Bush's Reform Would Unleash Familiar Monster
In its proposal for banking reform, the administration is seeking the removal of all the checks and balances that have characterized the United States financial system for 60 years.
Advocacy of removing the barriers between banking and commerce is no less than a call for the formation of conglomerates like the Japanese zaibatsu-/keiretsu in the United States.
From another perspective, the Treasury Department proposals are tantamount to asking the Michael Milken types to take over the U.s. financial system.
It is not very surprising, therefore, that the big banks, the foreign banks, the big brokerage firms, and the large corporations have either been quiet or supportive of the measure. Nor is it surprising that the smaller entities in the financial community are expressing concern and outrage.
Elimination of Barriers
The Treasury Department is suggesting, and Congress seems to be endorsing, that industrial corporations be allowed to buy banks. It is further suggesting that the distinctions between corporate finance activities in the brokerage and banking industries be eliminated.
Also, the Treasury wants the financial boundaries established by the states removed so that large nationwide banking organizations can be created.
The Treasury is only willing to allow companies with a lot of capital to have expanded powers under the new system. Moreover, the Treasury wants to reduce the available amount of FDIC insurance, which would result in the concentration of deposit funds in the hands of the largest institutions.
Shift in Accounting
Also, it appears that the Treasury wants to establish new accounting rules that would make these new organizations freer to pursue their operations. In a move reminiscent of the passage of the Garn-St Germain Act, which greatly expanded banking powers, the Treasury apparently wants to adjust the rules to the system's desires.
This new mechanism would be regulated, in essence, by one superregulator - the United States Treasury. Under the new system, Federal Reserve Board powers would be severely diminished and other competing regulatory agencies would be "blown away."
The government therefore wants big banking and industrial organizations to be created similar to the German banks or Japanese keiretsu. This is not a unique desire relative to what has happened in American history. This was the system operative in this country many times in the past. Each time, however, it resulted in massive excesses and a sharp reaction from the American public.
An Age-Old Problem
It was the system that John Adams, our second President, complained about when he wrote, "Our whole banking system I ever abhorred, I continue to abhor, and shall die abhorring." It was the concentration of power that President Andrew Jackson and the locofocos of the time raged against in the battle to eliminate the Second Bank of the United States.
It was this type of alignment that gave rise to the Robber Barons that Matthew Josephson wrote about. It was the system that Senator Carter Glass and the New Dealers of the 1930s believed created the Depression; the one they tried so hard to eliminate by instituting careful checks and balances against excessive power.
It is the system that Michael Milken almost re-established in the 1980s by linking the international money markets to a junk bond mechanism that then took over American corporations. It is a system that concentrates massive economic and financial power in a small number of hands.
If this legislation were in place today, the following could happen. American Telephone, Citibank and Goldman Sachs could merge. With their massive capital base, they could then obtain special powers from the Treasury Department that other more weakly capitalized institutions could not have. They could purchase a nationwide banking system to obtain funds from the American consumer.
The new company AmerCiti Gold would be able to self-deal. It could make loans to its wholly owned subsidiaries at "appropriate" rates and could fund the operations of captive suppliers and preferred customers in larger fashion than Sears and General Electric already do today. Moreover, it would not be controllable by any local authorities, just the Treasury Department that set the whole system up.
Perhaps upon close reading of the Treasury Department's Banking proposal, one might find some restraints that would mitigate this staggering concentration of power. However, if it is not there, Congress and the American people might want to consider if they really want to create such a monolith and at the same time throw out 200 years of legislation to stop it from happening.
Mr. Bove is a banking consultant with the Bove Group in Chatham, N.J.