more misnamed group, by the way?


    Talk about a derivative operation calling itself long term. When I read that, I said, Chairman Leach should really chuckle over that name, since he brought to the public's attention the derivative investing-mania some years ago.

    But here is where the Federal Reserve, New York to be sure, mostly, but with Greenspan's knowledge, basically going to banks and saying, ''We can't require you to do this, but we think it is pretty important to anti up $1 billion.'' So, that is one of the reciprocities, the expanded safety net.

    The second one goes——

    Chairman LEACH. You are off by a quantum measure; it was $3.5 billion.

    Mr. NADER. Oh, I am sorry. I would like to be corrected in that way.

 Page 358       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Senator Sarbanes, in the hearing last year, when we were fumbling around developing this—trying to articulate this rationale, delivered a three-minute statement on how the very essence of the Federal Banking System, the Government, allows the banks to engage in their multiplier and leverage effects in the capital and financial market, and it is the most fundamental rationale, and that is forever; that doesn't bob up and down with amendments to CRA or FDIC limitations over non-bank affiliates, and I really commend—I was awed by that demonstration by him, even though I think he gives up too early on this bill.

    You should go back and see the rationale that he delivered on that, and I think between the safety net expanding without limits and Senator Sarbanes' description of the Federal Government's banking system, there will be no question that CRA-like obligations need to extend to all of these financial institutions.

    Ms. GOLDBERG. If I could add one more point in response to your question, Mr. LaFalce. In the absence of the kind of extension that you are talking about, we have what is a rather perverse situation where you can have a bank, an insured depository, covered by CRA, owned by a holding company, that may, in fact, have a decent record operating in particular communities and an affiliate of that same institution that is not covered by CRA that may be competing for business in the same communities offering loans that are at best high cost, and at worst predatory. But the affiliate can get away with it, because they have no obligations to serve low- and moderate-income people in the same way that CRA requires for its sister institution.

    And from the consumers' perspective, it can be very difficult to know which door you are walking into with holding company affiliates. People tend to think if there is a bank-like name on the door—you know, we have talked about this in another context—that you are dealing with the bank and they expect that they are getting what might be a reasonable deal when, in fact, they may be getting a raw deal.
 Page 359       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Chairman LEACH. If I could yield to Mr. Vento. Mr. Vento is recognized.

    Mr. VENTO. I think we lost a couple of Members here. One was Ms. Schakowsky. She has been advocating, obviously, this business loan data, and so I wanted to point that out to you, and I think it is an important issue. My colleagues and I all would like to be able to do more in this bill. Obviously, it is a question of what you can do. I think the real problem here is that many of the groups that are supportive of it, if you tip it over just a little bit too far, it ends up tipping over the entire boat. It is a concern I reach in terms of consumer issues.

    There are, obviously, some differences with the panel in terms of the commerce and banking. I think that we agree, most of us agree, are willing to go along, I think, with the ops-subs. Obviously, we have got a major impediment in terms of the Chairman, and we have got some problems on the commerce and banking issue, though, that there is disagreement on, that comes from a lot of different quarters. Principally, from the historic role of securitization and insurance annuities, most of them have some equity investment issues, and there may be some that flow to banks that—you know, we can look at examples of raising the specter of the S&L crisis or other matters and find that there are commerce banking issues, and sometimes a raise in terms of direct investment in them, that their fundamental problem was their loan portfolios.

    So, I think the issue here is that if you have—I mean, I don't know that any of you have any specific examples right now of banking and commerce in this country that have been a problem, because we didn't have that absolute prohibition until when the bank holding company laws were written in the mid-1950's, and so I think that if you have some concerns like that, or if you have some examples, I would like to know about them, because we have had—obviously, this bill goes into expanding banking and commerce in the sense of CEBAs and, obviously, retains that issue with regards to unitaries.
 Page 360       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And then you have heard—I don't know if you were here for the whole discussion with regards to State-chartered institutions already have commerce role in many respects, and, of course, our edge corporations in terms of U.S. banks operating a profit that have a commerce role. And no one, I don't think, wants to model themselves after the Japanese or German banking in financial institution systems, but we are talking about something that is pragmatic. I don't think any of us—frankly, there are a number of institutions that their companies actually own banks that have been grandfathered—about five or six of them—and they haven't had any problems. They don't think 3-M is going to run their loan program through the banks that they own in my area. 3-M is headquartered in Minnesota, and they own a bank, but they have not used it that way, because it simply isn't that efficient. You are better off putting out bonds and securitizing in that manner.

