Richard Y. Roberts, a member of the Securities and Exchange Commission, angered bankers last week with a speech to the Financial Markets Association titled "Tie Me Up, Tie Me Down, Tie Me Not. "
The subject was "tying" - the idea that some banks are forcing loan customers to buy other products, as contended by some Wall Street firms competing with banks for municipal bond underwritings. Bankers claim the securities people are exaggerating because they fear bank competition.
Here is an excerpt from Mr. Roberts'address:
I note that the 1991 bank reform bill included strict firewalls designed to bar credit extensions or credit enhancements to issuers of securities underwritten by bank affiliates.
For instance, one firewall would have barred a bank from extending credit to or for the benefit of an issuer of securities distributed by a securities affiliate until 90 days after the end of the distribution, unless the bank created an extensive paper trail demonstrating non-tying.
Opposition from Bankers
Predictably, these firewall provisions were hotly opposed by the banking industry, and for this and other reasons the Glass-Steagall reform provisions of the 1991 bill ultimately came to naught.
The rationale behind the 1991 bill's firewall provisions was twofold: to prevent unwise loans and to prevent unfair competition. If a bank could tie credit to underwriting or other services, the result may often be a weak loan which turns sour and must be picked up by the federal banking insurance system.
These policies appear sound to me, and I was disappointed that a bank reform bill with appropriate firewalls was not enacted. In particular, in my opinion, the 90-day bar provision was a reasonable and appropriate firewall.
Shield for Taxpayers
I am of the view that taxpayer-guaranteed funds should be walled off from supporting the securities activities of banks or their affiliates. Otherwise, banks and their affiliates will have a substantial advantage in competing for, among other things, underwriting services.
This is not only an inappropriate use of the federal deposit insurance system but could ultimately prove detrimental to our capital formation system by perversely stifling competition under the guise of promoting competition.