Bankers have seldom been so worked up about political issues.
The House leadership was bent on pushing through a seriously flawed "financial modernization" bill. The leadership decided to couple the bill with legislation to let tax-free credit unions roam the financial landscape largely free of the "common bond" requirement.
The board of the American Bankers Association, divided equally among small, medium, and large banks, voted unanimously to oppose both bills. The Bankers Roundtable, America's Community Bankers, and the Independent Bankers Association had previously announced their opposition.
The House leaders managed a rare feat-they united the entire banking industry. Out of some 10,000 banks, the number supporting the financial modernization bill could be counted on the fingers of one hand.
It's difficult to fathom what the Republican leaders were thinking. Congressional elections are just around the corner. Bankers are very active in the political process and are overwhelmingly Republican.
It was virtually inconceivable that financial modernization legislation could pass the Senate this year. If it had somehow managed to do so in the form of the House bill, it would likely have been vetoed.
So the House leadership asked its members to vote against one of their strongest constituencies on a bill that was highly unlikely to become law. The Democrats were licking their chops.
The leadership found out what it should have already known. You can't cram through financial legislation that any major constituency opposes strongly. The bankers mounted a massive grassroots effort and in just a few days rounded up enough votes to defeat the financial modernization bill.
None of this had to happen. There were a lot of good things in the proposed bill, and bankers wanted to be able to support it.
The banking industry has been the principal proponent of financial modernization for three decades. It's suffered under the yoke of repressive laws and regulations for more than half a century. Banks' share of the financial services marketplace has fallen precipitously.
In recent years banks have won four unanimous victories in the Supreme Court, finally giving them a chance to stem the loss of customers. The insurance and securities firms, most of which fought reform every step of the way, changed tactics and began promoting "reforms" to further erode the value of a bank charter.
The congressional leadership appears to have misread the temperature of the banking industry. To be fair, the leadership was probably influenced in its judgments by a handful of large banks that decided to break ranks with the rest of the industry.
Now it's time to regroup and see if we can complete the financial modernization task.
The principal flaw in the leadership's bill was that it was constructed around an old, out-of-date paradigm-the bank holding company structure. The bank holding company was invented as a way to circumvent restrictions on branch banking. It's an inefficient, economically unsound model that's no longer needed.
There are two reasons some people are clinging to that model. Some want to preserve it to protect their regulatory turf. Others want to use the model to force banks into uneconomic restraints to hamper them in the marketplace.
I haven't seen a single persuasive reason why we should not adopt the "universal bank" model for financial modernization. All activities in which banking companies are permitted to engage should be allowed to be conducted in the bank itself or, in some cases, in a bank operating subsidiary. Companies wishing to operate in a bank holding company format should be allowed, but not required, to do so.
This simple change will help enormously in rounding up strong support from the banking industry for financial modernization legislation. It will also ensure a stronger, healthier, and more efficient financial system.
We'll have to wait and see what House leaders will do next month, when they take another stab at passing financial reform.
