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November 8, 1999
An analysis of the Gramm-Leach-Bliley Act reveals that the only broadening of the Community Reinvestment Act in the bill is the requirement that only holding companies with banks rated Satisfactory for CRA can be granted new powers, or (the most pertinent example) acquire insurance companies. But currently 98% of banks are given Satisfactory ratings by the regulators, including ALL of the banks of the top holding companies. The Administration and its Treasury Secretary, Larry Summers, agreed to a slow down in CRA exams for 80% of the banks in the country, to once every four to five years, and to punitive reporting requirements that only apply to community groups that comment on or testify about the CRA. What keeping and broadening of CRA is this?
This Reporter traveled to Washington on November 5, in part to explore this question. The account below relates statements of Treasury Secretary Larry Summers and two others in the Treasury Department. For the sake of immediacy (or perhaps just experimentation), it will be told in the second person, present tense.
To enter the Treasury Department on 15th Street, you have to have given your Social Security number and date of birth in advance. Upon entering the building, you go through a metal detector. Youre asked for a photo I.D. by the guard. The floor is checkered black-and-white, like a 1950s diner. Up to the third floor; down a hall. A meeting room like a French chateau, with heavy curtains, a pink ceiling, carved wood. In strides Larry Summers, followed by his Under Secretary for Domestic Finance, and a Deputy Assistant for Community Development Policy.
Heres the first question: how can the Administration claim that merely requiring a holding companys banks to have Satisfactory CRA ratings in order to buy insurance companies is an expansion (or broadening) of CRA, since 98% of banks are rated Satisfactory? The Secretary leans back and says, Well, on that point, I dont think we can claim it is a major expansion. You have to understand the political climate... I do, however, think weve maintained the relevancy of the Community Reinvestment Act.
While trying to reconcile this with Clintons public claim to have broadened the CRA, theres a voice of a elementary school English teacher in your ear: isnt it relevance, and not relevancy?
Asked why he acceded to Senator Gramms demand for detailed financial disclosures by those organizations which comment on CRA, the Secretary launches into a story. I was very involved in EITC... I remember when the allegations of fraud were made, we could have just said, people are poor, they do what they can. But we agreed to an aggressive anti-fraud provisions, and I think its been better, politically. Only after hes finished can you decipher the acronym -- its the Earned Income Tax Credit.
The Secretary pauses, then says, I think if this financial modernization bill had been torpedoed, solely on the issue of community groups disclosures, it wouldnt have helped communities, politically. People can always raise questions, after a negotiation, and ask Why werent you stronger on this or that point. But we did the best we could, and no one should question our good faith.
The Secretary is asked about the two CRA studies the Treasury Department and Fed are required to do, under the Gramm-Leach-Bliley Act, and he become animated for the first time. I assume you believe, as I do, that there are loans made due to the CRA -- that is, that there is some base line of loans that would be made anyway, then, on top of that, loans that can be attributed to CRA. You glimpse for a moment the danger of studying only the most innovative or experimental loans, but the Secretary continues: I come from a background where rigorous methodology is important... But be aware, we will not prepare an advocacy document. If others release advocacy documents, we will prepare advocacy documents to counter them. But our study will be objective.
Minutes later, the Secretary is called away, to Capitol Hill, about African debt relief. He leaves behind his Undersecretary for Domestic Finance, and his Deputy Assistant Secretary for Community Development Policy. Youre told: We believe in the access of all to the capital markets; were glad we did it during a strong economy, Youre told that they thought the agreement deleted the words detailed and itemized from the sunshine provision. But, thats the language the President gave Democrats the green light to vote for on November 4. And now its five oclock, and time to hit the bricks on 15th Street. In the dusk, assorted vultures caw into minuscule cell phones. Twilight of the millennium...
