The chief executive officer of a large bank met with a Republican leader a few days after financial "modernization" legislation squeaked through the House in an irregular voting procedure. The Republican leader was asking for support for his political aspirations.
The banker, a Republican, responded bluntly. "After what the Republican leadership has done to the banks on the financial reform and credit union legislation," he said, "I can't imagine bankers supporting Republican candidates for some time to come."
While it's difficult to find any real winners after the financial reform debacle in the House, the Republicans appear to be among the biggest losers. You know the bill had to be very bad when the Republican leadership aligned itself with Rep. John Dingell, D-Mich., in order to get it passed.
Rep. Dingell represents the antithesis of both financial modernization and free-market principles. For years, in his former post as chairman of the House Commerce Committee, he blocked financial reform from even being considered.
The banking industry also suffered potentially serious damage from the debacle in the House. If the bill becomes law in its current form, banks will pay a big price.
Lifeline banking and other measures added to the bill, to appease Rep. Dingell and other opponents of financial reform, would add to the already excessive regulatory burden imposed on banks. Nonfinancial companies would continue entering the banking business through the thrift charter, but banks would be denied the opportunity to invest in nonfinancial businesses.
Worse yet, the national bank charter is eviscerated in the bill. Financial reform wouldn't be a serious topic in Washington if it weren't for the actions of the Comptroller of the Currency to free banks from the shackles of excessive regulation-actions upheld in four unanimous Supreme Court decisions.
The opponents of reform were finally forced to the table. Their objective was to gut the Comptroller's authority to modernize the national bank charter. They found an important ally-the Federal Reserve, which wants banks to be forced to operate through holding companies regulated by the Fed.
If the bill becomes law, banks (and nonbanks that affiliate with banks) will regret deeply the curtailment of their ability to go to either the Fed, the Comptroller, or a state regulator for permission to engage in some new activity. I wouldn't want to bet the future of my company on the vision and political courage of an all-powerful regulator.
Equally serious is the damage the recent battle has done to the banking industry's political unity. A handful of large banking companies decided to break ranks and support the House bill. Without their support the bill would have gone back to the drawing board.
Banks were divided for decades-primarily due to the interstate banking issue. They were finally able to bury the hatchet in the early 1990s. There's been more progress for banks in the past six years than in the previous 60 combined.
A united industry has seen the enactment of nationwide banking, defeated attempts by the independent agents to roll back bank insurance powers, obtained enactment of bankruptcy reform (a second reform bill is currently under way), fended off attempts to impose on banks 8 to 12 cents in additional deposit insurance premiums to resolve S&L problems, and seen the enactment of two regulatory relief bills (a third is pending). Moreover, the industry has won significant freedoms from state legislatures, regulatory agencies, and the courts.
Many industry leaders are deeply concerned about the recent fissure among banks. If not repaired quickly, it could foreshadow a serious erosion in banks' political strength.
The action on financial reform is now in the Senate. One can only hope it'll be a slow, deliberative process in which wiser heads prevail. That's unlikely to be the case if the bill moves forward during a year in which the chairman of the Senate Banking Committee is running in a hotly contested election.
Republicans have some serious fence mending to do with the banks. The large banks that supported the House bill have some serious fence mending to do with their fellow bankers. The proceedings in the Senate provide an opportunity for healing in both instances.
