Jim Leach

Mr. LEACH

Mr. LEACH. Madam Chairman, campaign reform is the most pressing democratic issue facing the Nation. In politics as in sports, how the game is played matters. A government of the people, by the people, and for the people cannot be a government where influence is disproportionately wrought by those with large campaign war chests. Lord Acton once wrote that power corrupts and absolute power tends to corrupt absolutely. A fitting corollary to the Acton dictum is the precept that even more bedeviling than aspiring to power is fear of losing it. The current system is an incumbent-based political monopoly that rewards those who accommodate rather than stand up to interest groups. Campaign reform is about empowering citizens rather than influence peddlers. It is the equivalent of applying the antitrust laws to the political parties. It should be advanced. In this regard, there are a number of thoughtful approaches that will be brought to the floor in this debate. My preference is for the Shays- Meehan bill, but I acknowledge that it has flaws, the biggest of which is it does not go far enough. I would have preferred it to be accompanied by spending limits and greater restraints on political action committees, the so-called PACs. Nevertheless, I think Shays-Meehan is probably the most that can be achieved this year, and I am hopeful it, or something near it, will be the final product.

Mr. LEACH

Mr. LEACH. Madam Chairman, I yield 2 minutes to the gentleman from Delaware (Mr. Castle), my distinguished friend and colleague, the subcommittee chairman.

Mr. LEACH. Madam Chairman, I yield 3 minutes to the gentlewoman from New Jersey (Mrs. Roukema), distinguished chairman of the Subcommittee on Financial Institutions and Consumer Credit. (Mrs. ROUKEMA asked and was given permission to revise and extend her remarks.)

Mr. LEACH. Madam Chairman, I yield 2 minutes to the gentleman from New York (Mr. Lazio), our distinguished colleague and close friend.

