The Sultan of Brunei could probably pick up an ivory-handled phone tomorrow and start assembling a holding company of banking, insurance and securities interests, if it pleased him. But it wouldn't be in the United States, where even the biggest moneybags can't tip the Congressional maitre d' and get anything they want.
Sure, money talks loud and long in Gucci Gulch, the marbled halls of the Capitol. But it clamors with many voices, diluting its impact. And more than money is at stake in reform of the banking system. So are politics and--believe it or not--what some in Congress truly believe is in the country's best financial interests.
Will a Glass-Steagall reform bill clear Congress, and if so, when? Handicapping is at best a chancy venture--just look at horse racing--and the situation in Washington is in "enormous flux," says Kenneth Guenther, executive vice president of the Independent Bankers Association of America and a longtime front-row observer of banking legislation. Others use stronger language, words like "mess" and "dogfight."
As it stands, a markup of Rep. Jim Leach's bill looks like it could be postponed from an initial early May timetable. There may be an attempt to meld some of the language from Rep. Richard Baker's more sweeping legislation into that bill. Meanwhile, hearings are expected on House Commerce Committee Chairman Thomas Bliley's bill to reaffirm the role of the states as primary regulators of all insurance activities, including any by banks.
In the Senate, a broad cross-ownership bill sponsored by New York's Sen. Alfonse D'Amato has taken a back seat to other issues, including the Mexican debt crisis. But the consensus seems to be that the Senate Banking Committee will let the House take the lead.
Bank lobbying forces haven't endorsed any one approach, and the action has been as much defensive as offensive: The idea of new securities powers is something less than a bauble the industry can't resist. Laments the Consumer Bankers Association: "It is not clear that any of the proposals would be a net benefit to banks." Here is a summary of the various proposals and the outlook for each.
The Leach bill, House Resolution 1062, is generally given the best chance to succeed, though it's widely believed that some portions may be amended. Lobbyists are tailoring their message to Leach's proposal on the assumption that the D'AMato and Baker bills are too radical in bringing commercial companies into the mix.
Essentially, the legislation would break down the Glass-Steagall wall by creating a "financial services holding company" that could own a bank and a separate securities affiliate regulated by the SEC. Banks could underwrite securities through such an affiliate, and securities firms could purchase a commercial bank. Still, it would require that activities be placed in a holding company sub to create firewalls from insured deposits. The measure does not incorporate insurance activities.
Leach is an ardent admirer of the Federal Reserve System and would place most of the responsibility for regulating such holding companies in the Fed's hands, though the exact structure for doing that would need to be worked out.
The firewalls issue has generated some squawking. Firewalls "could totally defeat the intent of creating synergy within the institution," says James M. Shelton, executive director of the Bank Securities Association. However, "If what we get are not unnecessary or poorly conceived firewalls, legislation can be ultimately worked out."
At this writing, the Leach bill has the momentum. "Leach has the most comprehensive proposal, and he is the chairman," says Brian Smith, a partner at Mayer, Brown & Platt in Washington and former chief counsel for the Office of the Comptroller of the Currency. "If you use any of the previous committee chair models, much of what emerges will center around his proposal." That helps, because "there will be one language. They'll be reading from the some page."
But consideration of the measure has been slowed by attempts to create a legislative option to deal with the Mexican debt crisis, a distasteful task to many in Congress. Leach "has spent a lot of time on what is unpopular legislation," says the IBAA's Guenther.
Even so, several lobbyists interviewed said reform would be nowhere without the push it's getting from the Iowa Congressman. "He and his staff have been very inclusive, and they've worked very hard," says Paul Equale, senior vice president/government affairs for the Independent Insurance Agents of America.
But how deep is Leach's support? Not very. No trade group has strongly endorsed the bill, yet it keeps riding along--"a bizarre but not unusual event" in Washington, says Jeff Tassey, senior vice president/government and legal affairs for the American Financial Services Association, a trade group heavily represented by finance companies. Meanwhile, the approach endorsed by Comptroller of the Currency Eugene Ludwig and the Clinton Administration would allow securities underwriting and insurance within the banks themselves. That would clearly play to Ludwig's moves to boost the attractiveness of a national bank charter, but is widely perceived to be politically untenable because of the perceived risk to deposits if strong firewalls aren't in place.
Essentially, the Administration would add insurance activities to the securities capabilities, and would allow an insurance firm to own a bank. Regulation of the activities would be by function, reducing the prominent Fed role of the Leach bill. Community banks, led by the IBAA, are fighting the proposal, saying it lacks adequate firewalls and increases systemic risk to the banking system.
While the Administration hadn't brought forth a bill by press time, the shape of its ideas have been outlined by officials like Treasury Secretary Robert Rubin. "Their approach is really not that much different from the previous administration, or under Reagan," Smith says.
Leach has no use for the administration's idea of allowing an insurance affiliate inside the bank, argues Guenther, who maintains that the Treasury Department put that on the table basically to pacify Ludwig. Rubin, a former co-chairman at Goldman, Sachs & Co., would presumably be behind the principles contained in the Baker bill, he adds.
