WASHINGTON - Four times a year, a dozen bankers come to town to debate monetary policy and financial services regulation with Federal Reserve Board officials, led by Chairman Alan Greenspan.

What happens during these Federal Advisory Council meetings is a secret. They are closed to the public, and even the topics being discussed are kept under wraps. Most of the chosen bankers regard specific questions about the meetings with dread, as if they've signed a blood oath to keep their mouths shut.

"At your very first meeting, you're told with great pride that there's never been a leak in the council's history, and that's why we can attract such great speakers and have such frank discussions," one former member said.

But the secrecy leads some outsiders to wonder if the council isn't the industry's version of the Trilateral Commission, that shadowy collection of powerful people that conspiracy theorists contend wants to take over the world. "Here is this small, special group that in a secret way has enormous access," one critic said. "Who else has guaranteed access by statute to the full [Fed] board? No other group in the world."

IN THE BEGINNING

The Federal Advisory Council was mandated by the Federal Reserve Act of 1913, which created the Fed. It was one of three concessions designed to win the banking industry's support.

America's most famous financier, J.P. Morgan, was a member of the first Federal Advisory Council. Since then many of the biggest names in banking have taken a turn on the prestigious panel. During the 1990s the list included Walter Shipley of Chase Manhattan Corp., John McCoy of Bank One Corp., Ed Crutchfield of First Union Corp., Bob Gillespie of KeyCorp, Richard Rosenberg of Bank of America Corp.

Each of the 12 Federal Reserve Banks appoints one banker to the FAC who typically serves three one-year terms. The terms are staggered, so the council always has some seasoned members, one of whom serves as president. The group meets here during the first week of February, May, September, and November, typically at the Park Hyatt Hotel, though the bankers recently checked out the Four Seasons hotel in Georgetown.

About six weeks before each meeting, the Fed asks the bankers to gather reactions from their peers to six to eight multipart questions.

The meetings last a day and half, kicking off with a Thursday breakfast featuring with an important person in government or business, such as the attorney general or the head of Fannie Mae. The bankers spend the bulk of that day compiling their answers to the Fed's detailed questions. One banker is designated to speak for the group on each question. That evening Mr. Greenspan and his colleagues on the Fed board meet the FAC members at the hotel for dinner and discourse.

On Friday morning another luminary addresses the bankers. Then it's finally time to present the industry's opinions to the Fed board. Assembled in the Fed's boardroom, the bankers sit on one side of the massive table, and the governors on the other; a dozen or so of the Fed's most senior staff sit to the side.

According to sources who have attended these sessions, the debate is meaty. "They are very friendly and polite, but they are robust," said Charles T. Doyle, chairman of Texas First Bank in Texas City, and among the first community bankers appointed to the FAC in the mid-1990s.

In his 13-plus years as chairman, Mr. Greenspan has missed just three meetings.

DO BANKERS MATTER?

It's hard to tell how much impact the FAC has on the Fed's decision-making. For one thing, that's the sort of detail that anyone in the know is loathe to divulge. But also, the Fed gets input from diverse sources, and a variety of factors influence its moves, whether they be changes to interest rates or adjustments to bank capital requirements.

Still, it was just weeks after an FAC meeting that Mr. Greenspan delivered a headline-grabbing speech signaling a shift in his concerns from credit quality to availability. In the early December speech, he warned bankers against creating a credit crunch that could stall economic growth.

Fed officials and the bankers involved would not link the two events on the record, but sources made it clear that the Fed gets much of its intelligence on credit conditions from the bankers on the Federal Advisory Council.

And bankers, anonymously, claim they convinced the Fed to reconsider its stiff capital charge for merchant banking investments.

Fed Governor Edward M. Gramlich, the board's liaison to the council, said the bankers are influential. "They help us a lot with credit conditions and the state of the economy," he said in an interview. "They have helped us on every regulatory matter that we've had since I've been here."

Banker input was particularly helpful as the Fed implemented the Gramm-Leach-Bliley Act of 1999, including writing rules on publicizing Community Reinvestment Act agreements, he said.

