It's time to drag the bankers out for their semiannual public flogging. The last time we visited this subject, banking lobbyists were trying to sweet-talk Congress into deregulating the banks a la savings and loans. They wanted all kinds of changes: the repeal of the Glass-Steagall Act (which bars them from speculating on Wall Street), the right to branch nationwide and to sell their own insurance products, and laws allowing corporations like IBM and Exxon to own their own banks. All very bad ideas.
These measures, backed by the Bush administration, were stopped cold by two members of Congress who knew better, Texas Democrat Henry Gonzalez, head of the House Banking Committee, and Michigan Democrat John Dingell, Jr., chairman of the Energy and Commerce committee and son of the guy who pushed Glass-Steagall into law.
Banking on change. But as Little Orphan Annie and any Washington lobbyist will tell you, there's always tomorrow. And tomorrow has arrived. Having lost in Congress the last time around, bankers have turned to the new president for help. No sooner were the election results official last November than the American Bankers Association began making key changes to its lobbyist lineup:
- William Brandon, Jr., an Arkansas banker with close ties to Clinton, became the ABA's new president;
- Curt Bradbury, head of Worthen National Bank in Little Rock, was appointed to the ABA's board of directors. Worthen Bank extended a $3.5 million line of credit to the Clinton campaign. More than a third of the bank's shares are held by the family of Jackson Stephens, who is chairman of the board of Stephens Inc., Arkansas's giant financial holding company;
- Charles Manatt, a former banker who served as Democratic Party chairman and cochaired the Clinton campaign, was hired. His law partner, Mickey Kantor, is the U.S. trade negotiator;
- finally, the ABA brought on board Tommy Boggs, an influential Washington lobbyist whose law partner is Commerce Secretary Ron Brown.
They didn't even wait for the inauguration to begin lobbying. At the preinaugural Little Rock economic summit, ABA president Brandon assured Clinton that bankers would selflessly provide at least $86 billion in new loans if he first would loosen their regulatory straitjacket.
Following the inauguration, the ABA and other banking organizations sent the White House a formal set of proposals, impressively titled "Job-Creating Regulatory Relief," which recommended that President Clinton enact regulatory changes through administrative action without bothering Congress. In particular they suggested that the president "encourage regulators to recognize that banking involves calculated risks and that character loans do not warrant blanket criticism."
Bankers make character loans to people they know or have reason to believe are of sound character, and whom they figure won't run off without paying up. Such borrowers often lack the tangible trappings of net worth regulators prefer to see in a borrower--like strong financial statements, steady income, and/or real assets that could be attached or repossessed. If a borrower defaults on a character loan, all the bank gets is a "sorry 'bout that." (The S&L barons were big on character loans and loaned to a lot of real characters.)
Federal Reserve Chairman Alan Greenspan waded in on the side of the bankers last January. "Recent legislation and supervision has virtually eliminated the so-called character loan," he told Congress. "If regulations require that loans be based solely on collateral or always documented by full accounting detail, an important part of the credit-granting process that calls for the banker's special expertise will be lost, to the detriment of the economy." (I don't like to harp on people's past mistakes, but please recall that in 1985 Greenspan assured Congress that high flyers like Charlie Keating's Lincoln Savings and Loan represented the only hope for the S&L industry. Oops.)
A bank examiner friend of mine observed that character loans have not disappeared, just evolved. "We have character loans," he said. "They're called credit cards, and the hefty interest rates of 14 percent to 21 percent charged for those kinds of loans accurately reflect the significant risks involved in making them."
But bankers complain that, in a gross over-reaction to the S&L mess, Congress has tightened lending policies so much that banks are afraid to make loans to small businesses. To listen to them whine about bank examinations, one would think they were being subjected to physical torture. But in February, the General Accounting Office completed a study of fifty-eight randomly selected bank and thrift examinations to see if, in fact, regulators were unduly hassling banks. What they found was just the opposite. The GAO reported that:
- in 94 percent of the cases, regulators engaged in "less than adequate" examinations;
- in 70 percent of the cases, the regulators' examination of the banks' loan quality was slipshod and seriously lacking; and,
- in general, the regulators' review of bank-holding companies was too cursory to ensure that the banks' owners were not milking their own banks.
So much for regulatory overkill.
Stuck with the tab. Character loans and calculated risks sound logical enough, if you ignore one thing: the "calculated risks" bankers want regulators to sanctify are not their calculated risks--they're ours. If they calculate correctly they reap the profits. If they're wrong we pay off their debts. We already have. More than 100 banks failed last year, and the Federal Deposit Insurance Corporation estimates another 120 will topple this year, forcing the FDIC to cough up $76 billion. In 1991 Congress voted to allow the FDIC to "borrow" up to $70 billion from the U.S. Treasury to cover losses. So much for "calculated risks."
Still, by February the Friends of Bill at the ABA had already scored. Clinton announced that, in order "to deal with the credit crunch," the administration would ask regulators to shift their focus. Bank examiners would be instructed to stop enforcing rules that require bankers to gather proper paperwork, disclosures, and verifications for underwriting purposes. Instead examiners would concentrate on enforcing consumer protection laws and making sure that bankers are not speculating on interest-rate fluctuations.
The administration made its move against the advice of wiser and more experienced voices in its own party. Both House Banking Committee Chairman Gonzalez and Senate Banking Committee Chairman Don Riegle, a Democrat from Michigan, warned that bankers shouldn't be allowed to throw around figures (like the promised $86 billion in new lending) without providing some evidence that deregulation would produce the result in question. But the administration didn't listen.
Now, with a foothold in the White House, bankers have turned their sights back on Congress. Rewriting regulations and shifting priorities are important changes, acknowledged Kenneth Guenther, executive vice president of the Independent Bankers Association of America, but "examiners are bound by the law, not what the President of the United States wants." Guenther said the bankers' primary goal would continue to be the reversal of laws that strengthen bank regulation.
One thing bankers want from Congress is lower capital standards. Capital is the amount of money that must be set aside to cushion losses if the bank fails. It's like the deductible on an auto insurance policy. The higher the deductible, the less the insurance company pays in the event of an accident. Likewise, the more capital banks have to hold, the less it costs taxpayers when they fail. Bankers want their deductible lowered--and therefore ours raised.
Bankers are also trying to sidetrack a move toward real-world accounting for banks. Until now banks have used accounting methods so phony that if you or I or General Motors used them we would land in the slammer for fraud. In recent months Congress and the Financial Accounting Standards Board have begun plans to move banks away from illusory accounting methods, forcing them to account for their assets at market values. Without such accounting gimmicks, many banks that now meet regulatory capital requirements would flunk. (It was some of these same gimmicks that created the S&L fools' paradise of the 1980s.)
But for now the front lines of the banking battle are at 1600 Pennsylvania Avenue. Whose advice will President Clinton heed--his Arkansas banking friends cum ABA lobbyists, or those veteran legislators in his own party who are still cleaning up after the bankers who breezed through Washington a decade ago with a mouthful of give-me and a handful of nothing?
We'll be watching.