November 4-5, 1999
Today the Senate approved the financial deregulation bill, 90 to 8. This evening, the House followed suit, 362 to 57. The bill now goes to the President for his signature. While there have been calls for a veto, mostly on consumer privacy, Community Reinvestment Act, and corporate monopoly / Too Big To Fail grounds, the President, through his Treasury Secretary Larry Summers, has indicated he is eager to sign the bill. Summers wrote a letter to Congress on November 3, urging a yes vote, but expressing concern about one of the boondoggles in the bill: the provision allow a mutual insurer that wants to go public without returning the proceeds to its policy holders to simply move to a state that allows this. Summers and the President continue to claim the bill is strong on CRA.
On the House floor on Thursday night, no one challenged the Administrations one purported win on CRA: the provision that only holding companies whose banks have Satisfactory CRA ratings can acquire insurance and other firms. In 1998, over 97% of banks were rated Satisfactory or Outstanding, so this principled prohibition means very little, in the real world. Lacking any factual basis to claim leadership on CRA, some defended their vote with anecdotes. One Democrat confided (to the entire House, and the C-SPAN audience) that an unnamed Senate staffer who thought John Hawke was too soft on CRA said after the Conference Committee deal that the Senate caved on everything. What would that be, exactly? An illusory maintain Satisfactory rating (which is almost automatic)? Meanwhile, Phil Gramm (R-TX) has already bragged to the National Journal that hed beaten Clinton on CRA, because he sensed that with the Administrations post-Chairmens Mark veto threat, Clinton had taken a hostage he wasnt prepared to shoot. Too much bank money flowing around, for all concerned.
During the House debate, Rep. Markey (D-MA) noted that while Citigroup in Germany follows German law, and gives its customers a privacy contract, Citigroup claims its too complicated or burdensome to do so in the United States. Pro-bill members of both parties kept repeating that this bill contains the strongest privacy protections to date, while also revealing that its main protection is that consumers remain free to take their accounts out of banks whose privacy policies they dont agree with. Thats some pretty strong protection, courtesy of the U.S. Congress.
Rep. Maxine Waters (D-CA) hammered the bills CRA provisions, saying that because one person wanted to attack CRA, most of her Democratic colleagues had agreed to provisions that will burden the community groups that enforce the CRA -- reporting requirements these groups will not be able to comply with. The activists will go away, Rep. Waters said. Her colleague from Florida said the bill would impose penalties on groups; the Feds will whack [the groups], she said. Rep. Barney Frank (D-MA) noted that the bill would deregulate banks, while over-regulating community groups. Rep. Kaptur (D-OH) said the bill would disable community groups and make them a target.
The bulk of the Democrats, however, went along with the bill. Rep. Jackson Lee (D-TX) said shed voted yes, but hopes that Congress comes back to the floor about Senator Gramms anti-CRA provisions. Rep. LaFalce (D-NY) engaged in a staged colloquy with Rep. Leach (R-IA), in which they purported to enter into the legislative history that tax returns will suffice as a report, or simply a listing by category.
During the two counts of the House votes (first on how the debate would be conducted, then on the bill), C-SPAN took calls from its audience, under three separate lines: Liberal, Conservative and Moderate. Virtually all of the several dozen callers were against the bill, calling it a give-away to the big banks and an abuse of privacy. It seems that if one help a referendum on this law, the public would reject it. But the politicians are unconcerned about this split, since few apparently follow the progress of laws like this, and for few would it be a litmus test in the next election. The feeling seems to be, make your public points on symbolic issues, whether flag burning or obscene art; cast your votes for the financial services industry, because they can make or break your campaign chest.
Its not rhetoric to call this a financial deregulation bill -- thats exactly what Phil Gramm called it, just before the Senate vote on Thursday afternoon. This, then, would be Clintons near-to-last legacy: the deregulation of the financial services industry, in a bill that also disables (according to Rep Kaptur of Ohio) the community groups that have served as the de facto watchdogs of banks records of lending in their communities.
November 1, 1999
The final version of the financial deregulation bill may be voted on by the House and Senate on November 2 and 3. At weeks end on October 29, the Treasury Department was continuing its attempt to portray the bill as positive for the Community Reinvestment Act. But doubts were growing.