Mr. LEACH. Madam Chairman, we come to the Congress today to deal with truly historic legislation. Everybody knows there are massive changes underway in the financial landscape. Not all of us like all of these changes. In fact, I would suspect the majority of the country and the majority of this body have serious doubts. But the bill we are bringing before the Congress is about the question of whether we want to have a government of laws or of men, whether we want to have laws shaped and constrained to defend the financial system for the benefit of the public. What we really have before us as we deal with issues of this nature are differences between and within industrial groupings, differences between and within regulatory bodies, and questions of the public interest. In my view, the principal issue is the latter, what is in the public interest. What we have in the bill that is being brought before us is a bill designed to be pro-competitive. In its broadest outlines, there is enormous support in the administration, both sides of Congress, both committees for the principle that we ought to have more competition within financial services; banks being allowed to offer more securities and insurance services, insurance companies more banking and securities products, securities firms more insurance and banking products. That is a pro-competitive circumstance. Now, there are many differences of judgment on the subtleties: who regulates, who gets what powers relative to what other institutions. My view is very simple. We ought to put a great emphasis on antitrust, we ought to put a great emphasis and decide as many issues as possible on what is the most pro-competitive option, and we ought to be, most of all, concerned for small individuals and small institutions. Here let me just stress from the perspective of a Midwesterner, for the first time we have historic new powers granted to community banks to allow them to offer lower-cost services for small business and for agriculture based on access to capital from a government-sponsored enterprise, the Federal Home Loan Bank system. We also have the capacity of the consumers to get services from more sources in a single moment, what is called one-stop shopping. That is the framework of the bill. I think it makes sense. There are different subtleties that we will get into and certainly an amendment that I will be offering that I feel is of enormous consequence. Having said that, let me turn for a moment to the regulatory situation. What this bill does is establish functional regulation with a bit of a tilt to the Federal Reserve Board. The Department of the Treasury has some objection to this tilt. I would only say for Members of this body that the Federal Reserve Board is the only institution of the United States Government that has significant experience in the holding company regulatory area, which is what we are really getting into with this legislation. It is also the only institution that has resources available in a time of emergency, absolutely extraordinary and stunning resources that can be brought to bear in an instantaneous time period. It also has the greatest reputation for being a nonpoliticized institution of the government. These are reasons that this Congress has historically tilted, not just this legislative body, but historically tilted to the Fed. My own view is, the Department of the Treasury has some reasonable positions that this Congress is going to have to take into consideration. The gentleman from New York (Mr. LaFalce) will offer an amendment tilting in that direction, I think, fractionally too far, but in any regard, tilting in that direction. Certainly, whatever happens on this floor, if this bill passes, if we go to conference, I would expect the Treasury to have a seat at the table, and we will certainly take into consideration their views. But I would simply say to my friends and colleagues that have listened to the Department of the Treasury about certain concerns, I would hope that the Department of the Treasury would recognize that the major issue is what is in the public interest, not what is in the parochial interests of any particular institution of government. We have to be enormously cautious as we proceed that, as new powers are undertaken, as new changes occur in the marketplace, that we have a credible regulatory framework set in place. That is what I believe this bill in its final measure accomplishes. Certainly, there are nuanced changes that can occur without great damage to that structure, but I would hope very much that the administration and the other side would recognize that these are honest differences of opinion that this body will have to deal with over time. Madam Chairman, In this context, H.R. 10, the Financial Services Act, references a historic effort to modernize the basic laws governing the financial services sector of the economy so that our banks, securities and insurance firms can better serve customers in the United States and remain world leaders as financial services providers. The Glass-Steagall Act, which has separated commercial banking from investment banking, turns 65 years old this year. During these past six decades, financial services has proved to be one of the fastest evolving sectors of the economy, yet it continues to be governed by legislation that is antiquated. H.R. 10 has been several years in the making, and has involved negotiations and compromises: between different congressional committees, different political parties, different industrial groupings and different regulators. No single individual or group got all--or even most--of what it wanted. But it should be remembered that while the work of Congress inevitably involves adjudicating regulatory turf battles and refereeing industrial groups fighting for their piece of the pie, the principal work of Congress in the work of the people. To ensure that citizens have access to the widest range of products at the lowest possible price; that taxpayers are not threatened by institutions that take unacceptable risks; that institutions are able to compete against their international rivals, which far outweigh even our largest financial services groups. The trick in crafting financial services legislation that works to the public interest is to enhance competitiveness abroad, while advancing competition here at home. In this contest, H.R. 10 strengthens the competitive position of America's financial services sector internationally and at some time empowers community banks and small financial institutions to ensure competition and consumer choice. We address this legislation, of course, in the shadow of large mergers that have been announced in the financial services sector. Many of us have concerns about certain trends in finances. The key, whether one likes or dislikes what is happening in the market place, is to ensure that appropriate regulation is in place--anti-trust, consumer, and perhaps, most critically regulation related to derivatives always and other complex financial products. In this regard, this bill opts for functional regulations and for the primary of non-politicized Federal Reverse supervision. Here it deserves stressing that amid all the publicity about large financial institutions, the true beneficiaries of this legislation are small community banks and the ordinary citizens and small businesses they serve. This bill is opposed by many of the largest banks in the country, because they can already take part in most of the activities the bill permits. Americans have long held concerns about bigness in the economy. As we have seen in other countries, concentration of economic power does not lead to increased competition, innovation or customer service. But the solution to the problem of concentration of economic power is not to deny small banks the new powers included in H.R. 10. It is to empower them to compete against large institutions, combining the new powers granted in this legislation with their personal service and local knowledge in order to maintain and increase their market share. In order to compete against large regional institutions or new technologies like Internet banking, community based institutions need new powers like the ones granted in H.R. 10. Banks which stick with offering the same old accounts and services in the same old ways will find their viability threatened. For many communities, retaining their local, independent bank depends upon granting that bank the power to compete against mega-giants which are being formed under the current regulatory and legal framework. In a David versus Goliath circumstance, H.R. 10 is the small banks' slingshot. H.R. 10 provides community banks with the tools to compete, not only against large mega-banks but also against new technologies such as Internet banking. First, H.R. 10 gives community banks the ability to offer ``one stop shopping,'' so that they can attract new individual and business customers and retain customers who might otherwise feel they have outgrown a community institution. Large financial institutions can already offer a variety of services. But community banks are usually not large enough to utilize legal loopholes like Section 20 affiliates or creation of the unitary thrift holding company which large institutions--commercial as well as financial--have turned to. Second, H.R. 10 gives community banks access to low cost federal funds through the Home Loan Bank System, letting small banks compete against the Farm Credit System in providing credit for agricultural and rural development projects. Not only will community banks benefit from this provision, but increased competition in rural lending will lower costs to farmers. Third, H.R. 10 prohibits what are called ``deposit production offices''--that is, offices which are designed to gather up deposits in communities without lending out money to people in these communities. This provision helps ensure that deposits made by members of a community stay in the community, thereby creating economic growth and opportunity. By bolstering the viability of community-based institutions and providing greater flexibility to them, H.R. 10 increases the percentage of dollars retained in local communities. It should be our goal to approve a bill that first of all gives greater choice and lowers prices to the consumers of financial services; second, protects the taxpayer; and third, is balanced between the various industrial and commercial interests. As we all know, there are complex issues involved in this legislation, and there will be differing judgments on major issues by members. One thing we all may agree upon, however, is that Congress needs to reassert its Constitutional role in determining what should be the laws governing financial services, instead of allowing the regulators and courts to usurp this responsibility. If Congress turns its back on financial services modernization, we should not fool ourselves that rapid evolution in the fields of banking, securities and insurance will cease. It will not. Financial services modernization will take place with or without Congressional approval. Without this legislation, however, changes in financial services will continue unabated, but they will take place in an ad hoc manner through the courts and through regulatory fiat, and will not be subject to the safeguards and prudential parameters established in this legislation. Now is the time for Congress, not the regulators and the courts, to step up to the challenge of modernizing our nation's financial services sector for the 21st century, to ensure that it remains competitive internationally, that it is stable and poses no threat to the taxpayer, and that it provides quality service to all our citizens and communities. Madam Chairman, I reserve the balance of my time.

