Unable to Win, Diverse Lobbies Scuttled Reform
What derailed the Bush administration's ambitious proposal for overhauling the financial services industry?
Analysts picking through the wreckage have cited a long list of possible explanations: The climate was wrong. The president wasn't fully engaged. The banking industry was divided. Powerful lawmakers opposed it. The atmosphere turned partisan. Scandals erupted.
But ultimately, it was the power of special-interest groups that proved decisive.
Insurance agents, big banks, small banks, securities firms, and diversified financial services companies all wanted something different from Congress. And while none had the muscle to push through its own agenda, each had the power to block legislation it opposed. As a result, Congress settled on the lowest common denominator: a bill that permits the Bank Insurance Fund to borrow $70 billion from the government and that installs a series of get-tough reforms intended to minimize future losses.
In many ways, the process was no different from previous attempts to expand bank powers.
"In the end, [the special interests] are capable of stalemating each other, and that's the way it has been for 60 years," said Robert Glauber, the Treasury under secretary who was the administration's point man on its reform package.
Take the case of the Independent Insurance Agents of America. The agents wanted a comprehensive bill probably more than anyone.
Stopping the Banks
Citicorp and other banking concerns were preparing to market insurance nationwide from a newly opened base in Delaware, and this year's legislation seemed to hold the agents' last hope of stopping them.
With a formidable Washington office, backed by a broad grass-roots operation, the agents held the power to say no to a comprehensive bill that did not block bank incursions on their turf. But every effort to accommodate their position created countervailing forces that were also strong enough to derail the bill.
The battle centered around the effort to let banks branch across state lines. That proposal became the Treasury Department's highest priority and was also strongly supported by large banks.
Bigger Banks Balk
But once it appeared the only way to get branching would be by giving up existing insurance powers, the big banks refused to go along.
Complicating matters, one powerful lawmaker -- Rep. John D. Dingell, D-Mich. -- also used the branching proposal as a quid pro quo.
Rep. Dingell, the chairman of the House Energy and Commerce Committee, wanted to curb the already limited authority of banks to sell and underwrite stocks and bonds. But when he was unable to muster a majority behind the idea, he said he would support interstate branching only if Congress also adopted the securities curbs, another millstone as far as big institutions were concerned.
For the Bush administration -- and particularly for Treasury Secretary Nicholas Brady, who had made financial services reform a top priority -- the bill's demise was an embarrasing and bitter defeat that is likely to hobble bank reform efforts for years to come.
One Step Backward
"It was a step back from the onward march toward reform," said Karen Shaw, president of the Institute for Strategy Development.
The already fragmented banking industry suffered new fissures as big banks began asking if their interests were compatible. Many bank lobbyists wondered aloud if BankAmerica Corp. and NCNB Corp. -- among the most ardent proponents of interstate branching -- were willing to sell out their peers on new insurance and securities powers.
Those rifts, if not healed, are likely to further cripple the segment of the industry seeking new powers.
Some of Treasury's allies ended the year questioning whether the administration picked the right time to seek major legislation, while others were dismayed that the White House did not throw more resources into the battle once it began.
"This President clearly did not do a damn thing to push his major domestic initiative," said Paul Equale, senior lobbyist for the Independent Bankers Association of America.
"If the president had gotten involved, we could have worked it out," added Senate Banking Committee chairman Donald W. Riegle, D-Mich.
Others believe that the administrations should have narrowed its focus, seeking branching powers but dropping two other key proposals, which would have allowed nonfinancial companies to buy banks and broken down the barriers between banking and commerce.
"Of the three major |good things' in the bill for the industry," said Ms. Shaw, "only interstate had a chance."
Branching Rights Backed Early
Early in the year, Rep. Dingell and his key subcommittee chairman, Edward J. Markey, D-Mass., both warmly endorsed interstate branching and urged the administration to pursue legislation that included branching but did not address securities, insurance, and commercial ownership of banks.
Rep. Dingell "was willing to let the narrow bill go through earlier," noted Ms. Shaw.
Rep. Dingell acknowledged during the year he had changed his views about how to proceed tactically on banking and commerce issues. Midway through the year, he said, he concluded it was better to try to settle them now on his terms than to mount a defensive action year after year.
Still, the special interest gridlock, powerful enough in ordinary times, was magnified by the hostility toward banking legislation that developed among lawmakers in the aftermath of the 1989 savings and loan bailout.
"It was a colossal error to believe they could separate banks from the thrift bailout," said J. Denis O'Toole, chief lobbyist for the U.S. League of Savings Institutions.
Mr. Glauber acknowledges the atmosphere could hardly have been worse for the administration's package, but said Treasury had no choice. Its proposal "was the right policy," he said.
"The cloud of the S&L bailout was hanging over us and we knew from the beginning it was going to be hard," he said. "But you have to play the hand you're dealt."