THE FINANCIAL SERVICES ACT OF 1999

WEDNESDAY, APRIL 28, 1999

HOUSE OF REPRESENTATIVES,
COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:17 a.m., in room 2123, Rayburn House Office Building, Hon. Michael G. Oxley (chairman) presiding.

Members present: Representatives Oxley, Gillmor, Largent, Bilbray, Ganske, Lazio, Shimkus, Wilson, Shadegg, Fossella, Bliley (ex officio), Towns, Deutsch, Stupak, Barrett, Luther, Capps, Markey, Rush, and Dingell (ex officio).

Staff present: David Cavicke, majority counsel; Robert Gordon, majority counsel; Linda Dallas Rich, majority counsel; Brian McCullough, professional staff member; Robert Simison, legislative clerk; Consuela Washington, minority counsel; Bruce Gwinn, minority professional staff member; and Christian Fjeld, minority legislative intern.

Mr. OXLEY. The subcommittee will come to order. Today is our first of two scheduled hearings this year on H.R. 10, the Financial Services Act of 1999. For this first hearing, we are fortunate to have with us our good friend, the Chairman of the Board of Governors of the Federal Reserve System, Alan Greenspan.

Chairman Greenspan will hopefully enlighten us on how financial holding companies would be regulated under H.R. 10 and describe the structural problems we still need to address. In particular, I look forward to a thorough education on operating subsidiaries and the dangers of expanding taxpayer subsidies under a new financial system.

The House spoke clearly on this issue last term, rejecting two floor amendments to expand the powers of bank operating subsidiaries. But the operating subsidiary has more lives than Freddie Krueger, and I am sure it will continue to revisit us at every step in this process.

I also expect to hear more about the operating subsidiary at the second hearing on May 5, to which we have invited Treasury Secretary Rubin and other financial regulators, as well as various industry representatives. H.R. 10 is a continual learning process for the members, and we appreciate the testimony of all of our wit

nesses.

Last term this subcommittee took a bill that was opposed by almost every financial regulator and industry group and forged a series of bipartisan agreements to create consensus protections for

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consumers. We continued to work on the bill as it went to the House floor, and we passed Glass-Steagall reform in the House for the first time in 65 years. Unfortunately, despite a series of overwhelming votes for the bill in the Senate, H.R. 10 just barely missed crossing the finish line, and American consumers were left empty-handed yet again.

This term we must renew our commitment to enacting financial services reform, building on the bipartisan solutions of our last effort. Our committee will exercise its jurisdiction to make continued improvements in the bill to ensure consistent regulation of financial activities and appropriate consumer protections. But like last term, we will work in a bipartisan manner with an eye toward increasing consensus on a number of very volatile issues.

I would again like to thank our good friend Chairman Greenspan for agreeing to appear before us today, and express our continued appreciation for the assistance and support of the Federal Reserve in working toward enactment of financial services reform.

Now I would turn to our ranking member, the gentleman from New York, Mr. Towns, for an opening statement.

Mr. TOWNS. Thank you, Mr. Chairman. Congress has been working on this legislation for a long, long time. I think it was Chairman Bliley who indicated that this was the 11th attempt to repeal Glass-Steagall since 1979. I am hopeful that we can produce a bill in the 106th Congress that finally gets the job done, but it must be done properly.

New York is the home to our most important securities firms like Goldman Sachs and Merrill Lynch, major money center banks like Citibank and J.P. Morgan, and important insurance companies like New York Life, Metropolitan Life, and the list goes on and on. The financial services industry is an important catalyst for economic growth in our country. Repealing Glass-Steagall will improve competition in financial services, it will help consumers, and it will maintain our global leadership in the financial community.

In the last Congress, this committee rescued Glass-Steagall_repeal. We took legislation that had little support when reported to the Banking Committee, and we made changes that enabled the legislation to pass the House for the first time in 65 years. I would like to take this opportunity to commend the Chair of this committee Mr. Oxley, and, of course, the Chair of the full committee Mr. Bliley, and the ranking member Mr. Dingell, for their hard work and the leadership that they demonstrated in those days and times.