Mr. Shipley, FAC president in 1997, was asked whether the council has an impact. "In some areas it does, and in others - the ones that tend to be the more parochial self-interests of the banking industry - it probably doesn't," he said. For instance, as financial reform was taking shape in Congress, Mr. Shipley said the council pressed the Fed to let new powers be housed in either a subsidiary of a holding company or a bank, but the Fed insisted on the holding company format.

Beyond the economy and bank rules, however, Mr. Shipley noted that the council also helps the Fed assess the banking business, from competitive threats to potential weak spots to the outlook for earnings.

Ronald L. Hankey, president and CEO of Adams County National Bank in Gettysburg, Pa., and an FAC member since 1999, agreed that the CEO perspective is important and currently missing from the Fed's board. "We are the practitioners as opposed to the policymakers," he said, "and currently, frankly, the Fed doesn't have a banker on the board."

One banker who has served on the FAC credited the group for getting Mr. Greenspan interested in the debate over Fannie Mae and Freddie Mac. Last year the central bank chairman lent support to Rep. Richard Baker's drive for tougher oversight of the giant government-sponsored entities. The bankers told the Fed that Fannie and Freddie were overstepping the bounds of their charters. "Within three to six months, the Fed was taking a more aggressive position," this banker said.

James E. Annable, director of economics at Bank One and a former Fed economist, is FAC secretary - a job Mr. Greenspan personally asked him to take a dozen years ago. Bankers rotate off the FAC every three years, but as secretary Mr. Annable is a constant presence, helping to negotiate the questions considered at the meetings and generally organizing the council.

Asked if the FAC has an impact on Fed policy, he only needed one word: Yes.

He paused and added: "Alan Greenspan would say yes as well."

WHO GETS WHAT

So who gets what out of the FAC?

The Fed gets first-hand evidence of what's going on in the economy and the banking system. It gets unvarnished responses to the policy questions with which it's wrestling.

"Greenspan has often said to me how really effective this council is," Mr. Annable said. "He relies on it to be really good advice, honest advice, straight advice. These bank CEOs are willing to say, 'No, you're wrong.'"

Eugene A. Ludwig tried to establish a similar sounding board during his five years as Comptroller of the Currency. "It would have improved the quality of what we did," he said. "Debate is very healthy in setting policy. The FAC that the Fed has is a very good thing. It is a deep shame that other federal financial agencies can't have one."

(Other agencies are not actually barred from setting up similar councils, but a 1972 law made it nearly impossible by requiring that meetings and a record of activities be made public. Only the Fed and the Central Intelligence Agency are exempt from the law.)

The Fed also secures support from the industry's leaders, who through serving on the FAC become even bigger fans of the central bank. "The Fed is like anyone else: It needs and wants political support, and the FAC is useful in that regard," said Oliver Ireland, a former Fed lawyer who recently joined the Morrison & Foerster law firm here.

As for the bankers, they get to present their opinions on matters that directly affect their institutions in an intimate, confidential setting. "It's an opportunity to do long-term education and exchange, which is easy to pooh-pooh, but in this town with so much going on, that kind of time is important," said Edward L. Yingling, lead lobbyist for the American Bankers Association.

"It's a wonderful, informal way to get concerns to the Fed without going through 4,000 staffers," is how one former FAC member put it. "For example, you wouldn't want to tell a million people you're upset with Fannie, but in this setting it's OK."

As bankers and the Fed governors debate issues, the Fed staff is listening. "If the CEO of Chase Manhattan says something that is at odds with your perception, you are going to check it out," one said.

To be sure, not everyone thinks FAC meetings are much more than social events.

"Ultimately, it's very prestigious, but does it really amount to anything? I'm skeptical," said Bert Ely, a prominent industry analyst in Alexandria, Va. "The Fed gets input from so many directions. Bottom line, if the FAC disappeared tomorrow, I'm not sure it would have one whit of an impact on the economy."

WARNER AS MYSTERY MAN

Mr. Greenspan was the FAC's breakfast guest at the most recent meeting, Feb. 1-2. It was the first meeting for several members, and Mr. Annable said Mr. Greenspan likes to impress on new members how much he values their contribution. "He fires everyone up," Mr. Annable said. "He's quite willing to do almost anything to make this an effective interaction."

The bankers select a president and vice president to head the council. In an unusual move, Douglas A. "Sandy" Warner is back for a second year as president, and his fourth year on the council. He caused quite a stir at the council's September meeting by jetting off during it. He told others at the time that he was meeting with a very important client.

