Paul Sarbanes

Mr. SARBANES

Mr. SARBANES. Mr. President, let me quickly run through some important safety mechanisms that are in the Shelby-Daschle-Reed amendment: One, a full capital deduction for investments in subsidiaries so that all such investments would be fully deducted from the bank's regulatory capital. Banks must remain well capitalized after this deduction, meaning even if the subsidiary fails, the bank's capital will remain intact. Two, downstream investments in subsidiaries be no greater than the total amount that a bank could upstream as a dividend to a holding company. So they have exactly the same extent to which they can engage in new financial activities between the subsidiary or the affiliate. We remove any advantage for subsidiaries in terms of transactions with their parent banks by applying sections 23(a) and 23(b) of the Federal Reserve Act to subsidiaries, just like affiliates. It would require the maintenance of subsidiaries as separate corporate entities. The bank's credit exposure to a subsidiary be no greater than it could have been to an affiliate. Real estate investment and insurance underwriting is not permitted in the subsidiary. All of these features, I think, go to ensuring the safety and soundness of the approach contained in the Shelby-Daschle-Reed amendment, and I am supportive of this amendment. I thank the Senator for yielding time. Exhibit 1 [From the American Banker, Sept. 2, 1998] Ex-FDIC Chiefs Unanimously Favor the Op-Sub Structure (By Ricki Tigert Helfer, William M. Isaac, and L. William Seidman) The debate on banks conducting financial activities through operating subsidiaries has been portrayed as a battle between the Treasury and the Federal Reserve. The Treasury believes banks should be permitted to conduct expanded activities through direct subsidiaries. The Fed wants these activities to be conducted only through holding company affiliates. Curiously, the concerns of the Federal Deposit Insurance Corp. have been largely ignored. The FDIC, alone among the agencies, has no ``turf'' at stake in this issue, as its supervisory reach extends to any affiliate of a bank. The FDIC's sole motivation is to safeguard the nation's banks against systemic risks. In the early 1980s, when one of us, William Isaac, became the first FDIC chairman to testify on this subject, he was responding to a financial modernization proposal to authorize banks to expand their activities through holding company affiliates. While endorsing the thrust of the bill, he objected to requiring that activities be conducted in the holding company format. Every subsequent FDIC chairman, including the current one, has taken the same position, favoring bank subsidiaries (except Bill Taylor who, due to his untimely death, never expressed his views). Each has had the full backing of the FDIC professional staff on this issue. The bank holding company is a U.S. invention; no other major country requires this format. It has inherent problems, apart from its inefficiency. For example, there is a built-in conflict of interest between a bank and its parent holding company when financial problems arise. The FDIC is still fighting a lawsuit with creditors of the failed Bank of New England about whether the holding company's directors violated their fiduciary duty by putting cash into the troubled lead bank. Whether financial activities such as securities and insurance underwriting are in a bank subsidiary or a holding company affiliate, it is important that they be capitalized and funded separately from the bank. If we require this separation, the bank will be exposed to the identical risk of loss whether the company is organized as a bank subsidiary or a holding company affiliate. The big difference between the two forms of organization comes when the activity is successful, which presumably will be most of the time. If the successful activity is conducted in a subsidiary of the bank, the profits will accrue to the bank. Should the bank get into difficulty, it will be able to sell the subsidiary to raise funds to shore up the bank's capital. Should the bank fail, the FDIC will own the subsidiary and can reduce its losses by selling the subsidiary. If the company is instead owned by the bank's parent, the profits of the company will not directly benefit the bank. Should the bank fail, the FDIC will not be entitled to sell the company to reduce its losses. Requiring that bank-related activities be conducted in holding company affiliates will place insured banks in the worst possible position. They will be exposed to the risk of the affiliates' failure without reaping the benefits of the affiliates' successes. Three times during the 1980s, the FDIC's warnings to Congress on safety and soundness issues went unheeded, due largely to pressures from special interests: The FDIC urged in 1980 that deposit insurance not be increased from $40,000 to $100,000 while interest rates were being deregulated. The FDIC urged in 1983 that money brokers be prohibited from dumping fully insured deposits into weak banks and S&Ls paying the highest interest. The FDIC urged in 1984 that the S&L insurance fund be merged into the FDIC to allow the cleanup of the S&L problems before they spun out of control. The failure to heed these warnings--from the agency charged with insuring the soundness of the banking system and covering its losses--cost banks and S&Ls, their customers, and taxpayers many tens of billions of dollars. Ignoring the FDIC's strongly held views on how bank-related activities should be organized could well lead to history repeating itself. The holding company model is inferior to the bank subsidiary approach and should not be mandated by Congress.