Today we will hear testimony from the Chairman of the Federal Reserve, Mr. Greenspan. Chairman Greenspan's reputation is legendary. We are pleased to have the opportunity to hear his views on improvements we can make in H.R. 10.

There are two issues that I hope our committee will address. The first is the operating subsidiary. In the last Congress we decided that we should not expand taxpayer subsidies by having securities or insurance underwriting in operating subsidiaries. Chairman Greenspan pointed out that the affiliate structure provides companies with everything they need with no risk to taxpayers.

The second issue we need to address is functional regulation. I expect that securities and insurance should be regulated the same

way, no matter who is selling the product. I have long held this view. I believe that functional regulation is simply common sense.

In the last Congress, the House acted, but the Senate failed to act when faced with the issue of Glass-Steagall repeal. It is my hope that the Senate will resolve their differences, reconsider the committee's elimination of CRA protections, and move this important legislation forward.

Mr. Chairman, I look forward to this morning's testimony in the hopes that we can fashion legislation in the 106th Congress which will modernize the financial services industry without overriding the principles of consistency, safety and soundness as well as judicial jurisdictional roles that have been so important for this committee for years and years.

I yield back.

Mr. OXLEY. The gentleman yields back.

The Chair now recognizes the chairman of the full committee, the gentleman from Virginia, Mr. Bliley.

Mr. BLILEY. I thank you, Mr. Chairman. In the 105th Congress for the first time in history, the House of Representatives approved legislation to repeal Glass-Steagall and modernize the laws that govern our Nation's financial markets. Unfortunately, unlike horseshoes, we don't score any points with the American people for almost getting an important bill signed into law. H.R. 10 never made it to the Senate last year, otherwise we wouldn't be sitting here today to consider H.R. 10 once again.

This time around we are going to let the Senate go first before we move this bill in the Commerce Committee. I look forward to seeing the Senate succeed at the task that we were able to accomplish last Congress in the House. I still believe that the gentleman from Virginia, who first tried to repeal the law he coauthored, was right. The attempts of Carter Glass and many others over the years to repeal Glass-Steagall is still a good idea, but there are two very bad ideas that I intend to do everything in my power to ensure that this legislation does not include as we proceed in this Congress. One is threatening American taxpayers by expanding bank operating subsidiary powers. The other is undermining fair competition in the protection of investors and consumers by thwarting consistent regulation of securities and insurance activities engaged in by different entities.

Today we will hear from a very esteemed witness, our friend, the Chairman of the Board of Governors of the Federal Reserve System, Alan Greenspan. Chairman Greenspan will address the first of these very fundamental issues, that is the dangers of expanding bank powers through operating subsidiaries.

Welcome, Chairman, and thank you for joining us today to educate us about this extremely important, some would say the most important, aspect of the legislation that is now before this committee.

The House Banking Committee has worked very hard to forge compromises on this difficult legislation. Unfortunately, I feel these compromises would compromise the integrity of our financial markets. H.R. 10 as reported by the House Banking Committee contains both of the bad ideas I am most concerned about. It expands the taxpayer-funded government subsidy to bank operating subsidi

aries that can engage in not only securities underwriting, but also merchant banking. It does not provide for consistent regulations of securities activities by banks and securities firms.

I look forward to learning from Chairman Greenspan about the implications of the legislation before us and how we might improve the bill. I also look forward to learning more about both of these issues at our upcoming hearing next month when we will hear from regulators, including the Treasury, as well as industry participants.

I want to thank Chairman Oxley for his continued leadership on this issue of such vast importance to the Commerce Committee and for holding this first hearing on financial services reform this Congress. I also thank my friend, the ranking member of the committee, John Dingell, for his steadfast principles of protecting the taxpayer and ensuring consistent regulation as we continue our bipartisan work on this legislation. I look forward to working with both of you, as well as the ranking member of the subcommittee Ed Towns all of the members on the committee as we once again take on the challenge of modernizing our financial service regulations for the next century and beyond. Thank you, Mr. Chairman. Mr. OXLEY. The gentleman's time has expired.

