WASHINGTON -- Rep. Henry B. Gonzalez, D-Tex., the chairman of the House Banking Committee, yesterday urged Congress to take action before the end of the year on his derivatives bill.
"I, for one, will insist that we act before this session is over on this legislation," Gonzalez said at a committee hearing on the bill, which he and Rep. Jim Leach, R-Iowa, the top Republican on the committee, jointly ~ proposed last month.
The bill -- H.R. 4503, The Derivatives Safety and Soundness Act of 1994 -- calls for bank regulators, the Federal Housing Financing Board, and the National Credit Union Administration to establish comprehensive and consistent sUmdards for the derivatives activities of banks, government-sponsored agencies, and federal credit unions.
Banking industry officials and bank regulators oppose the bill. They say they already have the tools they need to oversee banks' derivatives activities.
But Gonzalez said at the hearing yesterday that he is not troubled by their opposition because they have repeatedly failed to foresee financial disasters.
"These are the same industry players and regulators that brought us similarly hyped endeavors such as loans to lesser developed countries, highly leveraged transactions, and massive real estate loans, which collectively resulted in the loss of hundreds of billions of dollars in soured loans," he said.
Gonzalez was particularly critical of Federal Reserve Board Chairman Alan Greenspan, who has said he is opposed to any derivatives legislation.
"Chairman Greenspan is the same man that came before the Congress ... and told us that [Charles] Keating and Lincoln Savings and Loan specifically, were the greatest ongoing venture ever and who also added his ... approbation to 16 or 17 other savings and loans, all of which went under in less than two years," Gonzalez said.
Keating is in prison after being convicted of defrauding investors and looting the Lincoln thrift. Lincoln, based in Irvine, Calif, was seized by federal regulators in April 1989. A spokesman for Greenspan declined to comment on Gonzalez's remark.
Gonzalez acknowledged that federal regulators have taken some steps toward ensuring. that derivatives market participants have good risk management systems in place. But more needs to be done, particularly to curb the speculative use of derivatives, he said.
"If the Treasury won't do it, if the Federal Reserve won't do it, then Congress must," he said.
The committee chairman said he is particularly concerned about a recent statement from an official at the Bank of England that some 20 central banks use derivatives to speculate on the gold market.
"I am absolutely opposed to banks using deposit insurance to support massive speculation and I am also opposed to central banks using derivatives to speculate in gold or any other market," Gonzalez said, adding that "bank regulators, in particular Chairman Greenspan ... have not taken adequate steps to curb excess speculation."
Gonzalez said he is also concerned that banks are increasingly engaging in proprietary trading with derivatives. He asked General Accounting Office officials at the hearing if banks should be forced to conduct their proprietary trading activities in separately established affiliates for which federal deposit insurance would not be available.
Comptroller General Charles Bowsher, the GAO's top official, said the issue should be carefully studied.
Bowsher told committee members that the GAO has called for derivatives legislation to ensure that federal regulators have the authority to set capital standards for, and oversee, all over-the-counter derivatives dealers -- including securities firm and insurance company affiliates that currently are virtually unregulated at the federal level. He said he supports the Gonzalez and Leach bill even though it would not cover these affiliates.
Rep. Rick Lazio, R-N.Y., asked GAO officials if the derivatives bill would give bank regulators any authority they do not now have.
Lazio seemed to be suggesting that the derivatives bill might not be needed since it is limited to banks and does not contain provisions from a bill Leach introduced earlier this year that would have subjected affiliates of securities firms and insurance companies to federal regulation.
But GAO officials said the bill would ensure derivatives standards are consistent and are being complied with by banks.
Rep. Melvin Watt, D-N.C., asked GAO officials for more details on the number of banks involved in derivatives.
The GAO officials said that of some 12,000 banks, 900 are involved in derivatives to some degree. Roughly 200 to 250 have significant derivatives activities and seven are major derivatives dealers, they said.
Dennis Beresford, chairman of the Financial Standards Accounting Board who also testified at the hearing, said the board plans to issue an accounting standard on disclosures about derivatives in the fall and a draft standard on hedge accounting by the end of the year.
Beresford recommended that Gonzalez and Leach revise their derivatives bill to contain a more general set of requirements for accounting standards that "leave room for regulators to adapt to changing conditions."