Mr. SARBANES. Mr. President, I suggest the absence of a quorum.

Mr. SARBANES. Mr. President, I suggest the absence of a quorum.

Mr. SARBANES. I object.

Mr. SARBANES. The Senator is absolutely right. I want to make it very clear, the provision that was adopted earlier today was an antifraud provision. It was designed to get at people who get this information by fraud. The fact of the matter is, under the current arrangements there is no restriction that precludes a financial institution from providing this information or selling this information to others. I think you are absolutely right; people would be dumbfounded to know that this information they are giving to their financial institution has no privacy protections around it. I think it is extremely important, as the Senator has emphasized, to establish such protections. It has an issue of some complexity to it. We need to work through it. I think the hearings that have now been committed to will give us the opportunity to do it. There are many members on the committee on both sides of the aisle who are interested in this issue. I hope we can move forward and bring a significant piece of legislation to the floor of the Senate.

Mr. SARBANES. If the Senator will yield, I echo his observation that this is not an issue that is going to go away. Those who are involved need to take a constructive attitude in arriving at effective ways to protect the privacy of the American people. There is no doubt about it.

Mr. SARBANES

Mr. SARBANES. If I could put a question to the chairman. There would be no intervening business between now and the vote on or in relation to the Johnson amendment, other than the debate time?

Mr. SARBANES. No intervening business with respect to this amendment?

Mr. SARBANES. Mr. President, will the Senator yield for a parliamentary inquiry?

Mr. SARBANES. Mr. President, it is my understanding that there are 60 minutes of debate equally divided.

Mr. SARBANES. Mr. President, I commend the able Senator from South Dakota because the amendment, as he was going to originally propose it, included this closing of the unitary thrift company loophole but maintained the existing law on the differential payment by the S&L's and the banks. The chairman offered that and it was accepted earlier this morning. I think the fact that it was embraced--and I think the adoption of that amendment should be taken in the context of this amendment--reflects an effort to come up with a very balanced approach on the part of the able Senator from South Dakota.

Mr. SARBANES. Will the Senator yield?

Mr. SARBANES. Will the Senator yield me 2 more minutes?

Mr. SARBANES. How much time does the Senator have remaining?