In fact, the council was meeting at the same time Mr. Warner's company, J.P. Morgan & Co., was negotiating its merger with Chase Manhattan Corp. "It was a very productive meeting, but he was flying back and forth," Mr. Annable said. "He had to be deceptive. I was bearding for him.

"I explained to Greenspan why he couldn't be there, and Greenspan surely knew" the real story.

Mr. Annable said the incident shows how seriously bankers take their responsibility to the FAC. "He was down there doing council business right in the teeth" of the merger, he said.

Through a spokesman, Mr. Warner declined to comment.

The council's membership has changed dramatically in recent years. Once the sole province of CEOs at the largest banks, today the FAC is more diverse. A third of its members run community banks, including Camden R. Fine, who heads Midwest Independent Bank, an $82 million-asset bankers' bank in Jefferson City, Mo.

Mr. Fine attended his first FAC meeting this month, and said that while the bankers try to come to a consensus on the Fed's questions, sometimes, particularly on regulatory policy, they offer both a majority and a minority opinion.

A tiny institution like Mr. Fine's is bound to see things differently than the $715 billion-asset J.P. Morgan Chase & Co. "There's a lot of difference between Sandy's point of view and my point of view," he said.

In 1999, Katie S. Winchester, who runs the $500 million-asset First Citizens National Bank in Dyersburg, Tenn., became the first woman to serve on the FAC. The council's second woman represents another change. Linnet F. Deily, a vice chairman at Charles Schwab Corp., just joined and is the first executive of a nontraditional banking company to gain a spot on the FAC. (Schwab became a financial holding company under the Fed's supervision last year, when it bought U.S. Trust Corp.)

SUNSHINE OR HEAT?

Under pressure to shine a little light on these meetings, in 1989 the Fed started releasing "minutes" with a three-year lag. (The Federal Open Market Committee releases its minutes after just six weeks.) However, the minutes include nothing but a summary of the bankers' presentation. None of the give-and-take among Fed officials and the bankers is noted.

Asked why the FAC's undertakings need to be so secretive, Fed spokesman David W. Skidmore said the panel gives the Fed advice, and publicizing its work "could have a chilling effect on the quality and candor of those recommendations."

Two other advisory boards help the Fed with thrift and consumer issues. The Fed created the Thrift Institutions Advisory Council in 1980. Its 12 members meet behind closed doors three times a year, and like the FAC, minutes of meetings are released after three years. The Consumer Advisory Council, mandated by Congress in 1974, has 26 members, including bankers, consumer advocates, and community activists; its three meetings a year are open to the public.

Members for both these councils are appointed by the Fed board.

Mr. Gramlich explained why the Fed feels the meetings with industry executives need to be closed.

"We actually do have frank discussions about the economy," he said. "To even have our questions known, because it shows what we're worrying about, could have all sorts of market implications.

"It really would have a chilling effect - on our side."

It should also be noted that when FAC members discuss any proposed rules the Fed is actively considering, those comments are released relatively quickly. For example, at the February meeting, bankers discussed proposed changes to rules implementing the Home Mortgage Disclosure Act, including requiring lenders to disclose annual percentage rates on all mortgages and to begin reporting all home equity lines of credit. Their critique of the plan was typed up and made a part of the public file last week.

But critics are not satisfied with the secrecy-begets-candor assertion. "The Fed has used that same standard argument on everything," one said. "It's all part of maintaining the Fed mystique, the Fed power."

This critic noted that the Fed has not always been as revered as it has been during the Greenspan era. In the 1980s the central bank was repeatedly criticized for being too secretive, particularly in "Secrets of the Temple," Bill Greider's nearly 800-page expose on the Fed. "These issues will get hotter when 'God' is no longer there," this critic predicted.

Jake Lewis, who handles banking issues for consumer advocate Ralph Nader at the Center for the Study of Responsive Law, said the FAC goes against the nation's democratic principles.

"To have the banking corporations go behind closed doors and help establish policy without the public having access is the opposite of the democratic system that we're supposed to be operating under," he said. "Clearly these private entities have a self-interest in the policies they are trying to influence."


From Our Archive

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.