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ment. It takes an awful lot of work by a lot of people, and I commend you for your effort on this.

I also want to note that Mr. Arnold Schultz is here today from Grundy Center which is very close to Des Moines. We will appreciate his testimony.

Thank you, Mr. Chairman.
Mr. OXLEY. The gentleman yields back.

The gentleman from Illinois, Mr. Shimkus? Do you have an opening statement? None.

The gentleman from New York, Mr. Fossella. Mr. Bilbray, the gentleman from California.

Mr. Gillmor, the gentleman from Ohio.

Mr. GILLMOR. Mr. Chairman, I don't have an opening statement. I just want to welcome a fellow "buckeye” who is going to be on our last panel, W. Craig Zimpher, with Nationwide Insurance who I first knew when he worked in then Governor Rhodes' office and has had a distinguished career both in government and the private sector, and we look forward to hearing his testimony.

Mr. OXLEY. I thank the gentleman. And finally the gentleman from Maryland, Mr. Ehrlich.

No further opening statements, we will now turn to our distinguished Members panel. Let me introduce the first witness, the gentleman from Louisiana, Mr. Baker. STATEMENT OF HON. RICHARD H. BAKER, A REPRESENTA

TIVE IN CONGRESS FROM THE STATE OF LOUISIANA Mr. BAKER. Thank you, Mr. Chairman. I certainly appreciate the courtesy that

you

have extended and that of the committee to allow me to appear here this morning with Ms. Roukema and to present a perspective from the House Banking Committee on this controversial subject.

The world is changing irrevocably in manners that few understand and even less can accurately predict. No doubt there are many companies that can lend you a mortgage, but there is one out there that can also do that and sell you a casket as well under current law.

The pressure is on, whether from uniquely chartered special purpose institutions, such as unitary thrift, a section 20 affiliate, or a foreign bank. The traditional institution has competitors with market advantages governmentally created.

Just one example. Since 1990, the Fed has issued approval for 18 foreign banks to own subsidiaries that engage in the underwriting of securities in the United States. This is not insignificant as the aggregate asset size of these foreign institutions exceeds $450 billion. The Fed has acknowledged that a foreign bank may establish a subsidiary while a U.S. bank may not.

On another point somewhat unrelated but of equal curiosity, under the Bank Holding Company Act, a bank may own up to 24.9 percent of nonvoting stock in a United States corporation, but at the same time that same bank may own up to 40 percent of nonvoting stock of a foreign corporation. I never have understood nor had it explained to me why a larger share of ownership in a foreign corporation is safer than a smaller share of ownership in a domestic corporation.

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Clearly there is a patchwork of regulatory standards and statutes that create current market inequities. I note, Mr. Towns, in your opening statement your concern for having a uniform playing field in which all participants are treated equally. The regrettable observation is, today, we have irregularities that create market inequities already. But to add another level of complexity to that decisionmaking process, I would note that there are nonregulated financial service organizations that do provide a full range of financial services without similar regulatory responsibilities.

This means that competitors of regulated financial institutions have a real cost advantage in the delivery of the same financial products. For instance, Ford Motor Company can offer a money market account which is, in all respects, a checking account as well as investment counseling, insurance products, radios, and bumpers.

Is this bad? Consumers don't think so. Profits are at record levels, stock valuations are at record levels. But they don't pay deposit insurance premiums. Consumers don't care. The Federal Reserve monitoring is not there. Consumers don't care. They don't comply with CRA. Consumers don't care. Neither the OTS, the FDIC, the OCC, or the Treasury inspect the books. Customers just don't care.

There is good reason why the customers don't worry about the lack of government intrusion. As Fed Governor Ferguson best stated on February 25 of this year, and I note after the Long-Term Capital failure, “perhaps the most fundamental principle that must guide us is that private market participants are the first line of defense against excessive private and public risk in the financial system.”

I would note that it was the market that first advised the regulators of Long-Term's significant problems, not the regulatory system. Despite the regulatory failure in the LTCM problems, the system almost always works in the best interest of the taxpayer and the consumer.

Can we assure there will never be failures? Certainly not. The markets do treat failure very harshly, but can we assure that there will never be any loss to the deposit insurance fund no matter whether we have the affiliate or the subsidiary structure? Absolutely not.

But the Secretary of the Treasury and all four past and present FDIC chairpersons, the current and three preceding, two Republicans and two Democrats, agree that the op-sub provisions make market sense and consumer sense. In fact, the preceding FDIC chairmen argue that forcing activities into an affiliate actually exposes insured banks to greater risks than that of the operating subsidiary.

So what are we to do? Ultimately, the consumer and taxpayer should be our focus. Government policy should not determine profitability. Government regulations should not determine winners and losers. In America, management should discuss in their boardroom how to best use their shareholders' investment to efficiently serve customers.

The best service at the lowest price serves investors and consumers well. But leaving business managers to structure their business as they see fit should not only be permissible but encouraged. The Fed would acknowledge that for the complex international financial

corporation that is permissible under current law, the best risk analysis comes from the corporations' own internal risk-management analysis.