The New York Republican's bill, S. 337, is a reiteration of a proposal he has introduced without success in previous Congresses. It would open the gates to ownership of any combination of banks, insurance companies, securities and commercial firms. Observers say the bill has garnered very few backers but plenty of opponents, and isn't being pushed forward.
"Nobody we've spoken to has come out in support" of the measure, says Smith. "The few commercial companies that in the past had tried to get very aggressive in banking are out of it. Almost every oil company has gotten rid of its card, and the auto companies have sold their S&Ls. I don't think anybody has an appetite for getting into banking."
H.R. 814, introduced by Louisiana's Rep. Richard Baker, is similar to the D'Amato proposal in that it would permit common ownership among banks, insurance, securities and commercial firms. And it's gotten more attention, in part because "Baker was out there selling while Leach was doing other things," says Guenther, referring to Baker's lobbying of freshment members of the Banking Committee.
"Baker is more of the generation and free-market spirit of the freshmen Republicans than Leach is," he adds, and he thinks their input will be critical.
Baker's bill has drawn a nod from the American Financial Services Association, which has objected to the ban on commercial/banking affiliations in the Leach bill.
But apart from the AFSA, the Baker measure has attracted little organized support. And one potent lobbying force arrayed against the Baker and Clinton proposals is the independent agents. Long accustomed to beating up on bank lobbyists, the IIAA wrote to the House Banking Committee urging opposition "to any proposal that would provide commercial banks with new insurance powers. IIAA believes these plans are a peril to the stability of the nation's banking institutions, anticompetitive for both the consumer and small business," and would concentrate financial power "in a few megacorporations at the expense of Main Street America."
The rumor mill was hot at the beginning of April that Baker, seeing that the Leach bill had momentum, was meeting with Leach to talk over compromise measures.
A bill introduced in late March by Rep. Thomas Bliley, a Virginia Republican who chairs the House Commerce Committee--and strongly seconded by ranking Democrat and historic banking scourge John Dingell of Michigan--would crush bank hopes of expanding broadly into insurance. Essentially, the legislation would reaffirm the primacy of states to establish limits on the powers of any entities that would sell insurance, including national banks. "The traditional role of the states in insurance regulation must be protected," Bliley declares.
Thirty-eight states allow state-chartered banks some role in insurance sales, but Bliley says his bill would preclude bank sales of insurance where currently barred by state law. That would include annuities, which the bill specifically mentions under its definition of insurance.
If that bill is attached as an amendment to the primary House Banking Committee bill on Glass-Steagall, it will be like a stink bomb lobbed into a crowded room, most observers say: it would stop the reform movement in its tracks as banks bail out.
Why? "It cuts back the insurance powers of national banks, and it reverses the Supreme Court on annuity sales," says Guenther. "If that passes in Commerce, it takes away more from banks than Glass-Steagall (reform) gives."
Any attempt to graft Bliley's insurance restrictions onto the broad reform bill would launch "an all-out, knock-down, drag-out fight," says Edward Yingling, executive director for government relations at the American Bankers Association. "If the agents win, we would try to kill the bill."
The independent agents group, which supports the Bliley measure, actually has forged an unusual pact with the IBAA in opposing broad cross-ownership. "We also recognize that (Bliley) is just one piece of the puzzle," says Equale. "As significant as it is, it is not a fundamental problem among all the groups."
Still, the bill "clearly has powerful support in the House," he adds. "I think it will be factored into any Glass-Steagall reform."
Will there be a Glass-Steagall reform bill this year? Most observers say yes, but they are vague--and necessarily so--about the timetable and form.
Attorney Smith expects a bill to clear the House by September and October and then be taken up by the Senate, with passage there perhaps by Thanksgiving. And barring some crisis that might cause the Administration "to take its foot off the accelerator," the Administration will go along--and Clinton would be expected to sign the resulting bill.
He and others say the Senate isn't likely to get much involved until a bill comes out of the House. Meanwhile, Smith thinks another round of lesser developed country (LDC) debt woes may be brewing, which could give banking critics new ammunition to oppose reforms.
"Leach is quite adamant that there will be legislation going through the House this year," says the IBAA's Guenther, adding that Speaker Newt Gingrich seems to have made it a priority. "The Commerce Committee counsel is singing the same tune. Gingrich apparently doesn't care that much what form it takes. You don't hear talk in terms of killer forces in the Senate. I don't see anyone (there) standing against it."
It makes sense, several observers noted, for Baker to seek an accommodation with Leach. "Nobody wants to embarrass the Republican committee chairman, especially this early in the session," says Tassey at the AFSA. Adds Yingling: "The last thing you want is warfare between a subcommittee chairman and the chairman of the full committee."
An advantage banks have on the securities powers side is that trade groups like the Securities Industry Association have taken on more and more bank members in recent years, softening their historic opposition. In fact, Yingling says the securities industry appears more eager for a bill than most of the banking industry.
The insurance agents are another story. They are heatedly opposed to any reform that would create vast concentration of capital, saying that runs counter to intrinsic American customs. "We're not a Japan or a Germany," Equale declares.
