Comment: Partisanship Imperils Financial Reform

It took Congress more than a month after the House passed HR 10 to organize itself -- if that's the word -- for the conference committee deliberations on financial modernization.

An initial meeting took place Aug. 3 at which the 62 conferees dealt with the tough questions: where will all the members sit, whose paper will be the basis for discussion, and similar matters.

It may take a while before this conference holds a roll call vote on when to return from a lunch break, as was required in a memorable banking conference a few years ago. Still, hopes for a speedy conclusion are slim, given the unwieldy number of conferees and the complexity of the process.

Process is perhaps the first of the financial modernization bill's problems. S 900 -- as the legislation is now numbered -- also faces policy and political problems. Though bills confronting similarly stiff odds have surmounted them in the past, optimism about this one must be tempered by careful consideration of the hurdles it must clear on its way into the legal code.

When the 62 conferees finally agree on the shape of their table, they will sit down to hammer out an agreement on legislation that weighs in at 400 or so pages. Though the House and Senate bills are about the same length, they differ dramatically on issues big and small.

The hard bargaining on relatively minor provisions will generally be left to staff members, though individual legislators will certainly work on issues of particular personal, political, or constituent interest. The biggest differences between the two bills will, however, have to be handled by the conference itself.

First, who is in charge?

Financial modernization legislation did not fail in the past because Congresses were too idle to get around to passing it. The issues involved are genuinely intractable, raising tough problems of structure and control over the reformed industry.

If earlier Congresses could have settled the dispute between the Treasury Department and the Federal Reserve over whether new activities should be in operating subsidiaries or holding company affiliates, they would have. The current Congress has come closest to an accord because the Treasury has compromised its position more than ever before. The Fed and the Treasury are still far apart, however, on what structure financial holding companies should take. The conference lineup seems sure to favor the Fed, setting the stage either for capitulation by the Treasury or a veto by President Clinton.

Last year Sen. Phil Gramm, now Senate Banking's chairman, threw himself bodily before a financial modernization bill that then seemed to have good prospects for passage. At the time he unequivocally stated his strong opposition to language requiring financial holding company bank affiliates to have "satisfactory" or better Community Reinvestment Act ratings or face divestiture.

That same language is in this year's House bill, and Sen. Gramm remains as opposed to it as ever. He has also added several other CRA-related provisos to S 900, including a small-bank exception, that are anathema to CRA fans.

Though some think the Texas senator is using CRA as a bargaining chip, his level of rhetoric remains as high as ever. If he plans to compromise much, he isn't showing substantial signs of it. If he doesn't compromise much, Democrats will cry foul and, again, a presidential veto looms large.

The op-sub and CRA controversies are familiar, but the squabble over financial and medical privacy that embroils S 900 is new.

To a longtime analyst following this issue, this is a bit refreshing. For the bill itself, though, the addition of yet another complex and partisan controversy adds to the air of gloom.

There is, though, a potential solution to the privacy problem. If the Treasury and Democrats are more or less satisfied with S 900 on op-sub and CRA grounds, they will probably accept minimal financial privacy language and, perhaps, even a defeat on the more controversial medical language. If they aren't, though, privacy will figure prominently in the presidential rhetoric accompanying a veto.

It is often hard to tell in Washington whether policy or political problems are the most daunting obstacles for a bill to surmount. Usually, though, the policy problems can be taken care of if there is a political will to do so. In the case of S 900, the impetus for concessions is not obvious.

Sen. Gramm, among others, has suggested that the President will be hard-pressed to veto S 900 because Mrs. Clinton is seeking a New York Senate seat. His reasoning is that New York financial interests really need S 900 and would withhold support of Mrs. Clinton in case of a veto.

One tends to doubt this, especially given the President's further interest in giving Vice President Gore some issues to run on. Mrs. Clinton's problem in New York is not money -- which is where the big financial companies come in -- but upstate voters. A veto would have little impact in Utica.

Sen. Gramm may himself be part of the political equation President Clinton weighs when considering whether to veto S 900. If this bill is signed into law, it would give a Republican Congress and the new chairman of the Senate Banking Committee a major victory.

Why the President would want to do this on a bill that does not have to pass is hard to guess, even factoring in the heavy pressure from some big financial companies.

Even more elusive is why the President would want to make Phil Gramm look good. The Texan is an unrelenting critic of the administration on a wide range of issues, and he cannot be counted on to return any favors the White House may give.

In short, three Ps -- procedure, policy, and politics -- are creating T -- that's a capital T, and it stands for "trouble" -- when it comes to financial modernization. The bill could, of course, find its way from the President's desk into law, especially since this Congress has another year to go. Still a lot of hard work and tough lobbying will be needed to overcome the big problems this complex bill now faces.

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