Mr. SARBANES. I commend the very able Senator from South Dakota and his colleague from Wyoming for offering this amendment. I think it is a very important amendment. They have made some very strong arguments for it. Both Chairman Greenspan and Secretary Rubin, who differ on other aspects of this legislation that is before us, are in agreement, along with Chairman Volcker and Henry Kaufman, and many others who have examined this issue, that we need to address this question. It is called the unitary thrift loophole, because over time the powers of the thrifts have been expanded. So a provision, which at an early time may not have appeared to be a loophole, now becomes a loophole through which commercial companies can acquire thrifts and, in effect, eliminate the line drawn between banking and commerce. The recent experience with banking crises in other countries--Japan, Korea, and so forth--where they had industrial financial conglomerates, indicates the difficulties and the dangers of allowing these arrangements. I want to address very specifically the argument of limiting the transferability of a unitary thrift holding company--and this would limit it only in terms of being transferred to a commercial company; it would not limit it in terms of being transferred to a financial company. It would be unfair because companies bought thrifts at a time when they could sell them to any commercial company, and it is now being asserted that this would be a taking under the fifth amendment of the Constitution or perhaps, alternatively, a breach of contract by the government. You cannot keep people from making any argument that is available to them. They can sort of reach out and grab hold of any argument that exists and sort of bring it in and try to set it down here in the middle of the Senate and say, aha, here is this argument and you have to pay attention to it. You need to look at the argument and what is involved. Let me just for a moment analyze this argument that it is a taking. The Supreme Court's rulings in the area of the fifth amendment takings of property have generally dealt with real property, not with business charters issued by the government, such as a thrift charter. However, even if a thrift charter did qualify as property for taking purposes, prohibiting transfers of thrifts to commercial companies would not give rise to liability under the standards which the courts have used to require compensation. It is being asserted here that this is going to be a taking; you are going to have to pay compensation. Then you have to take a look at it. Is this limitation that is involved in this amendment, this limited limitation with respect to the transferability of this thrift, is that going to be considered a taking by the court? I submit it would not give rise to liability under the standards which the courts have used to require compensation. Courts have held that no compensation is owed if there is not an invasion of the property or a total diminution of economic value of the property. Closing the loophole would not involve either of these two things. There is a considerable value in the thrift charter which would continue even if this limited amount of transferability is no longer permitted. In fact, these thrifts may be sold to thousands of other thrifts, banks, securities broker dealers, insurance companies and other financial companies under this legislation. Of course, this is the very kind of transfer that occurs in the vast majority of thrift transfers. It is to some other financial institution. Of course, the legislation would permit that, and this amendment does not touch that. The potential for change in the powers of a unitary thrift holding company is in fact inherent in having an S&L charter. The holder of a federally granted charter cannot expect that the government will never change the laws under which the charter operates. The Constitution does not guarantee that a company allowed to engage in some activity will have the right to continue to do so in perpetuity. I am as sensitive as any to the takings question. It is a very important part of our Constitution. It is an important part of the workings of our economic system. But we need to look at the cases in terms of what the court has interpreted as constitutional. We need to exercise some practical sense judgments. Clearly, the law has never been that a company engaged in some activities can never be limited or restrained by the government and has that right to go on in perpetuity. In the past, Congress has changed statutes governing savings associations and has required compliance with the amended statute. In 1987, Congress imposed a qualified thrift lender test requiring thrifts to hold a percentage of their total assets as qualified thrift investments. New requirement. New limitation. A unitary thrift holding company owning a thrift that failed to comply with those new requirements would have been required to divest its commercial activities. Also in 1987, we limited the transferability of nonbank banks by requiring that upon transfer the new owner bank would be required to register as a bank holding company. These actions have not been found to be takings. Let me turn to the other possible argument; that is, that there is a breach of contract by the government. The argument has been raised that closing the loophole may break a supposed contract. The Winstar case, U.S. v. Winstar Corporation et al, 518 U.S. 839, a 1996 case, has been used as a basis for this concern. However, closing the unitary thrift loophole involves facts that are materially different from those on which the case of U.S. v. Winstar Corporation was decided. In Winstar, the Supreme Court determined that the United States had made specific contractual promises to acquirers of failed thrifts and had breached those specific contractual promises.

Mr. SARBANES

Mr. SARBANES. How does the Senator get this $1 trillion figure?

Mr. SARBANES. The Senator said earlier today that the cost this is imposing on small banks is $1.3 trillion. I am thinking to myself, $1.3 trillion from these examinations? So I asked him, How did you get that figure? He took the number of examinations--about which we have just disagreed--and he multiplied it by 80,000. I am not sure where he got the 80,000 figure. Someone must have written in and said: That is what it costs our bank.

Mr. SARBANES. I don't know any study that validates that figure as the right figure. Even assuming for the purpose of this Alice-in-Wonderland discussion that both the number of exams and the costs which we were then told came to a $1.3 trillion burden, the fact is, it is $1.3 billion. That is still a lot of money. I don't pretend to the contrary, but it is a lot different from $1.3 trillion. It was escalated 1,000 times. Let me give one other example. We were told the CRA is allocating more money each year than the gross domestic product of Canada. The CRA commitments are over a 10-year period. Those commitments, factored out over a 10-year period, do not begin to approach the gross domestic product of Canada. These are only a few examples. We could give a lot more. I want to underscore these figures that come floating in out of the air, and we hear this long disquisition. When we start probing these figures, we discover it is not there; it is Alice in Wonderland. I thank the distinguished Senator.