Says Smith of the agents: "They have great lobbyists, and they've beaten the banks badly in the past. But I think they're less of a factor now because banks are smarter, and insurance companies and banks are working in tandem."
The ABA's Yingling claims that recent battles between the insurance agents and banking forces have basically ended in a draw, but they keep pressing on. "There's nothing new here," he sighs. Agents' concerns have "been front and center in every piece of banking legislation" for 20 years.
One lobbyist who asked for anonymity says that for all the talk about the reform push, an insurance measure like Bliley's wouldn't even be out there if the new House leadership hadn't condoned it in some way. "The House leadership also wants to help the (insurance) agents, and us," says the AFSA's Tassey. "How they do all that and get a bill is not clear. It's kind of frustrating." Tassey calls the situation "a mess," and says he won't bother lobbying the Glass-Steagall issue heavily until a vote gets closer.
Yingling says the variables are daunting. Most GOP members of the Banking Committee are freshmen, he notes, and it's impossible to predict how they'll vote. On the other hand, reform "has going for it the fact that for the first time, so many key players are all moving in same direction... The traditional lines of opposition have changed dramatically."
Weighing everything together, he says it's way too early to talk of timetables. "I'd say the chances are 50-50 for getting a bill enacted by the end of this Congress.... It's far from a done deal."
What Form Regulation?
Any major change in the structure of the financial services industry could have a concomitant impact on regulation. At this point, it's hard to even guess what form that regulation could take.
According to a recent survey of bank and thrift CEOs by KPMG Peat Marwick, 93% agreed somewhat or strongly that bank and non-bank financial services firms should have common regulation for the same activities, whether or not that means stricter regulation of nonbanks.
Leach, who is interviewed on page 41, supports the notion of regulating by product line and not by industry--though he would put the Federal Reserve in charge of most bank-related activities. Leach's approach got a lukewarm thumbs-up recently from Securities and Exchange Commission Chairman Arthur Levitt, who called it "a good first step." Levitt told the House Banking Committee that he thinks the bill should be broadened to make it easier for securities firms to buy banks. He also fretted that the bill might allow bank securities activities to "migrate" from a securities affiliate to the bank to avoid SEC oversight, and urged adding insurance companies to the list of cross-ownership possibilities.
The prospect of new regulation of bank securities operations is troubling to many. "It's a very complex set of circumstances. The OCC regulates bank-owned broker-dealers, and any change there can have a major impact," says Shelton at the Bank Securities Association.
"There are turf battles on the regulatory front. So many different scenarios could take place. Our concern is that there not be overlapping jurisdictions; that already exists with NASD 94-94," Shelton says, referring to rules proposed late last year by the National Association of Securities Dealers for broker-dealers operating on bank premises.
There's actually a form of reregulation embedded in the Leach bill, which would strip away the sanctions given to new unitary thrift holding companies to engage in commerce and investment activities. Observers say the bill would grandfather existing unitary thrift companies like Household Finance and Beneficial Finance.
If a reform bill emerged with an insurance ownership provision, that raises the whole issues of an "umbrella regulator" over the combined activities, says the IBAA's Guenther. While the Leach bill has created a holding company structure in which the primary regulator is the Federal Reserve, that may not sit well with insurance or securities companies.
The securities lobby could argue that if Merrill Lynch is the dominant partner in a holding company that contains a bank, the SEC should be the umbrella regulator, Guenther says. "And if you add the insurance box, a Prudential could say that if we're the dominant entity in a company with bank and securities affiliates, we should be regulated in the state in which we're domiciled, by the insurance regulators there."
The idea of state insurance rule-makers somehow riding herd on banking or securities activities seems a bit far-fetched. But turf battles between banking and securities regulators are practically guaranteed, since it's hard to imagine the SEC ceding authority without a pitched battle.
So there you have it: A situation that changes almost daily, with constant jockeying for position, ego battles, turf battles, a rehashing of old arguments and old animosities. Is this any way to change the future of banking? Maybe not, but it's the only system we've got. Democracy--ya gotta love it.
HANDICAPPING THE GLASS-STEAGALL LEGISLATIVE RACESponsor What it combines Odds(*) CommentLeach Banking and securities 2-1 Off to a slowHR 1062 activities under a financial start, but has services holding company. the strongest Would not permit affiliation rider and most with insurance concerns. attention.Baker Banking, insurance, securities 50-1 Aggressive start,HR 814 and commerce could be inter- but lots of strong mingled. opposition.Clinton No bill by April, Would allow No odds A stalking horse? combination of banking, Powerful opposition securities and insurance in a based on perceived holding company or inside the bank. risk to banking system.D'Amato Broad bill, like Baker's, to 100-1 Very long shot, notS 337 permit cross-ownership among really out of the gate. banking, insurance, securities, commercial companies.Bliley Insurance measure, 3-1 Seems like slam reaffirming rights of states dunk in Commerce, but to regulate all insurance activities. what then? Banks are strongly opposed.
(*)Odds are hypothetical and unscientific, but reflect thinking of industry experts.