“All in all, I think we hit the jackpot,” President Ronald Reagan told a Rose Garden audience of congressmen and lobbyists celebrating the deregulation of the savings and loan industry on Oct. 15, 1982.
Less than seven years later, a somewhat red-faced Congress was forced to adopt a massive package of reforms and launch a huge taxpayer bailout to correct the failed deregulation scheme.
Now Congress is icing down the champagne again in celebration of the new and much more grandiose deregulation package, this time of the entire financial services industry – combining banks, securities firms, and insurance companies (and in some cases, nonfinancial corporations) under common ownership in soon-to-be trillion-dollar conglomerates. In the process, Congress is creating a financial system designed for the affluent customer in which low- and moderate-income families and small businesses will face less access, fewer choices, and higher fees.
Congress is wading into the deregulation swamp in good economic times with a roaring stock market and quarter after quarter of record financial profits – the worst possible time to ask Congress, with its short-term memory, to make tough decisions against the wishes of the industry. Amid the economic euphoria, it is little wonder that warnings about the safety and soundness of financial institutions, inadequate deposit insurance reserves and the weaknesses of an uncoordinated, overlapping and outmoded regulatory system are greeted with legislative yawns.
A study released by the Federal Deposit Insurance Corp. (FDIC) last month found that consolidation in the banking industry just between the years of 1990 and 1997 had “increased the risk of insurance fund insolvency by 50 percent.” The report warned that the risk had increased further during the past two years.
The risk of insolvency is “becoming inseparable from the health of the 25 largest banking organizations which control 54.5 percent of the assets,” the FDIC researchers found. These are the very institutions that will be combined with insurance companies and securities firms in the new, too-big-to-be-allowed-to-fail conglomerates.
But that wasn’t the kind of testimony sought by the House and Senate banking committees, which instead used the hearings largely for the purpose of painting simplistic rosy scenarios and providing a platform for the corporate executives, lobbyists, and campaign donors to promote the legislation.
Congress took a harsh and often mean-spirited view of efforts to provide consumer and community protections that could keep pace with the vast changes the legislation creates in the financial system.
At critical points, Congress caved to Senate Banking Committee Chairman Phil Gramm, who has conducted a long, vitriolic attack on the Community Reinvestment Act and the citizens who organize community organizations in low- and moderate-income neighborhoods.
As a result the Community Reinvestment Act was weakened, with most banks being exempted from its examinations for periods of four to five years, sharply diminishing the ability of regulators to monitor community-lending performance or seek remedial action. An effort by Rep. Maxine Waters to establish machinery for basic bank accounts for low- income citizens was rejected.
At Gramm’s insistence, so-called “sunshine” language was adopted, which singles out community organizations for special government surveillance of their agreements with banks – an effort to intimidate community organizations from testifying, commenting on or filing protests about community lending and to discourage banks from entering into agreements that strengthen community lending.
The privacy protections that emerged in the banking reform legislation are a joke that will simply delude the public into believing privacy provisions exist where there are none. As a result, the affiliates of the conglomerates and their telemarketers will be free to share many intimate details of an individual’s buying habits, investing patterns, health records, entertainment choices, employment data and other aspects of one’s existence.
As an added slap at consumers, the bill incorporates overly broad and unnecessary preemptions of state laws as they apply to financial products offered under the provisions of the legislation. This will nullify efforts to enact state consumer protection laws – something that has raised the ire of state attorneys general.
The banking legislation is deeply flawed and clearly anti-consumer and anti-community. The president should have the courage to use the veto pen on this one.
This piece originally appeared in the Washington Post, Friday, November 5, 1999; Page A33.