In the cold light of day, after the midnight wheeling-and-dealing on October 21, many observers noticed that the Administration and most of the Democrats on the Conference Committee had gotten very little, for CRA, in the final deal. They agreed to much-extended CRA exams for 80% of the countrys banks, and to a sunshine requirement that only targets organization which comment on or testify about CRA, in exchange for a requirement that only holding companies with banks rated Satisfactory or better for CRA could use the new power (e.g., buy insurance companies). But 98% of banks are rated Satisfactory. This past week, Treasurys Office of the Comptroller of the Currency released 57 CRA grades -- all were Satisfactory or Outstanding...
Midweek, the actual language of the sunshine provision was circulated. It requires reporting (but only by groups that mention CRA -- see below) of agreements with banks or bank-affiliates. The inclusion of affiliates in the sunshine requirement is inconsistent with the bills rejection of proposals to apply CRA to bank affiliates. For example, if a fair housing group reaches an agreement with Travelers Property Insurance (which is a bank affiliate), the fair housing groups would have to report in detail on its use of funds to the OCC, Citibank, N.A.s primary regulator. But the bill explicitly does NOT extend CRA to Travelers Property Insurance, or any other insurer, whether bank affiliated or not. This is inconsistent, and would represent a burden not only on bank-accountability initiatives, but even on insurer-accountability initiatives, as banks buy insurance companies.
Most surprising, and potential violative of the First Amendment of the Constitution, the bills sunshine provision, in its Definitions, at Section (e)(B)(iii), it excludes from reporting any agreement between banks or their affiliates and organizations that have not commented on, testified about, or discussed with the institution, or otherwise contacted the institution, concerning the Community Reinvestment Act of 1977.
The narrowing of the sunshine requirement did NOT narrow it to agreements by a nonprofit with Bank X, after the nonprofit has commented on Bank Xs CRA performance. Rather, in the current draft, the moment a group comment[s] on, [or] testifie[s] about....the Community Reinvestment Act of 1977, it will have to report on its agreements with ANY bank or bank-affiliate. As written, groups that comment on CRA regulations, or even regulations related to CRA, like Regulation B or HMDA (if the comment mentions CRA), will be placing themselves into that class of groups which will be required to report on all agreements with banks or bank-affiliates.
Essentially, the proposal creates a class of targeted nongovernmental entities -- those who comment on, or testify about, the CRA. Under this provision, if a group MENTIONS the CRA, then it will have to report about any agreement it reaches with a bank or bank-affiliate, and subject itself to penalties that do not apply to bank-fund-recipients who do NOT mention the CRA.
Some public interest law-minded observers now wonder is this proposal does not run afoul of the First Amendment. It targets a particular type of speech, one that is petitioning the government for redress, and imposes an arguably chilling burden, the possibilities of penalties, only this type of speech.
The type of speech in question is the mere mention of the Community Reinvestment Act, a law protecting the residents of low-income and minority communities, a law that most on Congress, and certainly the Administration, say they support. In the cold light of day, targeting only this type of speech (the mentioning of CRA) is inconsistent with the expressed support for the law.
The Administration has tried to downplay this inconsistency, or to portray it as moot. The compromise was reached on October 21, theres no changing it, the message has been. But, on issues of important to other, more moneyed constituencies, changes have been made. The wholesale financial institution proposal, that was agreed to on October 21, has since been dropped, since J.P. Morgan and Merrill Lynch claimed it would give Goldman Sachs an unfair advantage. The moneyed constituencies get changes; other constituencies get rhetoric and assurances. Speaking at the Bond Market Associations conference in New York, Treasury Under Secretary Gary Gensler emphasized that the sunshine language had been improved, and said it is important that these requirements be implemented in a reasonable manner to ensure they do not chill the work of those who do so much in our underserved communities. By October 29, the Treasury Department broadcast-faxed out a second defense of the compromise, this time adding that the Managers Report on the bill includes the following language: the Federal banking agencies are directed, in implementing regulations under this section, to minimize the regulatory burden on reporting parties. But the problem, legally and otherwise, is with the targeting of only those groups which mention CRA. The Managers Report language does not solve this problem.