Mr. SARBANES. Mr. President, shortly we will be voting with respect to the Bryan amendment. I, again, want to underscore the very strong and powerful statement which I think Senator Bryan made shortly after noon at the outset of this debate, and I am deeply appreciative to him for the strong leadership he has shown with respect to this amendment. We have tried to give all Members a chance to speak. I, in fact, have refrained from doing so in the course of the day in order to make sure that our colleagues had a chance to speak. I would like to take just a few minutes now. I want to speak in support of the amendment. But I really do not want to repeat a lot of the extensive discussion of the issues which have taken place, both during opening statements on the bill, and on the alternative amendment, and now on this amendment itself, although they may well bear repeating. I want to make sure my colleagues appreciate the intense feeling and the critical importance which civil rights groups, mayors, rural groups, Hispanic groups, and Native American groups attach to this issue of CRA. They have all sent letters to the committee. I ask unanimous consent those letters be printed in the Record at the conclusion of my remarks.

Mr. SARBANES. Mr. President, these letters reflect how CRA has benefited communities all over this country--small, urban, and rural. They demonstrate how CRA has expanded economic opportunities for people of all races, colors, and ethnic affiliations. Yesterday morning, the Leadership Conference on Civil Rights, our preeminent civil rights group, held a press conference in support of CRA. I would like briefly just to quote some of the comments made by civil rights leaders at the press conference, as well as comments made by individuals who benefited from CRA. Dr. Dorothy Height, chairman of the Leadership Conference on Civil Rights, president emeritus of the National Council of Negro Women, spoke, and said: Since its enactment in 1977, the Community Reinvestment Act has served as one of the crowning achievements in the civil rights movement. The premise of the legislation is simple--to make sure that economic opportunity for families and communities is available to every American. Opportunities for home ownership, small business development, and sustaining rural communities are critical to the strength of this Nation. With CRA our neighborhoods have a chance. Without it, they are discriminated against. Just as civil rights legislation enacted a decade ago sought to break down the walls of discrimination that separated us in schools, restaurants, and places of work by the color of our skin, the CRA has meant opportunity for everyone, whatever race or color. As a result of CRA, millions of minorities across this Nation now have access to the capital that will allow them to build new homes, to create new businesses, and to improve education. She concluded her introductory remarks at the press conference by saying: Leaders you see before you represent dozens of organizations galvanized by an assault on the Community Reinvestment Act. Those organizations represent millions of Americans who have been touched by CRA and millions more who deserve the same opportunity. Make no mistake about it, this issue is seen by the civil rights community as a critical civil rights issue. Fair access to credit is fundamental to hopes for economic progress in our minority communities. Another speaker at the press conference was Hugh Price, president of the National Urban League, who said: We of the National Urban League strongly support financial services modernization because we believe it is in tune with the times. But we staunchly oppose any effort to gut the CRA. We at the Urban League work with the leaders of many financial institutions. Just last week I talked with Kenny Lewis, president of Bank America, who said that his bank stands strongly behind the renewal of CRA. I know that belief is echoed by many leaders in the financial services and banking community who see it as good business for their corporations. Charles Kamasaki, senior vice president of the National Council of La Raza, stated: The National Council of La Raza is the Nation's largest Hispanic civil rights organization. We represent more than 200 local community-based organizations who provide a range of services, many of them supported by CRA-related funds in over 32 States. Mr. Kamasaki, the head of the National Council of La Raza, introduced Richard Farias as president of the Tejano Center for Community Concerns in Houston, a member organization of La Raza. Mr. Farias stated, in speaking of the importance of CRA: Now because of CRA, a number of banks in Houston created a consortium to help us purchase a $2.1 million school building. The building has 7.5 acres and 80,000 square feet of space, including a gymnasium, a cafeteria, an auditorium and 25 classrooms. They now have a charter school for success that houses 400 