    In fact, of course, banks have gone that way—I think the issue here in terms of operating service—and, frankly, I look at the CRA issue as really an extension of trying to deal with a revisiting of the whole franchise purpose by which we extend banks. I mean, the money multiplier that Paul Sarbanes talked about and the role of banks in terms of grading credit within our communities is a vital—it is a Jeffersonian concept, and trying to keep these institutions current in terms of powers today is essential if we are going to meet the economic growth needs and the needs of these communities.

    I think the real strength of the CRA is, of course, that it has a creditworthy basis and workable, and I think if it led financial institutions, in a sense, back to where their roots are and doing the job that needs to be done in terms of extending credit—I mean, this is really part of the strength of our entire economy, and so we want to get this bill right, but one of the functions is to make certain that those financial institutions that are based on models of yesterday are able to do it.
 Page 361       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    What is happening today is a lot of money is flowing out into mutual funds, and that is really where the competition is going. I mean, it is flowing out of the institutions which could or should be diverting and operating creditworthy services, and so that is the concern, and if we put those back into those small banks—that is why the ops-sub, I think, becomes important in some of these other structures is because we want to be able to continue to serve the credit needs of our community.

    I mean, I have had official studies done in my district in Minnesota of lower, socioeconomic income neighborhoods and so forth, and they find that in terms of total dollar amount, that they are actually—the financial institutions in those areas are taking money out of those low-income areas—the Social Security savings, the other savings—and spending it in other places, because they haven't had the ability to, in fact, to reloan the money back into those areas, and that is what is really going on today is even in these low-income neighborhoods—and really when we ought to be investing and putting more money into this infrastructure in these communities, we are actually taking money out of them.

    But I think the banks are doing really a pretty good job with CRA today. I mean, I am pretty proud of the small banks in St. Paul and Minneapolis, as a matter of fact, for the job that they are trying to do in most instances, not in all instances.

    A question that hasn't been brought up—and I think we all probably agree on this, more or less—obviously, there is some with commerce banking, but if you have specific examples of that you want to send along where is the problem, I would like to know about it. I think it is pretty clear here we are going to have some commerce and banking mix, but it is a question of how affirmative this bill is, if we are going to do it on the basis of the language of the Chairman's financial nature and then apparently complimentary, but we are going to actually deal in percentage terms. So, I think it is going to happen. In this bill there is a reverse of 15 percent for 15 years, as has been pointed out in some of your testimony, where there is commerce and banking that is going to occur with insurance and with securities, and that is going to become a distinction without a difference down the road, because these are going to be—I mean, it is going to—I wish I could stop some of these mergers too, but under the existing antitrust and other laws that we have, we can't do it. I just had—you know, was one of the few voices complaining about Norwest, and there weren't too many. We had hearings on it, but that didn't do any good; they trotted out some of our good friends that are getting help from the community to tell the virtues of Norwest Bank.
 Page 362       PREV PAGE       TOP OF DOC    Segment 2 Of 3  


    Mr. TAYLOR. Well, that is part of what Senator Gramm is trying to get our representatives——

    Mr. VENTO. Well, no, these guys are coming out and testifying on the other side about being in favor of the mergers.

    Mr. TAYLOR. He pointed that out as well, but he is opposed to banks paying groups to come up and say wonderful things about them.

    Mr. VENTO. Well, he didn't have to pay them.

    Mr. TAYLOR. He is being balanced on that end.

    Mr. VENTO. These guys came on their own; they didn't need any pay; they didn't need much prompting. They were delighted to support Norwest Bank because of the good things that they had done in the community, and it was enough to—and, so I think they outnumbered, in fact, in terms of those that were raising questions.

    But this one question is, you lamented to the fact there is not a lifeline account in this bill, but I think that most of us talking about the lifeline account in the last go-round with regards to this two years ago, we are really talking about the ETA accounts required by the law, and so they have actually, in fact—Treasury, now, has come out with an account. I know that there is some concern about it, but I think that I was wondering your reaction to that and if we should try and track that in this particular—I mean, I understand what you want to do. It is really a flash point, incidentally, in the bill with regards to financial institutions. They were never convinced of the benign nature of the amendment as I was with regards to actually simply tracking the loss with regards to the mandatory deposit accounts.
 Page 363       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mary, do you want it or Ed?