Objective analysis is one thing; politics is another. By weeks end, the Treasury Department was emphasizing to all who would listen that the bill, including its potential speech-chilling provisions, is supported by the community. In support of that proposition, Treasury could cite only two main organizations: Reverend Jesse Jacksons Rainbow / PUSH Coalition (see last weeks Report, below -- see also P.R. Newswire of May 8, 1998: Rainbow / PUSH and its founder endorsing the Citigroup merger; Citigroup co-CEO Sandy Weill has supported Rainbow / PUSH Wall Street Project) and the Local Initiatives Support Corporation (LISC).
LISC was established by the Ford Foundation and six corporations in 1979. It is an intermediary, that works with (and some say dominates) hundreds of community development corporations in over 100 cities and urban communities nationwide. (The quotes are from LISCs web site, <www.liscnet.org>).
While LISC has played a role in the development of thousands of units of housing in the past twenty years, legitimate questions are now been posed about the Administrations implication that LISCs endorsement of the compromise means that communities endorse the compromise. On LISCs board of directors are representatives of Chase Manhattan Bank, Deutsche Bank (ex-Comptroller Eugene Ludwig), J.P. Morgan Securities, Washington Mutual, and Citigroup.
Citigroups representative has been 30-year Citibank veteran Pam Flaherty. On September 16, 1999, LISC announced that ex-Clinton-Treasury-Secretary Robert Rubin, then just a private citizen, was named the chairman of its board of directors.
On October 22, LISC endorsed the previous nights compromise, which had been announced by Rubins successor, Larry Summers.
On October 26, Citigroup named Rubin to its office of the chairman, along with Sandy Weill and John Reed.
Rubin told the New York Times that he had been active in brokering the compromise on S. 900, specifically on CRA. Rubin acknowledged that even while he was negotiating his own jobs with Citigroup, he had helped broker the compromise agreement repealing Glass-Steagall... Federal law requires retired Government officials to refrain from interceding with their former agency on behalf of a new employers for at least one year after leaving public service. The Clinton Administration requires its top officials to pledge that they will not lobby their agency for at least give years... I dont think there should be any political sensitivity here, Rubin said.... NYT, Oct. 27, 1999.
Would that be because the financial deregulation compromise, which Rubin acknowledges he helped broker, was announced two business days BEFORE Citigroup formally became Rubins employer?
Would it be fair to assume that Rubin, LISCs chairman since September 16, 1999, had something to do with LISCs fast (Oct. 22) endorsement of the compromise?
It is reported that LISC itself was involved in the final October 21 compromise, on the narrowing of the sunshine requirement. Informed sources say that LISC believes that, as narrowed, it would not have to report under the sunshine amendment.
Senator Gramms allegation has been that large sums of bank money are going to community groups, that the funds are not being accounted for, and that the groups are not accountable to the community, or, in other phraseology, to Americas working families. The question of LISCs accountability to low income communities (when five major banks are represented on its board of directors) is set forth above. Consider also that LISC has the highest paid executive director of all human services groups in the nation -- $415,000 a year. (Chronicle of Philanthropy, reported in the Indianapolis Star of September 20, 1999). One cannot help noticing LISC was listed in the Federal Reserve Boards Citicorp - Travelers approval order as being in support of the merger. See Federal Reserve Bulletin of November 1998, at footnote 2. See also, e.g., P.R. Newswire of February 5, 1999: Citigroup announcing a number of grants, including to LISC.
While Senator Gramms claim is that he wants to see the connection between what groups say, and what they are paid by banks, the current (politicized and retaliatory) sunshine amendment compromise would apparently exclude a large non-profit, whose director makes more than the entire budget of most of the groups that narrowed provision would target, a group which has testified in favor of banks and their mergers, and receives bank funds. Sunshine, indeed...
The larger pattern seen here is the domination of legislation by the nations largest bank, Citigroup, which contributes to Republicans and Democrats, and even has its hooks into some of the most visible community voices, and gets them to endorse a bill, opposed by most other community groups, which would free Citigroup from having to divest Travelers insurance businesses. This conflux of events has led Inner City Press to devote most of this weeks Bank Beat to Citigroup...