Mr. LEACH. Madam chairman, I yield myself such time as I may consume. (Mr. LEACH asked and was given permission to revise and extend his remarks.)

Mr. LEACH

Mr. LEACH. Mr. Speaker, just briefly to respond to the gentleman from Massachusetts (Mr. Kennedy), whose perspective I think we should listen to very carefully, this bill does advance low cost banking accounts as obligations of certain kinds of banking institutions, which is a very powerful step forward to protect low income people. Secondly, in terms of protecting smaller institutions, this bill allows community institutions of a smaller size to tap into the Federal Home Loan Bank system, which is a government-sponsored enterprise, to be able then to marshal low cost loans for farmers and for small businesses. This is a new power designed for small institutions, basically to serve smaller communities. These are very extraordinary new powers. Finally, let me just conclude by saying all of us are concerned about some of the trends in finance today. The question is not whether the trends are all wrong, but whether this bill applies more humanity and more reasonableness in controlling and constraining those trends. I believe it does.

Mr. LEACH. Mr. Speaker, I want to make several points on the consumer protection and CRA protection issue. In several ways, CRA is expanded in this bill. One is all subsidiary depository institutions will have to have a satisfactory CRA rating to take on any new powers. That is the first extension of CRA in this regard. Secondly, for the first time, CRA is partially placed on the securities industry and the so-called wholesale financial institutions. Those are expansions, not contractions, of CRA. The third point I would like to stress is that we are looking at expanding in addition the antitrust authorities of the United States of America. If the managers amendment is adopted, we will have stronger antitrust laws. We will move in the direction of greater oversight, not less, of the antitrust laws of the United States, as applied to financial institutions. These are very important consumer provisions, and I think that one should be very cautious about reaching judgments to the contrary.

Mr. LEACH

Mr. LEACH. Madam Chairman, I rise in opposition to the amendment. I do not want to speak at length at this time; I simply would say that the gentlewoman has outlined a very thoughtful perspective on a very troubling area of law. I happen to believe this is perhaps the most profound amendment, if not profound approach, that applies to the financial landscape in the United States that can be expressed or will be addressed by this body, and I will have a substitute amendment at the appropriate time that will be designed, in effect, to negate the effects of this particular amendment. I would simply suggest to my colleagues that if one believes that what this country needs is more conglomeration, greater integration of financial institutions with other parts of commerce, then this amendment is a very sensible way to go. If, on the other hand, one believes that the engine of dynamism in this country are smaller enterprises, more discreet enterprises, enterprises that are hallmarked by competition, enterprises that are hallmarked by nonintertwined capitalism, then I think one will want to give serious thought to alternatives, or the alternative that I will be presenting. Madam Chairman, at this time I would allow the gentlewoman and the advocates of her approach to make as strong a case as they can marshal, and I reserve the balance of my time.

Mr. LEACH. Madam Chairman, I also believe that what the gentleman is doing makes sense. I would only also stress what an enormous contribution he has made to the committee this year. I think this is a worthy amendment.

Mr. LEACH. Madam Chairman, will the gentleman yield?

Mr. LEACH. Madam Chairman, likewise, it is a very thoughtful amendment from a very thoughtful Member. I urge its consideration.

Mr. LEACH. Madam Chairman, will the gentleman yield?

Mr. LEACH. Mr. Chairman, again, I think this is a very thoughtful amendment, and I am delighted the gentlewoman has brought it to the attention of the House and urge its adoption.