students and is expected to grow to 650 students. He goes on to say that it is very important to understand that CRA is not just about community development; it is about empowerment of the people; it is about being able to give low-income children and families the right that they have to not only good housing but to good education and to good health services. Daphne Kwok, executive director of the Organization of Chinese Americans, also took part in the press conference. She stated that the Organization of Chinese Americans supports the Community Reinvestment Act because it has enabled home ownership among minority and low- and moderate-income individuals: Asian Pacific-Americans, especially Chinese-Americans, Korean-Americans, Vietnamese-Americans, Asian Indian- Americans are small business owners, and many of them are seeking to open up businesses in low and moderate income areas. JoAnn Chase, executive director of the National Congress of American Indians, then spoke and stated: Founded in 1944, the National Congress of American Indians is the oldest, largest and most representative national organization devoted to promoting and protecting the rights of American Indian tribal governments and their citizens. One of our key missions has been to continuously advocate for Indian self determination and self sufficiency, and toward that end from its very inception, our communities, our governments, our people have supported the Community Reinvestment Act, which has proven to be an effective means of encouraging federally insured financial institutions to extend prudent and profitable loans in traditionally underserved areas, particularly in Indian country. Specifically, the CRA has helped focus attention to the challenges of extending credit to reservations and has acted as a catalyst to reservation-based economic development. Since the implementation of the CRA, Native American governments and citizens and our own banks have negotiated agreements for lending more than $155 million within the Indian country which has substantially advanced efforts toward economic self-sufficiency. It is a law that has helped build homes for our people, has inspired hope and has created jobs in many native communities. The final speaker at the press conference was Hillary Shelton, Washington bureau director of the NAACP, who stated: * * * on behalf of the NAACP * * * we are honored to strongly support and continue to endorse the Community Reinvestment Act and consequently oppose any attempts to weaken it. The CRA has been instrumental in the revitalization of literally tens of thousands of communities nationwide, and continues to be an important tool in the NAACP's ongoing efforts to help people and communities achieve the goals of community resurrection, development, and growth, at no cost to American taxpayers. Mr. President, there has been printed in the Record a letter from the U.S. Conference of Mayors which was quoted from earlier, a letter from a coalition of 19 family farm and rural groups, which states: Rural areas continue to suffer from a serious shortage of affordable housing. Farmers are facing the worst financial conditions in more than a decade due to declining commodity prices. Rural Americans continue to need the tools of the CRA to ensure accountability of their local lending institutions. CRA helps to meet the credit demands of millions of family farmers, rural residents and local businesses. Mr. President, I ask unanimous consent to have printed in the Record other letters from a number of organizations which have written to us in very strong support of the CRA, as well as editorials.

Mr. SARBANES. I move to lay that motion on the table.

Mr. SARBANES. The Senator from Texas interrupted the Senator to make the point on this ``comments'' question, the safe harbor issue, that if we previously had a satisfactory rating or better, they could not take into account people's comments, unless they had substantial, verifying information, and then we are being told that a lot of cases were read that indicated that ``substantial'' means a scintilla of evidence. The Senator was a distinguished attorney general for the State of Nevada for a number of years before he became the Governor. Wouldn't he read the phrase ``substantial, verifiable information'' as a more exacting standard than ``scintilla'' of evidence?

Mr. SARBANES. Mr. President, I yield such time as the minority leader may consume.

Mr. SARBANES. Mr. President, I ask for 1 minute so I can pose a question to the Senator from Texas.

Mr. SARBANES. Finally, let me simply say, as the Democratic leader indicated, unless we can get the substitute in place, we are on a veto track with S. 900. The substitute will eliminate the veto problem. So, for those who want legislation, who want to see financial services modernization enacted into law, I urge them to vote for the substitute. I assume the chairman will probably make a motion to table.