    Mr. MIERZWINSKI. Well, Mr. Vento, first of all, I want to say that Mr. Taylor's distinguished commentary on the access of credit and capital and Mr. Nader's extensive remarks on the extension of the safety net, whether it is de facto; whether it is by Executive fiat, whatever the imperative is that causes the Government to back the safety net of these institutions whether or not they are insured or uninsured, this industry has tremendous benefits that flow to it from the Government, and all we are asking is that it does not leave average, working-class Americans behind.

    The ETA account that the Treasury has proposed is designed to establish kind of a second-class banking system for people to get transfer of benefits. We are asking that banks—federally insured, and so forth, and so forth—provide accounts that are reasonably priced and are affordable, not only by people collecting benefits, but by working Americans, and 48 million—to reiterate a point that both Ms. Griffin and I made and is from Treasury data—48 million Americans have less than $1,000, on average, on balance in their bank accounts. An additional 12 million don't even have bank accounts, and I just find it incomprehensible that the committee just doesn't stand up to the American Bankers Association and Mr. Brackley's association and say it is a condition of financial modernization that we bring along everybody and require you to provide low-cost, lifeline banking accounts, and that is really our point.

    Ms. GRIFFIN. I wanted to respond both to your point about low-cost accounts and because we do think that it is a broader issue than just the ETA accounts, although we understand that there is movement for the ETA accounts to remain more affordable.
 Page 364       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    But Mr. Leach has pointed out, which we appreciate, about the major compromise in trying to get something done when the market is going to do it anyway, and we agree that there should be something done. I guess from our perspective there are a number of issues of safety and soundness which are critical to consumers, and we completely agree with you on that, and we worked very hard on banking and commerce. We even agree with you about the affiliate approach, which is not what everybody agrees with.

    But I think the other half of that, which we feel as impassioned as you do about banking and commerce, is that the market—and we have seen this in telecom, and we are seeing it in other deregulated industries—is moving more and more to the top 20 percent. As that Wall Street Journal article mentioned, big banks are calling ''bad'' customers those with $1,000 and under in their accounts and, as Ed just pointed out, that is 48 million American households. So, 48 million American households are being red-lighted, and we think that at some point there is a role for Congress, when you are dealing with federally backed institutions, to step in and say it has to got to work for everybody.

    When you go home and you talk to people, they talk about fees, and they talk about their concerns about privacy. We have huge, gaping holes in the Fair Credit Reporting Act that are only going to get worse and worse with these mergers. I, right now, can get information on all of your bank accounts. I can get information on transactions. If you are lucky enough to get an inheritance from a nice aunt or something, I can find out about it. I can find out a lot of information; I am not legally prohibited from finding that out. People don't even know that. When they hear that, they get even more excited about their privacy.

 Page 365       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    What we are saying is these are some of the things that we don't see how the market can work unless these situations are taken care of and unless it is taken care of for everybody. We are not talking about banks leaving out 10 or 20 percent of the market; we are talking about 80 percent of the market being underserved right now by federally backed institutions. And when we look at ''compromise,'' we look at the overall bill, and what are banks giving up? Banks are giving up an unfair competitive advantage. I mean, it is sort of like a 16-year-old who has to give up his Corvette. I mean, I wouldn't call that a compromise, and when you look at insurance and securities, what is happening with them? They are going to be able to get into the banking business.

    Now, we are going to be giving up some consumer protection. We are going to be giving up State laws and the ability of State regulators to protect us. So, I guess from our perspective, we see safety and soundness, and we see day-to-day consumer concerns. And we are just trying to get it across that there has to be more of a balance in this bill, and it just isn't there yet, but we appreciate the effort, and we are here to keep working on it.

    Mr. VENTO. Well, I don't want to continue this; I think it has been a great discussion. I just think that one place we might look to is where there have been some—there is a reluctant agreement. I mean, the banks still—there are some that don't want, of course, what the end result was with the direct deposit accounts that Treasury has agreed—the Government has agreed to pay for the establishment of some of these accounts, and then the Federal Government saves money by direct deposit, so they are willing to compensate or try to facilitate this process.