Mr. LEACH. Mr. Chairman, will the gentlewoman yield?

Mr. LEACH. Madam Chairman, in my view, it is a very thoughtful amendment. We are very appreciative that the gentleman has offered it, and I hope it will be adopted.

Mr. LEACH. Madam Chairman, will the gentleman yield?

Mr. LEACH. I yield to the gentleman from Nebraska.

Mr. LEACH. Madam Chair, I yield myself such time as I may consume. First, let me talk about competition. In case no one has noticed, over the last 2 decades the United States of America has outstripped competitively virtually every Western European country. We organize differently than Europe. We decentralize. In case nobody has noticed, the last 7 years Japan has averaged about 1 percent growth. The United States 2 to 4 times the rate of growth in each of these years in Japan. We organize differently. In terms of speed, in very short order, very large things can occur. We have just witnessed announcement in the last 4 or 5 weeks of the largest financial combination in American history. Reports after the fact indicate that the leadership of the two institutions involved, Travelers and Citicorp, reached a decision in a 6 to 7 week time frame. As financial institutions grow, these percentage restraints grow with them. So we have a circumstance that the larger financial institutions become, the larger the commercial enterprises they can intertwine with. In very, very short order the American commercial landscape as well as financial landscape can change if this kind of approach is adopted. Finally, let me just note that in addition to concentration of ownership that can occur, we are likely to get a concentration of geographic control. It simply is a fact that most large enterprises are not located in rural areas. It simply is a fact that people in what are called money center areas are more mobile with large sums of capital than people who are not. And so, in very short order, if one goes ahead with an approach that authorizes the mixing of banking and commerce, one can see a concentration of ownership grow in this country and one can see a geographic concentration of that ownership come to be of rather telling dimensions. So I would simply urge this Congress to note that, other than some very large interest groups, I know of no one that advocates this approach. I have never in my time in public life gotten a letter that has said, ``What ails America is that Chase Manhattan and General Motors are not combined.'' I have never gotten a letter that says, ``What we need are larger enterprises, not from growth within but from conglomeration.'' And I just suspect that if the American public thought this through, there is not only lack of majority support, there is lack of any support other than a very, very few very, very wealthy people. So I would urge restraint.

Mr. LEACH. Madam Chairman, I yield 1 minute to the distinguished gentleman from California (Mr. Campbell), who is also a coauthor of the amendment.

Mr. LEACH. Madam Chairman, I yield 3 minutes to the gentleman from Nebraska (Mr. Bereuter), my distinguished friend and coauthor of the amendment. (Mr. BEREUTER asked and was given permission to revise and extend his remarks.)

Mr. LEACH. Madam Chairman, I yield 3 minutes to the gentleman from California (Mr. Campbell).