The Chair now recognizes the ranking member, the gentleman from Detroit.

Mr. DINGELL. Mr. Chairman, I thank you. Mr. Chairman, I commend you for holding this hearing on H.R. 10, the Financial Services Act of 1999, the legislation reported by the Banking Committee to modernize the U.S. financial regulatory system, to enhance competition in the financial services industry, to provide protections for investors and consumers, and to increase the availability of financial services to citizens of all economic circumstances and for other purposes.

I also want to welcome my good friend Mr. Greenspan to the committee. Welcome. We are delighted to see you here. Your good works are widely known on many matters, including the operating of the economy, but your leadership is not appreciated as well as it should be. So I am delighted to see you here, and maybe people can get a better understanding of the real leadership you have shown on this matter also. In any event, welcome to you, Mr. Chairman.

Mr. Chairman, the Banking Committee's mark falls short of many of the goals that I am concerned with, and I must inform you that in its current form I will be regrettably compelled to oppose it vigorously.

I want to thank my old friend Mr. Bliley, the chairman of the committee, for his kind remarks and also for the fine leadership which he has shown in difficult times in addressing this legislation, not just in the last Congress and this Congress, but also in other years. His effort on this has made for a better and stronger economy.

Mr. Chairman, key consumer protection provisions that the chairman of this committee and the chairman and ranking member of the House Banking Committee joined me in adding to last year's bill are not in H.R. 10 this year. The SEC opposes the bill because it eviscerates consumer and investor protection. Yesterday the

North American Securities Administrators Association submitted a 10-page memorandum outlining serious concern with this bill. Last week the National Association of Insurance Commissioners sent us a strong letter stating that the State insurance commissioners oppose H.R. 10 as passed by the House Banking Committee because the bill is hostile to consumers, to the States, and to purchasers of insurance polices. I ask unanimous consent to include these documents in the hearing record along with my statement.

Mr. OXLEY. Without objection.

Mr. DINGELL. At the same time, Mr. Chairman, we received letters from American Bankers Association, Securities Association and the ABA Insurance Association telling us not to change a word in the securities and insurance language of the Banking Committee bill. In response it should come as no surprise that I have requested the staff on this side to go over every word with a magnifying glass because this tells me there is a skunk in the wood pile somewhere. The last time I checked, the rules of the House blessed this committee with jurisdiction over securities and the business of insurance and responsibilities for reviewing and addressing these matters. No matter how difficult, we must do so, and it is clearly in the public interest that we should.

I want to welcome, as I said, my good friend Chairman Greenspan. Like all of us, I am an admirer of his because of his outstanding period of public service going back so many years. I thank him for joining us today to share with us his wisdom on matters in which he is the Nation's most foremost expert.

I may also be the only man in this room old enough to remember the banking crisis of the early 1930's. Those were grim times. I remember what it did to the economy and the people of the country and what was necessary to restore the confidence of the American people in the Nation's banking system and in the securities markets. Moreover, the thrift debacle of the 1980's should serve as a much more fresh and current reminder.

My colleagues, I will not support a regulatory structure that imposes upon the American public the danger of a repetition of these terrible events and the possibility of a similar raid on the U.S. Treasury by banks which have not engaged in the necessary standard of responsible behavior. Congress should be anxious to prevent the loss of public confidence and prevent large losses to the public treasury. I am hopeful that Chairman Greenspan can share with us some of the relevant lessons of the recent Asian financial crisis and the decision of the Japanese to adopt a holding company format in their financial structure on a going-forward basis.

Absent significant changes in H.R. 10, and that is one of the responsibilities of this government, to protect consumers, to protect depositors, and to protect, of course, the taxpayers to whom we have a paramount responsibility, I would be compelled to oppose this bill with every bit of strength that I have. Like the President, I will also be compelled to oppose any legislation that weakens our commitment to the Community Reinvestment Act.

In Greco-Roman mythology, Sisyphus was the cruel king of Corinth. His punishment in Hades was to run up a hill with a stone that constantly rolled down upon him again. As we enter banking Hades this year and attempt to roll H.R. 10 up the legislative hill