Can we appropriately conclude that we can best determine business structure when we can't fully understand even the business activities that we are attempting to regulate? Governor Meyer, in a speech of March 2 of this year said, "if we excluded banks from financial modernization in order to avoid safety net and subsidy transference over a wider area, banks would simply take smaller shares of the total financial markets' pie as their less-protected and subsidized competitors expanded.”

I doubt that banks would wither away, but they would surely become less important. Let me say it in my own way. Imagine for a moment your last name is Kennedy, not the Massachusetts kind but the Clinton, Louisiana, kind, and you are sitting behind the desk as the CEO of Feliciana Bank and Trust in Louisiana, a $44.2 million institution. While you look down the street, and it is a short street, you look to the automobile dealership where you used to finance six, maybe eight automobiles a month. Now G.E. Capital finances those. You look up the street to the sheriff's department and you see G.E. Capital financing the fleet-leasing program for that sheriff's department. As a matter of fact, everywhere you look in that town you find evidence of G.E. Capital, home mortgages, insurance, retail, finance, credit cards, computer services, appliance manufacturing, plastics, lighting and aircraft engines. By the way, they can advertise it all on their own network, NBC.

Now, do you think that Mr. Kennedy is really worried about affiliate versus subsidiary structure? You see, G.E. Capital is not subject to Federal regulation. Neither the FDIC, the OTC, the OCC, or CRA or any other financially regulatory constraint which Mr. Kennedy is subject to. This is just one example among many. So while we fervently debate the advisability of affiliate versus subsidiary, Mr. Kennedy wonders why A.G. Edwards, credit unions, and G. E. Capital and the like are able to do what he can't, make a profit without strangling government regulation.

Does the Federal Reserve really need to sit on Mr. Kennedy's board to protect America's economic interests? Would a subsidiary in Clinton, Louisiana, threaten national safety and soundness? I do not think so. Let the free enterprise system work. Let services and products meet consumers needs. Let regulators monitor professional conduct, and let Mr. Kennedy make his own business decisions whether those include a subsidiary or not. In this matter, financial markets will continue to innovate products and services whereby consumers will be protected and served in the best manner possible.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Richard H. Baker follows:) PREPARED STATEMENT OF HON. RICHARD H. BAKER, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF LOUISIANA The world is changing, irrevocably, in manners that few understand, and even less can accurately, predict. Governor Meyer of the Federal Reserve captures this change well.

High-speed computers and constant pressure to press the envelope of regulatory limits made possible everything from money market mutual funds to deriva

a

tives; from loans once held permanently by a bank to securitization into a capital market instruments; from computer shopping for a mortgage to a higher yielding deposit at a virtual bank; from equity mutual funds from a bank or a broker to a checking account at your credit union; from a company that will lend you a mortgage to one that will do that and sell you a casket (yes a casket manufacturer owns an S&L); and I could go on. Gov. Laurence Meyer (March

12, 1999) The pressure is on, whether from uniquely charted, special purpose financial institutions, such as a unitary thrift, a Section 20 affiliate, or a foreign bank, the traditional institution has competitors with market advantages governmentally created. Just one example, since 1990, the Fed has issued approval for 18 foreign banks to own subsidiaries that engage in the underwriting of securities in the U.S. This is not insignificant as the aggregate asset size of these foreign institutions exceeds $450 billion. The Fed has acknowledged that a foreign bank may establish and fund a subsidiary, while a U.S. bank may not.Another anachronism of financial regulation includes current Fed practices. Under the Bank Holding Company Act, a bank may own up to 24.9% of non-voting stock in a U.S. corporation, but at the same time it may own up to 40% of a foreign corporation. I have never understood how a larger share of a foreign corporation is less risky than a smaller share of a U.S. corporation. And don't get me started on the subject of unitary thrifts except for one observation. The unitary thrift charter was created by Congress in 1967. Not only do these institutions engage in diversified financial activities, they engage in commercial activities as well. Although existing charter operations number in the hundreds, many more applicants are pending approval. More importantly, of all thrifts operating today, unitary thrifts control 70% of all thrift assets.

Despite this predominant market share, are regulators in pursuit of abusive market participants? No. Are consumer organizations demanding their closure? No. Are securities and insurance companies fighting to eliminate them? Not hardly. In fact, the only group outspoken in their demand for limits on the unitary thrifts are the banks. Why, because of the competitive advantage of their charter.

Clearly, there is a patchwork of regulatory standards and statutes that create current market inequities. But to add another level of complexity to our decision marking process non-regulated financial service organizations provide a full range of financial services without a similar regulatory responsibility. This means that nonregulated competitors of regulated financial institutions have a real cost advantage in the delivery of financial services.