    There are a significant number of individuals that receive these, and I am not talking about electronic benefits transfer, this is actually electronic transfer accounts with direct deposits. I know that the electronic benefit issue is an important issue, because we were, again, in our State, we were one of the jurisdictions that began that. Now, it has, of course, spread to several others. It has had its problems, I guess, but it, by and large, is a better thing in terms of the administration of these programs. But there are many that will not, in fact, engage, but I think the 48 million that have accounts, that these really represent a business opportunity for financial institutions in my judgment.
 Page 366       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Obviously, there are many that want to shift the focus of what their business is, but, nevertheless, they have a franchise in these communities and these areas to serve. And one of the bigger complaints is, of course, converting everyone into an ATM and not being able to get direct fact-to-face type of services.

    There are a lot of major problems along those lines, but I have read your testimony, and I don't want to continue, but if you have examples on banking and commerce problems, I would like to know about them; specific examples that relate to that, because since there is a lot of anxiety about it, I can understand. I have anxiety too, but I need to have facts. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Vento.

    Mr. LaFalce.

    Mr. LAFALCE. Thank you, Mr. Chairman.

    Mr. Mierzwinski, you argue very strongly on page 8 against the mutual redomestication provisions that are in H.R. 10. I agree with you, but could you explain in more detail why this change in Federal law would be so unfair to mutual insurance company policyholders and where, in particular, the policyholders might be most especially affected? Of course, if anybody else wants to comment on that, you are free to also.

    Mr. MIERZWINSKI. I will just let Mary answer this one.
 Page 367       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. LAFALCE. Sure, sure.

    Ms. GRIFFIN. Currently, without a mutual holding company law, current mutuals would go through a traditional mutualization. In a traditional mutualization, the assets of the company, insurance companies, or the surplus of the company is valued and formulas are determined to determine how much the policyholders will get based on how long they have been with the company and the type of policies that they hold with the company, and then they are given either stock—outright or greater insurance benefits, and/or just straight cash.

    Under mutual holding company structures, the first step is that the policyholder's interest in the policy is split from their ownership interest in the company. So, the mutual is converted to a mutual holding company that holds under it an insurance company. The policy goes with—as a policyholder, it goes with the insurance company. The ownership interest goes with the mutual holding company. The mutual holding company is basically just on paper. It doesn't really have any assets, and there is nothing to gain from that. And then what they have been doing is giving the people the right, when they convert to stock, to purchase stock from the company, and that is one key difference. In the traditional mutualization, you get the stock. In other words, you either get a $1,000 worth of stock or you get a call that says, ''Do you have $1,000 to buy stock?'' Now, clearly, one is better than the other. For a lot of people who have been doing insurance for many years, they call it thievery. I mean, it is just out and out——

    Mr. LAFALCE. It is prohibited in certain States, isn't it?

 Page 368       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Ms. GRIFFIN. Where mutual holding companies are not allowed, they have to go through traditional mutualization, such as New York.

    Mr. LAFALCE. Yes.

    Ms. GRIFFIN. And I know a lot of the New York——

    Mr. LAFALCE. And a lot of other States, too, right?

    Ms. GRIFFIN. Right, a lot of other States. It is the biggest issue in New York, because that is where the biggest mutuals are right now. But, as I am sure you know, a number of those mutuals who were fighting for this last year, are now going for the traditional mutualization process, and they argued that the mutual holding company process was too cumbersome, it was too expensive, but——

    Mr. LAFALCE. And the changes proposed to the law would permit them to do it in a different State, is that right?

    Ms. GRIFFIN. The changes would permit them to go to another State that has a mutual holding company law and take advantage of that law, so they would not—they could avoid doing it under traditional mutualization, and it is particularly important in New York I believe, as New York probably has some of the strictest redomestication or movement laws on insurance.

    Mr. LAFALCE. I really consider that to be one of the biggest anti-consumer provisions being proposed. I would like to see that limited.
 Page 369       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Let me go to a separate issue now.

    Mr. NADER. By the way, the New York State Assembly report is very key on that point as well.

    Mr. LAFALCE. Very good on that point, yes.

    Mr. NADER. That is available for the distinguished media in absentia.


    Mr. LAFALCE. Can we talk about something else that I think is pretty important too? And that is our consumer protection that I have tried to provide in my bill and that is suitability standards. Ms. Griffin, can you tell me why you think that suitability standards are important and the type of abuses that you have seen without suitability standards?