...Various accounts of the Thursday night negotiating session have Phil Gramm instructing Citigroups lobbyist Roger Levy to have Sandy Weill call the White House. Weill did speak to Gene Sperling, and soon the deal was worked out. The next day, Jesse Jackson said the revised bill can heal the breach between surplus and deficit cultures and begin to green line red lined America. Rainbow / PUSH press release of October 22. It should be noted that in a press conference with Gene Sperling on October 15, Reverend Jackson specifically praised two bankers, as champions of the CRA: Bank of Americas Hugh McColl, and Citigroups Sandy Weill. While McColl, despite BankAmericas continued ownership of high interest rate mortgage lenders NationsCredit and EquiCredit, has at times spoken publicly in favor of CRA (see below -- BofA did not get its wish of loosening the nationwide 10% deposit cap) , Sandy Weill has made no such public pro-CRA statements (although Travelers, even pre-Citibank merger, supported Rainbows Wall Street Project). In fact, Citigroups actual community lending record remains weak. The New York State Banking Department concurred in this weakness, and required a rare community lending commitment from Citigroup in 1998. Senator Gramm requested this agreement from the NYSBD earlier this year; the NYSBD refused to give it, pointing out Gramms lack of jurisdiction under New York law. But since the Fed must request the views of the NYSBD on most NYS mergers, the NYSBD is, for purposes of Gene Sperlings definition, a commenter, and would have to file reports in the future. Of course, it would all be in the Feds discretion.
Lets take a closer look at Citigroups community lending record in New York City -- by race, most tellingly. For conventional home purchase mortgage loans in the NYS Metropolitan Statistical Area in 1998, Citigroup (combining Citibank, N.A. and Citicorp Mortgage) denied the applications of African Americans 2.97 times more frequently than the applications of whites. This compares unfavorably to the industry aggregate in the NYC MSA: a 2.15 denial rate disparity in 1998. Citigroups defense cannot be that it does more outreach to communities of color than other lenders. Whereas, for the industry as a whole in this MSA in 1998, 12.2 percent of conventional home purchase loans went to African Americans, for Citigroup, the figure was only 6.6 percent. Citigroups disparities for Latinos are also glaring: a denial rate disparity of 2.3 (compared to the industrys figure of 1.75); 5.9 percent of conventional home purchase loans to Latinos, versus the industrys 9.0 percent. How exactly do Mr. Weill and Citigroup support the CRA?
Another interesting angle was the failure of BankAmericas push to ease the prohibition on any one bank controlling 10 percent or more of all federal insured bank or thrift deposits. Various BofA sources have been saying that their bank and its CEO, Hugh McColl, need something from Phil Gramm and Congress. Now its clear what that need is: BofA is already up to 8 percent of U.S. deposits, and would be precluded from any sizable bank acquisitions. BofA was trying to get an amendment to S.900 that would include deposits in credit union and in the U.S. branches of foreign banks in the calculation, but failed. The lobbying (and campaign contributions), however, are sure to continue...
Coming full circle: before announcing their merger in April 1998, Sandy Weill and John Reed met with Fed Chairman Greenspan, and then again, repeatedly, with Fed General Counsel J. Virgil Mattingly. The Fed never agreed to release the notes taken at these meetings, claiming they were the personal property of Mr. Mattinglys deputy, Scott Alvarez (see ICP Federal Reserve Report Archive #1, link at the bottom of the current Federal Reserve Report). Now in October 1999, Sandy Weill places the last (and apparently decisive) lobbying phone call on financial modernization, to Gene Sperling (and, were assuming, Sen. Schumer, unless such a call wasnt even deemed necessary). If the compromise language is actually signed by the President, it will bear watching how the Fed exercises its discretion in demanding reports from particular (Citigroup-funded) organizations...