For instance, many non-banks such as GMAC and Ford Motor Company offer a money market account, which is, in all respects a checking account, as well as investment counseling, insurance products, radios, and windshield wipers. Is this bad? Customers don't think so. Profits are at record levels, stock valuation is at record levels. But they don't pay deposit insurance premiums. Customers don't care. The Federal Reserve doesn't claim to monitor their conduct. Customers don't care. They don't comply with CRA. Customers don't care. Neither the OTS, the FDIC, the OCC, or the Treasury inspect the books. Customers don't care. And there is good reason why customers don't care about intrusive government regulation.

As Fed Governor Ferguson best stated on February 25 of this year, note after Long Term Capital's demise:

Perhaps the most fundamental principal that must guide us is that private market participants are the first line of defense against excessive private and public risk in the financial system. Private borrowers, lenders, investors, institutions, traders, brokers, exchanges, and clearing systems all have huge stakes in containing their risks as individual agents and risk to the system as a whole. Private market participants can discourage excessive risk taking by choosing to do business with those firms that demonstrate sound risk management systems, and portfolios that balance appropriately risk and expected return.Gov. Ferguson, Feb. 25, 1999) Despite the regulatory failure in the LTCM incident, the system almost always works in the interest of the taxpayer.

Can we assure there will never be failures? Certainly not. The markets do treat failure harshly! Can we assure there will never be any loss to the deposit insurance funds, no matter what structure we dictate? Absolutely not.

But I am assured by the Secretary of the Treasury, and all four FDIC chairpersons, (the current and three preceding—2 Republicans and 2 Democrats), agree that the op-sub provisions make market sense and consumer sense. In fact, the preceding FDIC chairmen argue that forcing activities into an affiliate actually exposes insured banks to greater risks than that of an operating subsidiary.

So what are we to do? Ultimately the consumer and the taxpayer should be our focus. Government policy should not determine profitability. Government regulation should not determine winners and losers. In America, management should hold discussions in the boardroom how to best use their shareholders investment to efficiently serve their customers. The best and most convenient service at the lowest price serves investor and consumer well. Permitting business managers to structure their business as they see fit should not only be permissible, it should be encouraged.

The Fed acknowledges, that for complex international financial institutions—all operating under existing law—the best risk analysis comes from the institutions own internal managerial risk assessment. Can we appropriately conclude that we can best determine business structure, when we don't fully understand the nature of the business activities we are attempting to regulate?

Let me say it another way. Imagine for a moment your last name is Kennedynot the Massachusetts kind, but the Feliciana Louisiana kind, and you're sitting behind the desk of Clinton Bank and Trust, which is a $44.2 million community bank. While we debate subsidiary versus affiliate, he looks down the street and sees, say for example, the local credit union or GE Capital which is financing the 6 or 8 cars a month he used to finance. He sees GE Capital down the street leasing an auto fleet to the Sheriff's department. GE Capital in fact can do home mortgages, insurance, retail finance, credit cards, computer service, appliance sales, plastics, lighting, and aircraft engines, and advertise it all on their network-NBC. All without bank holding company regulation. Do you think Mr. Kennedy is really worried about affiliates versus subsidiaries? You see GE Capital is not subject to Federal regulations, FDIC, OTC, OCC—and particularly CRA—or any other financial regulatory constraint, but Mr. Kennedy is subject.

Now this is just one example among many. So while we fervently debate the advisability of affiliate versus subsidiary, Mr. Kennedy wonders why credit unions, unitary thrifts like AG Edwards, GE Capital, and the like are able to do what he can't-make a profit without the strangling government regulation. Does the Federal Reserve really need to sit on Mr. Kennedy's board to protect America's economic interests? Would a subsidiary in Clinton, Louisiana threaten national safety and soundness? I do not think so.

Let's let free enterprise work. Let services and products meet consumer needs. Let regulators monitor professional conduct. And let Mr. Kennedy make his own business decision-whether a subsidiary or not.

Mr. OXLEY. Thank you, Mr. Baker.

We now turn to our distinguished lady from New Jersey. What are your druthers, Marge?

STATEMENT OF HON. MARGE ROUKEMA, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NEW JERSEY Mrs. ROUKEMA. Well, my druthers would be, I think in the interest of your time and everyone's patience here, to just submit my testimony and give maybe a 2 minute summary so that it can be submitted. Because I, as chairwoman of the Financial Institution Subcommittee, have very strong feelings here on the subject of the holding company affiliate structure that are consistent with Chairman Greenspan's position. I know you, Mr. Chairman, have referenced the Greenspan position.

This is not about winners and losers, it is about fire walls and safety and soundness and the American taxpayers. In my full testimony, I reference the fact that if we don't learn from history, we are doomed to repeat the same mistakes and item by item referenced the savings and loan debacle as being a parallel that we would be inviting if we did not follow Mr. Greenspan's position.

This is not a turf battle. It is about having more than rhetoric relating to safety and soundness and those fire walls. I believe firmly, as my testimony will reflect in specific detail, that the holding company structure is absolutely essential to prevent conflicts of interest and the safety and soundness questions.

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