    Ms. GRIFFIN. Well, suitability standards simply mean that the product that is being recommended by the particular person at the bank would meet the particular customer's financial needs based on the information that the customer provides. In other words, if the customer won't provide information, you can't hold someone to a standard without having that information.

    It is important, because what has happened is people come in—there was one case that I believe the banking commissioner, maybe, or securities commissioner of Ohio brought up today. We had heard of a similar one, of a 92-year-old woman in a nursing home that had a bank branch downstairs. I have spoken with the woman—she went in with $10,000 or $15,000; they sold her a product—and she said, ''I need a certain amount of income to live every month. All I want is safe and secure. I want the income to live.'' Now, apparently, the seller at the bank was betting on time or something, but he put her into a stock bond and, basically, her money was just being taken out to pay her that monthly amount. They were just paying her the principal. So, she had a broker; she did not want to use the bank as a broker. Two or three months later, she was talking to her broker about something, and her broker was looking at her accounts, and her broker said, ''What are you doing? What is this bank account here?'' The broker said, ''Did you realize that you bought this stock?'' Actually, it was not a stock fund, but stocks, and the woman said, ''I had no idea,'' and they immediately canceled that transaction, but in the meantime she lost $4,000 to $6,000 worth of principal. That is clearly an unsuitable sale for a 92-year-old woman, and we would like to make sure that the suitability requirements are put on any seller of those products who sell them from the bank.
 Page 370       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And I would like to point out something that a lot of times the insurance industry argues, and the banks argue, ''Why should we do suitability for insurance?'' In the NARAB proposal, one of the requirements in the National Association of Registered Agents and Brokers is that all insurance agents comply with suitability requirements. So, we don't see why it is so difficult to put suitability requirements in the bank sales when the agents themselves are apparently ready to go along with it, which is a newer concept of insurance.

    Mr. LAFALCE. I agree with you.

    Mr. Taylor, a number of people agree that there should be adequate compliance with CRA as a precondition to affiliation, but I also think that you need some continuation, some modeling, so that if you fall below certain standards, you could have some enforcement mechanism, and I think that is extremely important. We can sustain the CRA commitment. What are your thoughts about the necessity for some enforcement mechanism to ensure continued CRA compliance?

    Mr. TAYLOR. Well, there is no question that——

    Mr. LAFALCE. And what would you see as a possible or probable result if you didn't have an enforcement mechanism?

    Mr. TAYLOR. Well, we didn't have it for the longest time. We had the law, but there was no enforcement, and I think when many of the staff and the regulatory agencies are being open and honest and will admit that for a great period of the time, this particular law, this CRA, was a ''stepchild law'' and something that just wasn't very high on their radar screen. And, frankly, thanks to this body, I think it has moved up in its importance, and we have gotten more enforcement, although I think what Mr. Nader referred to as the incestuous relationship between the regulatory agency and the industry is very problematic.
 Page 371       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    We really do need to have an enforcement agency that sees it as their job and sees consumers as their clients and not just banks as their clients. That having been said, I think the impact of enforcement and not just from the regulatory agencies, but from the Justice Department, and we give thanks to the Bush Administration for bringing the very first fair lending case in this country against Decatur Federal & Savings and then Ms. Reno bringing eleven cases since she has been in office. That has helped lenders not make bad loans or unsafe loans sound loans, but rather pay attention to this law that they for many years and, frankly—I don't want to sound like an apologist for the bank, but if the regulators didn't care about it for the longest time, why should they? That is changing, and enforcement is key.

    The problem, now, is from the lending industry we hear that there is no value in an outstanding rating, and why should they struggle to get an outstanding rating and do a great job—we hear that repeatedly—and from community groups we hear that enforcement is so easy now—it is a wink and a nod—and, indeed, we have gone from just five years ago 11 percent of the industry getting failed CRA ratings to less than 2 percent, and that has an impact.

