Bush's Banking Reform Bill: From Nirvana to Nightmare?

WASHINGTON - The Bush administration, which promised to lead banks into the promised land of insurance and securities, instead appears to be stumbling into the clutches of the industry's enemies.

After tortuously working its way through Congress for months, the omnibus banking bill suddenly is shaping up as many bankers' worst nightmare.

Under a compromise reached last week by two House committee chairmen, key elements of President Bush's plan would be gutted. Many bankers now think that the measure would do them more harm than good.

While the administration still hopes its proposal will prevail, these bankers believe that derailing a broad-based bill is the only way to limit damage. They think the industry should now press for narrow legislation that would do little more than recapitalize the Bank Insurance Fund.

Showdown on House Floor

The climax of the long-running saga is nearing. The measure is slated to go to the House floor this week, with Congress set to adjourn by early December.

Late Friday afternoon, some sources said the administration might support efforts to strip out the section dealing with insurance and securities powers.

That was the component most altered by the House compromise, which would roll back existing bank insurance powers, thicken the so-called firewalls between banks and their securities affiliates, and retain curbs on bank ownership by nonfinancial companies.

Under this scenario, the administration would try to push through the rest of the measure, including authorization for interstate branching.

But that would likely precipitate a messy floor fight. The Independent Insurance Agents, one of the capital's most powerful grass-roots lobbying organizations, would insist on a curb on bank insurance powers if interstate branching is part of the bill.

And if Treasury loses, many bank lobbyists doubt they can count on Mr. Bush to veto the bill.

"I've never seen a banking bill vetoed in the 20 years I've been a lobbyist," said James Butera, a lobbyist who represents thrifts and other financial institutions.

Many observers, including the administration's strongest supporters, believe it is far too late to try to repair the bill. The only choice now, they said, is between a narrow bill and one that is bad for the banking industry.

The committee leaders' compromise, which is going to the House floor with the Democratic leadership's blessing, would repeal the Glass-Steagall Act, thereby allowing affiliations between banks and securities operations.

But it would impose a number of restrictions on bank securities underwriting activities.

Furthermore, bank insurance powers would be scaled back, and the separation between banking and commerce would remain intact.

Other sections of the bill, not affected by the compromise, would make $70 billion available to the Bank Insurance Fund, authorize interstate branching, and overhaul the deposit insurance system. Among other things, the bill would limit the too-big-to-fail doctrine and require regulators to move early to close troubled banks.

Gonzalez-Dingell Compromise

The compromise package was hammered out by House Banking Committee Chairman Henry B. Gonzalez, D-Tex., and Energy and Commerce Committee Chairman John D. Dingell, D-Mich. With the support of the two powerful chairmen, many bankers believe, the altered bill would be hard to stop.

What's more, amendments are expected to be proposed that would add teeth to the mortgage-disclosure laws and greatly expand the Community Reinvestment Act. Bankers also think Reps. Gonzalez and Chalmers Wylie, R-Ohio, will make another effort to limit insurance coverage of multiple deposit accounts.

"Anyone who says not to worry about that is smoking something," said Kenneth Guenther, executive vice president of the Independent Bankers Association of America.

Douglas B. Kidd, the lobbyist for Bankers Trust New York Corp., said the banking industry can limit the damage only if it unites now behind a narrow bill. But he expressed concern that banks are carrying different messages to Congress.

Industry Dissension Bemoaned

"Why on earth are we still giving them a garbled message?" he asked after a meeting Thursday between bank lobbyists and House Speaker Thomas s. Foley, D-Wash.

At the meeting, Bankers Trust, Citicorp, J.P. Morgan & Co., and other big banks argued for a narrow bill. The American Bankers Association urged that Title IV, the section of the bill dealing with insurance and securities powers, be deleted.

Others, most notably NCNB Corp. of Charlotte, N.C., were said to have argued for the comprehensive approach. NCNB, which is assembling an impressive nationwide network of banks, has made interstate branching authority a top priority.

Mr. Kidd acknowledged a split in the industry between those now advocating a narrow bill and "those who would pay for interstate branching with a rollback of insurance and whatever Glass-Steagall measure emerges."

Lobbyists' Assessments

Sam Baptista, president of the Financial Services Council, which represents big banks and diversified financial services companies, said he believes the Dingell-Gonzalez package can be stopped.

"It's going to be tough, but I think we have a decent shot," he said.

The IBAA, which represents community banks, would still prefer a narrow bill "if a realistic opportunity presents itself," said Mr. Guenther. But his group is proceeding on the assumption, he added, that a narrow bill will not be an option.

"There's no sense spending lobbying time on it at this point," he said.

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