Senate leaders have finally agreed to meet to hash out a deal on financial reform legislation, and debate could begin on the floor as early as Monday.
The leadership meeting, slated for today, had been delayed for two weeks as Majority Leader Trent Lott and Senate Banking Committee Chairman Phil Gramm searched for common ground with Minority Leader Thomas A. Daschle and Sen. Paul S. Sarbanes, the committee's ranking Democrat.
But while momentum was building in the Senate, Federal Reserve Board Chairman Alan Greenspan dealt the legislation a significant setback in the House on Wednesday.
He criticized the bill more fiercely than ever in testimony before House Commerce's finance subcommittee.
"The long-term stability of U.S. financial markets and the interests of the American taxpayer would be better served by no financial modernization bill rather than one that allows the proposed new activities to be conducted by the bank," Mr. Greenspan said.
The Fed chief has repeatedly insisted that banks be required to conduct new powers through holding company units instead of direct subsidiaries.
Mr. Greenspan rejected compromises struck by the House Banking Committee, which adopted the legislation on a 51-to-8 vote March 11.
Lawmakers agreed. Republicans and Democrats alike unloaded on the legislation and vowed to scale back powers for operating subsidiaries, among other changes.
Committee Chairman Thomas J. Bliley Jr. and ranking Democrat John D. Dingell made special appearances at the subcommittee hearing to complain that the legislation, HR 10, would excuse too many bank activities from federal securities regulation.
"It expands the taxpayer-funded government subsidy to bank operating subsidiaries that can engage in not only securities underwriting but also merchant banking," said Rep. Bliley, R-Va. "And it does not provide for consistent regulation of securities activities by banks and securities firms."
Rep. Dingell, who rallied Democrats to support financial reform legislation last year, said he would be "compelled to oppose this bill with every bit of strength I have" unless changes were made.
The Michigan Democrat said pleas from the banking industry to leave the securities and insurance provisions untouched had aroused his suspicion. "This tells me there is a skunk in the woodpile somewhere," he said. "I have instructed the staff ... to go over every word with a magnifying glass."
Like Mr. Greenspan, subcommittee Chairman Michael G. Oxley urged a revival of measures in last year's bill that would restrict bank operating subsidiaries to selling insurance and securities and other relatively low- risk activities.
The Ohio Republican acknowledged, however, that the Clinton administration would defend House Banking's version. "The operating subsidiary has more lives than Freddie Krueger," he said. "I am sure it will continue to revisit us at every step in this process.
Treasury Secretary Robert E. Rubin, who contends curtailing operating subsidiaries would damage the national bank charter, has been invited to rebut Mr. Greenspan at the subcommittee's second hearing May 5.
But Mr. Greenspan held center stage Wednesday as the lone witness. Nearly unchallenged by lawmakers, Mr. Greenspan methodically attacked the Treasury Department's defense of the operating subsidiary.
The Fed chief reiterated that banks enjoy a federal subsidy in the form of deposit insurance and access to emergency loans, which give them "a distinct competitive advantage" over nonbanks. A Fed study concluded that banks pay up to 12 basis points less than holding companies for debt capital and hold a greater advantage over nonbanks, he said.
Giving operating subsidiaries more powers would strengthen the unfair upper hand for banks, make capital markets more inefficient, hurt consumers by weakening the economy, and put tax dollars at greater risk for bailouts, he said.
Mr. Greenspan was particularly critical of allowing merchant banking activities outside holding company units.
"Merchant banking is potentially the most risky activity that would be authorized by (the bill), and would be especially risky ... if permitted to be conducted in bank subsidiaries," he said.
He dismissed Treasury's argument that requiring a bank to deduct its full investment in a subsidiary from regulatory capital would insulate it from risk. "You can run through that capital in a rapidly changing market faster than a hot knife goes through butter," he said. "The presumption that we regulators have the capacity to fend that off is misplaced."