    We are looking at the numbers now of lending in low-income communities to minorities. In the last year, year-and-a-half, are not heading in the right direction. We saw a great period of time where there was a lot more lending, and I think everybody was pleased with that. Again, we haven't seen any default or any bad loan problems come out of that, but rather still safe and sound lending, but we are beginning to see with more lax enforcement we are heading in the wrong direction. And, obviously, that is why H.R. 10 and whatever you do with modernization, if it doesn't reinforce and expand the importance of these kind of laws and regulations as it relates to access to credit and capital, it is going to exacerbate the problem and only hurt people's ability to get access to credit and capital.
 Page 372       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. NADER. And enforcement without a facility for people to band together back home, become informed of their own champions. Without that facility, enforcement is going to be very dubious, and the law will serve to legitimize private corporate power instead of to advance public and consumer justice. So, I always come back to that facility in the bank statement or any other conveyance so people at their option can ban together and fund their own financial consumer association.

    The trouble with this bill also is that the corporate structure is so fluid, is so transnational, is so complex, has so many different ways of transferring assets and moving money around instantly, that it takes more than a genius of the legislatures to be able to shape legislations anticipated without the organized citizenry behind it. It is not like the public utility holding company in 1930 which was a genius of a drafting success. What they had to deal with with these pyramid utility holding companies is child's play, both jurisdictionally in a global sense and in terms of the tailored complexity and maneuvers that these structures can attain, and you desperately need the organized people back in your home State to make any law enforceable, but, more important, to make a law good in the first place, so it is worthy of being enforced.

    Mr. TAYLOR. And If I might add, Mr. LaFalce, and I think that process is undermined by something that I would like to bring to the attention of this committee, and that is the process of the public hearings that the Federal Reserve has. Representative Vento might have thought I was kidding, but I wasn't kidding when I was saying that I think banks pay in both directions. Banks fund community groups, and what happened in some of the hearings—I won't go into names, but I can document and give you the information if you are interested—but banks take away airline tickets, hotel tickets, the whole shebang, to get groups from different areas to come to the hearings and testify on their behalf, and you get these groups that would come up and literally say, ''This bank gave us $750 to a Just Say No campaign at our high school, and it is a wonderful bank.'' And what the Federal Reserve does in the process of these hearings—I know, because we have experienced this, many of our members—is that they ask you, ''Are you testifying 'for' or 'against'?'' And you tell them, and then when the ''against'' list gets full, they take no more hints, and they wait until the ''for'' list gets full, if it does get full.
 Page 373       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    And so what they do is artificially imbalance public comment on this, and what they need to do is they really need to look at people who are looking at community investment activities and the fair lending activities of the bank and not just somebody who is there and they are happy because they have got a $10,000 grant to build a shelter or whatever. Not that that is a bad thing, and we ought to encourage that, but this really is about fair and equal access to credit for individuals and communities and how the bank doesn't hold neighborhoods through whole populations, not whether a group gets a grant.

    Mr. LAFALCE. This reminds me of an article that was written in the Wall Street Journal in the late 1970's or early 1980's by Herb Stein. And he said that the Wall Street Journal takes the six economists that favor the gold standard and the 15,000 that oppose the gold standard, and they have six articles for the gold standard and six articles against the gold standard, and the world thinks that there is an even-flip division of authority amongst the economists.

    Mr. TAYLOR. And all the editorial——

    Mr. LAFALCE. I always remembered about that piece by Mr. Herb Stein. They called it a crazy idea.

    Ms. GOLDBERG. Mr. LaFalce, if I could make, I think, another point about the issue you are raising on this, the CRA standard for cross-industry affiliation and the lack of any sanction for banks that should fall out of that standard post-affiliation. It is not that hard, particularly, for the banks that are likely to engage in these cross-industry mergers to get and maintain a satisfactory CRA rating. So, it is not like we are putting a goal post that is all that high out there for them to get over. If they can't keep at least that level of performance—as John pointed out, 97 to 98 percent of the banks are at satisfactory and above—if they can't maintain at least that level of performance, then there ought to be some sanction available to the Federal regulators if they fall below, and that should include all of the tools that are available to them to enforce the other standards that are set out——
 Page 374       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    Mr. LAFALCE. At least the sword of that enforcement.

    Ms. GOLDBERG. It ought to be there for the cases where it is needed.

    Chairman LEACH. Let me bring this to an end. I want to, first, just so there is an understanding, note that this bill is designed to reconfigure regulation for the modern world under the assumption that there are a lot of cracks today that exist. But, so there is no misunderstanding, we have to keep functional regulation. We try to keep a role for State regulation, and we try to keep a role for national regulation. We try to keep a role for State SIAs through the State SECs. Same for insurance, but only at the State level, but that is current law. On, for example, the issue of suitability, since the bill requires both the dealers that come under the SEC and it says suitability is covered, and it is intended to be.