Mr. LEACH. Madam Chairman, I yield myself such time as I may consume. The movement to go beyond the integration of financial services and eliminate the traditional legal barriers between commerce and banking is simply a bridge we should not cross. It is a course fraught with risk and devoid of benefit and one for which there is no justification. Such a step would open the door to a vast restructuring of the American economy and an abandonment of the traditional role of banks and impartial providers of credit, while exposing the taxpayer to liabilities on a scale far exceeding the savings and loan bailout. At issue with financial services modernization is increased competition. At issue with mixing commerce and banking is economic conglomeration, the concentration of ownership of corporate America. Recognizing this, warnings about mixing commerce and banking have been issued by the Federal Reserve Board, by Paul Volcker, and by consumer activist Ralph Nader. It is opposed by groups representing consumers, labor organizations, community bankers, farmers, travel agents, realtors, pharmacists, building contractors and the self- employed. In other words, the concept is opposed by the millions of workers, small businessmen and women who are the generators of economic prosperity in the United States. Proponents of a commercial basket argue that U.S. financial holding companies need a commercial basket to be able to compete with foreign competitors, and that virtually all European countries permit banks to make direct investments in commercial activities. However, this overlooks a couple of simple facts. First, in testimony before our committee, Chairman Volcker noted that the mixing of commerce and banking in Germany, France, Spain, Japan and elsewhere has led to massive financial losses for both banks and taxpayers in these countries. There is plenty of recent experience in other parts of the world to suggest that potential problems with banking-commerce links are not just theoretical, Paul Volcker noted. Second, a recent New York Times article indicated that the European universal banks have a lower return on equity than U.S. banks, such as Citicorp, which does not have a commercial basket. So why would we encourage our banks to go in that direction? Third, the U.S. financial system has much more depth and credit in equity markets. That is one of the strengths of the United States system. It thus could not be more ironic that powerful groups in Washington are today suggesting that Congress redesign America's financial landscape to make it more like that of Japan and Germany, France and Spain and the 1980s United States S&L industry. Mixing commerce and banking only benefits large banks and large corporations at the expense of small banks and small business. For decades small business has been the engine of job creation in the United States, and mixing banking and commerce places American job growth in jeopardy. For instance, would an individual hoping to open a restaurant in a town where the only bank was owned by McDonald's be able to obtain a loan, or would the bank disregard its role as an impartial provider of credit? Would a bank owned by a real estate developer provide comparably priced credit to competing developers? Given these troubling possibilities, it is no surprise that the nonpartisan General Accounting Office issued a report demonstrating that there is no compelling economic argument for mixing commerce and banking and a lot of socioeconomic and political jeopardy in doing so. In this time of crisis in Asian economies, the lessons of the chaebols of Korea, the keiretzus of Japan and cartels of Indonesia should not be lost in the United States. Those who advocate financial modernization legislation which mixes commerce and banking might want to take a hard look at the conflicts of interest endemic to systems that have allowed such mixing. In East Asia, bank ownership of industrial firms led to crony capitalist relationships with the government. The virtue of America's decentralized, stock-market-oriented financial system is that credit and investment decisions are made based on economic fundamentals, not entangled relationships or corporate favoritism. America is a country which has traditionally opposed concentrations of power, both political and economic. It is the country of Jeffersonian individualism, Jacksonian bank skepticism and Teddy Roosevelt trust busting. The contemplated mixture of commerce and banking goes beyond the lessons that we have learned and the values that we hold. Madam Chairman, I reserve the balance of my time.

Mr. LEACH. Madam Chairman, I offer an amendment as a substitute for the amendment that would eliminate the commercial basket for financial services holding companies.

Mr. LEACH. Madam Chairman, I yield myself such time as I may consume. Madam Chairman, let me make several points. There has been a lot of talk on the floor today about the bill in general. This amendment comes to summarize several aspects of it. For example, there has been talk about consumer issues, protecting the public. I do not know a bigger consumer issue or a bigger public protection issue than the question of do we allow the safety net of financial institutions to be spread to commercial activities of banking institutions. This is what has cost lots of countries in the world lots of money. Asian countries, European countries, a French bank, a Spanish bank, German institutions have cost substantial funds either to their institutions or to their public deposit safety nets, if they exist. Let me give an example in Germany, because we have focused so much time in the Far East. In Germany a few years back there was a metals firm that went under called Metallgesellschaft. This particular metal company entered into some very sophisticated derivatives trading. A study at the Chicago Federal Reserve Bank has indicated that they believe that the risk environment involved, the lack of supervision, because it was associated with a commercial bank, caused substantial losses; by ``substantial'', $6 billion. The Chicago Federal Reserve then examined an American company not associated with the bank, a major American company called Enron. Enron entered into the same kinds of derivative transactions on the same metals at the same time. It made a mistake or two, but because of the discipline of the United States stock market, Enron run survived quite nicely, and it is prospering today. Metallgesellschaft caused enormous losses to a particular financial institution. Now, if we think about what it is that is at stake in all of this that one relates to, is there a difference between financial prowess and management of enterprise prowess? What we have developed in this country today are the most sophisticated capital markets, but also capacities of people that know how to manage money to take over lots of enterprises, enterprises that they may not be very good at managing. I happen to think that there is a huge distinction between management and financial prowess. And what this approach before us has in mind is the idea that because one is a good money manager, one then can become a manager of manufacturing, a manager of retail sales, and the end result is very simple. It is a concentration of ownership. This country has long had an antipathy to concentration of ownership. Here we are going to be looking at combining financial and commercial ownership in ways that I think, if one takes a step back and looks at it, one should have grave doubts about. I know, frankly, some very smart individuals have brought this approach to the Congress that are Members; smart people on the outside have suggested it would be the way to go. But every time I try to describe it neutrally to people in my district and I ask the local Rotary if they think the local bank ought to own the local department store, if they think it would be smart for a national auto company to be intertwined with a national bank, I get people saying, you have got to be crazy. That is what this amendment not only endorses, but leads to. I personally think we ought to just take a step back, think it through and suggest that mixing commerce and banking, which is an abstract concept, just simply does not fit the United States of America. I urge serious consideration of the amendment that I will shortly be offering to this particular approach.