Wall Street Foxes Are Guarding The Henhouse
No bankers by training were involved in drafting the banking legislation put forward by the Bush administration.
In fact, the legislation was prepared by people with decades of training in industries competitive to banking.
This has had a major effect on the shape of the proposals.
The foxes are guarding the henhouse.
Consider the players. The Federal Reserve is headed by Alan Greenspan, a man with long-standing ties to Wall Street. He has worked for Bear, Stearns & Co. and once headed an economic consulting operation that served institutional investors.
Then there is Nicholas Brady, the former investment banker from Dillon Read & Co. who now heads the Treasury Department. One of his chief lieutenants, David Mulford, received all his private-sector training at Merrill Lynch & Co.
More Wall Street Alumni
Over at the Office of the Comptroller of the Currency is Robert Clarke, whose keen interest in investments was reported this year in the Washington Post and investigated by the Senate.
At the Federal Deposit Insurance Corp. is Harrison Young, who is entrusted with determining who should be allowed to buy troubled banks. Mr. Young's background is similar to that of Mr. Brady - Wall Street investment banking, most recently at Dean Witter Reynolds.
With the possible exception of Rep. Doug Barnard, D-Ga., no ex-bankers are prominent on the congressional committees writing banking legislation.
Moreover, when banking regulators leave their posts they seem to gravitate to Wall Street.
Reverse Migration
Jill Considine left the top bank regulatory post in New York State to accept a high post at the "nonbank bank" owned by American Express Co. Charles Dallara left the Treasury Department conduct nonbanking activities within J.P. Morgan & Co. And former Fed Chairman Paul Volcker now works for an investment firm.
The men and women regulating banking are, therefore, philosophically tied to Wall Street. They have spent their entire private-sector careers figuring out how to take business away from the banks.
Given this perspective, some of the decisions being made by these people are perhaps understandable:
* Mr. Brady and Mr. Mulfrod at the Treasury conceived the administration's Latin American debt-reduction program - perhaps the most destructive act ever taken against bank capital by any U.S. financial policy-makers.
* Treasury's decision-makers introduced legislation this year that would dilute forever the controls over banking enacted by a very different Congress almost 60 years ago.
* Mr. Young of the FDIC reportedly wrote the study that persuaded former Chairman L. William Seidman to award Bank of New England to an investment firm - Kohlberg Kravis Roberts & Co. in a joint bid with Fleet/Norstar Financial Group - despite a superior bid from BankAmerica Corp. This was clearly a monumental change in American banking policy.
* The comptroller's people have rewritten the rules for auditing banks in ways that make the oversight of these institutions far more stringent than that of nonbank competitors.
Are Banks Up to Snuff?
The speeches and testimonies of these officials show that they sincerely believe that today's banks cannot meet tomorrow's needs. They want companies with advanced technology, ties to the international money markets, and industrial leanings to be involved in banking.
Not surprisingly, the solutions offered would dramatically advance the cause of Wall Street in its attempt to garner an even larger share of banking business.
A recurring theme in the speeches of the policymakers is that banks will be smaller and safer when the new legal framework is in place.
These men are constructing an environment in which banks as we understand them would have a much smaller role.
Political Impotence
Meanwhile in the henhouse, the hens continue to lay eggs. Bankers still pour money into the political environment through political action committees and personal contributions.
But the beneficiaries pay them no heed - and place competitors in positions of dominance.
Strangely, the most prominent ex-banker in the establishment, John LaWare of the Federal Reserve Board, publicly argues that banks should lend more money and take more risks.
He does so despite public knowledge that such a policy did nothing to aid Shawmut National Corp., the ailing New England institution he once chaired.
Dead Wrong
Clearly, bankers have forgotten the lesson of the Tower of Babel. Unlike the Wall Street veterans, they have no unified program or strategy.
Ex-Wall Streeters Brady and Greenspan, who supervise the banks, say the elaborate safety net that was constructed to aid depositors and the banking system is not working and costs the taxpayer too much.
The problem, of course, is that the Wall Street soothsayers who tell bankers what to do are dead wrong.
The financial system established in the 1930s, based on the concepts of "checks and balances" and "separation of powers," resulted in the elimination of sustained economic downturns in the United States.
Nevertheless, officials who at some point will return to Wall Street are asking Congress to tear down this system - supposedly because it no longer works.
No one is stopping to note that the breakdown began when the government decided to let nonbank companies violate the rules of the 1930s.
PHOTO : Peggy Turbett/American Banker