    Quite appropriately, you have alternative visions, and you have alternative bills, and some are designed to attract some, and some are designed to attract other interests, but I will tell you the bill the Chairman of this committee is bringing is designed not to allow a breach in commerce and banking. Alternatives in other bodies and in this committee have major breaches. I would hope the consumer groups of America would recognize that.

    The bill that the Chairman of this committee is bringing closes down the commerce and banking unitary thrift loophole in terms of no more unitary thrifts; alternatives do not. I would think the consumer groups of America would find that not a small measure.

 Page 375       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    The bill that the Chairman of this committee is bringing calls for the regulator of the part of the American financial landscape that is now out of sunshine to have sunshine. I would hope that consumer groups would have some appreciation for that. There is also an effort to ensure that that part of the American financial system that is engaged with the CRA obligations stays healthy.

    All of you recognize that when you have restraints with some and not on others, there is a tendency for those without restraints to go. This bill is trying to preserve a place in the sun for America's financial community that has a CRA obligation at a time period where there is great diceyness about the future, and the alternatives of doing nothing are very, very harsh.

    Finally, some of you have argued that the Federal Reserve Board should not be the regulator; but it should be put in terms of a politically-sensitive regulator. Well, I will tell you there is political sensitivity that goes very much the other direction, and if you look at the rulings of the office that you want to empower, as stipulated in this panel, they are not consumer-friendly rulings in many instances, and I think that there can be great protection in a professional regulatory apparatus.

    I would just stress, we are in an international environment of enormous stress. At any moment in time, we could see a collapse of the financial system based on some of the things that Mr. Nader has talked about in terms of derivatives; based upon concerns that everybody is looking at. I happen to think that the Fed made a mistake in the Long Term Capital Management issue, but I also believe that the Fed is professionally better able to handle some of these problems than other institutions of Government and have the wherewithal to do something about a problem on a timely basis, and that it would be wrong to ignore the Federal Reserve Board in this regard.
 Page 376       PREV PAGE       TOP OF DOC    Segment 2 Of 3  

    In any regard, a number of very complicated issues exist in terms of framework and complicated subtleties. I think some of the concerns you have raised today have a degree of fairness that this committee is going to have to take into account, but I would also say that they haven't been totally ignored, and, as we go forward, I would just simply like to stress that the goal of legislation has nothing to do with enhancing the financial capacity of financial companies, but it has everything to do with serving the consumer of financial services. And that consumer, in a world in which bifurcations are getting larger and larger, as John Taylor stresses, has to be every American in the sense that you can't leave pockets of America totally outside the landscape or you end up with a society that gets to be bifurcated in very unfortunate ways.

    Now, I will tell you we can't do everything for you, and I don't think you can expect that, but we will listen and will do the best we can within the constraints of what can realistically be accomplished. But I am hopeful that a bill that comes out will strengthen the American economy, and in strengthening the American economy that has massive consumer effects. The Secretary of the United States Department of the Treasury has suggested that the consumer will be saved $15 billion. That is a pretty big number in a pro-consumer circumstance that can't totally be ignored. What all of you are concerned about, and I would say Congress must be concerned about, is that there is not so much concentration that some of those savings do not go to the consumer, and that is something we are all going to have to be wary of. But things are happening in finance without this bill, the concentration direction, and what this bill is designed to do is basically manage it in the most credible way for the safety of the American economy. Thank you all.

    Mr. LAFALCE. Could I have 15 seconds, Mr. Chairman?

 Page 377       PREV PAGE       TOP OF DOC    Segment 2 Of 3  
    Chairman LEACH. Yes.

    Mr. LAFALCE. I just wanted to say that I share your statements with respect to basic banking provisions. That is not in my bill; that is not in the Chairman's bill, but I guarantee you that it will be offered during the course of the markup as it was last year and that I think it would be extremely important to provide a model, not of consumer protection, but consumer promotion in the bill to deal with these 48 million who are more than $1,000 below or who have nothing, and I thank you.

    Chairman LEACH. Thank you. The hearing is adjourned.

    [Whereupon, at 4:45 p.m., the hearing was adjourned.]

Next Hearing Segment(3)