Whatever the outcome of this year's bank legislative drama, the leading bank trade groups, including the state associations, deserve very high marks. They've defended the industry's interests ably in an extremely difficult climate.
It could have been a good year for banking legislation, but for a series of blunders by Congress and the administration. Glass-Steagall reform, for example, should have sailed through.
Prior to the Glass-Steagall Act, which stripped banks of underwriting authority, banks provided much of the capital needed to finance the nation's development. They underwrote securities directly without major problems. Glass-Steagall should never have been enacted, and there's overwhelming support for reform.
Competitors argue that deposit insurance gives banks a cost advantage, so banks should be required to place underwriting activities in separate companies. If the House Banking Committee had pursued a bill authorizing underwriting activities in either bank subsidiaries or holding company affiliates, the bill would have had broad support. Instead, the committee bought the silly notion that only holding company affiliates are suitable vehicles for underwriting.
This provoked strong opposition from the Treasury and dissipated banker support. They argue that bank subsidiaries serve every purpose that holding company affiliates serve. They contend banks must have the freedom to choose whatever organizational structure and regulatory venue is most efficient and effective. They're clearly right on both counts.
The bill could have survived this mistake. Bankers seemed willing to let the bill get out of the House with the hope of correcting it in the Senate.
Not content to leave bad enough alone, the House leadership next caved in to the insurance agents. The chairman of the House Banking Committee had urged banks to back his Glass-Steagall reform bill and promised it would be "neutral" on bank insurance powers. He couldn't deliver.
The leadership insisted that a moratorium on insurance activities by national banks be added to a regulatory relief bill and that it be merged with the Glass-Steagall bill. The moratorium was unprincipled and anticonsumer and really riled the banks.
What little hope remained for the bill was dashed when the administration balked at major regulatory relief. The President sent word he would veto any bill containing provisions reducing significantly the burden of the Community Reinvestment Act.
In the middle of all this controversy, the administration made a big push to tax banks to bail out the Savings Association Insurance Fund. Bankers, to the politicians' shock and dismay, were reluctant to pony up $12 billion to solve a competitor's problems.
The banks could have been forgiven if they had at this point cut off all contact with any person employed by the federal government. Instead, they offered to negotiate terms under which they would send billions to the SAIF.
The banks wanted only a few things, all of which were in the public interest. They wanted a merger of the SAIF and the Bank Insurance Fund, a single charter and holding company law for banks and thrifts, common supervision of banks and thrifts, and passage of a decent Glass-Steagall and regulatory relief package. They also wanted the credit unions, whose deposits are federally insured, to contribute something to the SAIF.
The administration responded that the SAIF was in dire straits, and Congress needed to pass immediately narrow legislation to fix the problem. The larger, structural issues raised by the banks would be handled promptly in follow-up legislation.
Guess what? Nearly a year has passed since the administration cried wolf on the SAIF. No quick fix has been enacted, and the SAIF continues to grow. Moreover, the administration has not even begun to forge a consensus on the structural issues.
It appears no banking legislation will be passed this year. That's disappointing in that the stage had been set for some real progress. Sometimes, though, success in Washington should be measured by the bad things that didn't happen.
Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and CEO of Secura Group, Washington.