October 11, 1999
Behind closed doors, the Republican troika of Gramm, Bliley and Leach have developed a so-called compromise draft of financial modernization legislation, which they intend to present to the disempowered Conference Committee on October 12. Both Gramm and Leach have told lobbyists the outlines of the compromise on CRA: examinations for small banks pushed back to every five years, including of Senator Gramms so-called sunshine requirement, and a weakening of the House bills requirement that bank holding companies have and maintain a Satisfactory CRA rating in order to own insurance or securities firms.
The Conference Committee will be given Thursday and Friday, October 14 and 15, and perhaps a part of October 18, to debate the mark up. Then it would go to the House and Senate floors.
The driving force here are the campaign contributions of the financial services industry. On October 6, Gramm said he hoped that senators whose constituencies have a vast stake in the legislation, such as Sens. Charles Schumer, D-N.Y., and Christopher Dodd, D-Conn., would buck th[e] trend, and do so early in the process. CongressDaily, Oct. 7. Does constituencies mean -- contributors?
Gramm continues his brinkmanship -- he began with openly extremist positions (CRA commitments by banks should be made illegal), then present slight erosions in his positions as diplomatic compromises. Since, given the CRA rating grade inflation by regulators, 98% of banks are given Satisfactory CRA ratings, Gramms opposition to requiring this rating in order to own insurance or securities firms is still extreme. On October 5, Treasury Secretary Summers was asked about Gramms sunshine proposal. Gramm responded that there are very valid concerns about protecting proprietary information. We need to be very careful about adopting any coercive measures in this area that could undermine the objectives we are all trying to promote. BNA, Oct. 6, 1999.
On October 6, the Conference Committee held a kangaroo-court like debate on CRA -- members were allowed to blow off steam, while Gramm, Leach and Bliley continued to craft the bill themselves. Speaking in favor of CRA were, among others, Reps. Vento, LaFalce, Watt, Gutierrez, Waters, Carolyn Maloney of New York (strangely citing ex-Fed Governor Lindsey as a supporter of CRA), Frank, and Sen. Sarbanes. Rep. Beureter called CRA a rip-off, and Sen. Gramm noted that some CRA groups have even hired pollsters and consultants. (This was a strategy pushed by supposedly liberal foundations, but thats another story...).
But on the topic of pollsters and consultants, Merrill Lynch on October 5 released a supposed scientific survey of 804 registered voted, and found that 58% of Americans support financial modernization. The questions posed, of course, were leading. Merrill announced that 73 percent of voters agree that the U.S. needs financial services reform to stay one step ahead of foreign competitors. P.R. Newswire, Oct. 5. Who exactly ARE these foreign competitors -- Japans failing banks? The same loaded questions could have been (and were) used during the savings and loan crisis: Savings banks need more powers, to be able to compete. Were still paying for that one...
Also, on October 6, the Cato Institute issued a warmed-over policy analysis by libertarian professor George J. Benston, calling for the repeal of the CRA. Catos spokesman, Ed Hudgins, said Cato deliberately released the report during the conference committee: Were hoping that this paper will for the CRAs supporters to put up or shut up, he said. But the study is little more than a rehash of Benstons own previous writings. Five of the six first footnotes cite to -- Benston himself. Benston was anti-CRA even before the law passed in 1977. In fact, it was based on Benstons the myth of redlining writings in the 1970s that Senator William Proxmire blocked Benstons rumored nomination, heavily supported by S&L kingpin Charles Keating, to the Federal Home Loan Bank Board in 1986.
Another historical footnote: Fed Chairman Alan Greenspan (then a private citizen) and Benston collaborated in 1984 on a Keating-funded study pitching the great advantages of letting savings and loan associations make direct investments. As noted, that one cost the taxpayers hundreds of billions of dollars...
Fast forward to 1999: Sen. Trent Lott says he wont bring a bill to the Senate floor that Fed chairman Greenspan does not support. (Greenspan, of course, claims that neither he nor the Fed are political). Gramm was quoted in the Dallas Business Journal of October 4 that I think I know who the next president of the United States is going to be and he agrees with me on all of these issues. I can afford to wait. But we thought George W. Bush was against the Republicans legislating on the backs of the poor...
And the beat goes on... Until next time, for or with more information, contact us.
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