Two senators who are pushing a bill to reform the Federal Home Loan Bank System have watered down their legislation, but they might not have gone far enough to appease critics.
As early as next week, Sens. Chuck Hagel, R-Neb. and Evan Bayh, D-Ind., plan to submit the Federal Home Loan Bank System Modernization Act of 1999, which would change how the system is capitalized. Banks would contribute capital based on the riskiness of their loan portfolios rather than on asset sizes.
The bill also would make it harder to sell Home Loan bank stock, make membership in the system voluntary, and let small banks borrow for agricultural and small-business loans. Currently, all thrifts must belong to the system, and small-bank membership is restricted.
The most significant change from a bill that Sen. Hagel offered last year is the elimination of a contentious provision that would have given the system authority to invest in capital markets.
Home Loan banks currently have a $135 billion investment portfolio. It has become a target for critics who charge that Wall Street investments do little to further the system's mission - housing.
Bruce Morrison, chairman of the Federal Housing Finance Board, said removing the investment language would not affect what banks are allowed to do and could make the bill more politically attractive.
"Because some people viewed the legislation last year as expanding the investment authority, rather than focusing it, taking the language out is probably a good thing," he said.
The Treasury Department, however, does not appear ready to compromise. Treasury Secretary Robert Rubin, testifying Friday on the financial reform bill, said Home Loan bank reform must limit the investment portfolio.
"The system uses little of its government subsidized debt to further the system's original homeownership purpose," he said.
"We recognize the desire of members to see the system lend more to community banks," Mr Rubin said. "Indeed, we believe that the system should focus on such lending but not on using taxpayer funds for arbitrage activities and overnight lending, which currently constitute so much of its activities."
Treasury officials have previously said that any reform bill should require the investment portfolio to be cut by two-thirds, to $45 billion.
The finance board has defended the investment portfolio, saying it grew out of a need to raise money when the thrift industry was ailing. Now that the system is healthy, investments could be curtailed through internal incentives, it argued.
The Hagel-Bayh bill also includes a controversial provision to create several classes of Home Loan bank stock. One class would be redeemable after six months, while a preferred stock could be cashed in only after five years. A third class would be permanent and could be transferred only to members of the system.
The Treasury objects, fearing that the stock system could be changed later to let nonmembers own shares.
If the bill again fails to garner support, there is a pared-down version of reform in the financial modernization bill.