The Inner City Reporter's Federal Reserve Beat


Inner City Press' Federal Reserve Reporter Archive 2001-2 (

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December 23, 2002

      The Federal Reserve's quiessence regarding HSBC's proposal to acquire the multiply-sued subprime lender Household International should be coming to an end. As Inner City Press reported on Dec. 19, HSBC has now attempted to evade the Fed, by changing the organizational structure that it included in its Nov. 27 applications to the OCC and NYBD. HSBC's Dec. 20 preliminary proxy statement states:

"Household has entered into contracts to dispose of Household Bank, f.s.b.'s current assets and deposits. If Household Bank, f.s.b. continues to be owned by Household at the time of the completion of the merger, an approval by the Board of Governors of the Federal Reserve System, or the FRB, of HSBC's indirect acquisition of that savings bank will be required. However, Household expects to sell the assets and deposits of Household Bank, f.s.b. and dissolve it before the completion of the merger."

    Household has proposed to "dispose of" the Orchard Bank division of Household Bank f.s.b. to Idaho-based Panhandle State Bank. As noted in ICP comments to the FDIC, Panhandle's most recent CRA exam is from four years ago, and reflects a weak loan-to-deposit ratio and weak lending to low- and moderate-income areas. Also, as ICP has now raised to the Fed and others, Panhandle's search for funding for this its first acquisition is irregular, to say the least. Panhandle's Application to the FDIC states that its parent "has applied with and received preliminary approval from US Bank for $8 million in trust preferred securities... to maintain required capital ratios... no obligation to purchase the Securities and may in its sole discretion choose to terminate any potential transaction."

     ICP (and the FRB) have previously raised questions concerning U.S. Bancorp's investments in the publicly-traded subprime lender New Century: in the U.S. Bancorp - Firstar proceeding, for example. U.S. Bancorp subsequently relinquished its controlling stake in New Century. U.S. Bancorp has told ICP that it no longer has a stake in New Century, and had made proclamations about its "standards" with regard to business transactions with subprime lenders. Here, however, U.S. Bank is proposing to provide the sine qua non funding for the purchase of a subprime credit card lending unit of a company, Household, charged on Oct. 11, 2002, and since with predatory lending by state attorneys general and others. ICP has asked the Fed, as U.S. Bancorp's regulator, which has previously received representations and commitments from U.S. Bancorp on these business-with-subprime-lender issues, to inquire into and act on U.S. Bancorp's apparently standardless role in the proposed sale of the subprime credit card lending Orchard Bank unit of Household, which has been sued for predatory lending.

    ICP has also now formally contended to the Fed that HSBC must apply to the FRB to acquire Orchard Bank, under Section 4 of the Bank Holding Company Act. While HSBC's now-amended OCC and NYBD applications still claim that HSBC will only file post-consummation notice with the FRB under 4(k) of the BHC Act. But (1) Household's ownership of retail banks overseas, including HFC Bank plc in the United Kingdom, trigger, ICP contends, pre-consummation applications under the Fed's Regulation K, and (2) Household's continued ownership of the Orchard Bank division of Household Bank f.s.b. should require HSBC to apply to the FRB under 4 of the BHC Act. The importance of the FRB reviewing HSBC's proposed acquisition of Household under the BHC Act, rather than having the only federal scrutiny be limited to a narrow OCC review of one small part of the proposal, under the Change in Bank Control ("CBC") Act, is made clear by the Treasury Department Inspector General's recent report on the February 2002 failure of NextBank, which evaded the FDIC (as HSBC is trying to evade the Fed) so as to only apply to the OCC under the CBC Act.

     So, beyond predatory lending, does the Fed care about safety and soundness, and the proposed capture of a state member bank by Household's senior management? We should be finding out soon. Happy holidays. Until next time, for or with more information, contact us.

December 16, 2002

    Our current focus: while HSBC lurches forward trying to acquire Household International without applying to the Federal Reserve Board, on Dec. 16, Inner City Press / Fair Finance Watch commented again to the Fed -- during a December 13 conference call with stock analysts, hastily scheduled in the face of ICP's Fair Disclosure complaints (but still not complying with the SEC's Regulation FD) HSBC's CFO Douglas Flint said that HSBC "'may or may not' need approval from the Federal Reserve." As ICP has argued to the Fed since Dec. 4, HSBC must apply for Federal Reserve approval, in light of the structure set forth in HSBC's Nov. 27 OCC application. HSBC's Flint also claimed that HSBC has "good relationships with its regulators and would expect the approval to travel a normal course." It's difficult to reconcile this with HSBC's blatant gamesmanship regarding its Household proposal, including making an argument for a waiver of the Bank Holding Company Act and of the New York Banking Law as relates to new holding companies that would control two insured depository institutions, including a new one (Household Bank (SB), N.A.) in a mere footnote to its proposed organizational chart, that HSBC didn't submit to the Fed. In ICP's view, HSBC is a rogue company, one that is for example arguing that it is a "foreign private issuer" exempt from the SEC's Fair Disclosure regulations (in a way that, for example, a U.S.-based acquirer would not be -- a fact that, ICP argues, must be considered by the Fed under, for example, the post-BCCI Foreign Bank Supervision Enhancement Act.). How this all works out will be reported on this Web site, in ICP's ongoing HSBC - Household Watch.

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November 11, 2002

     On November 6, the Fed cut rates a full 50 basis points. This was followed by speeches by Governors Bies, Gramlich and Bernanke (this last on the occasion of Milton Friedman's ninetieth birthday. Meanwhile, because the Fed approved Citigroup's application to acquire Golden State Bancorp on October 28 without imposing any waiting period, despite the Fed's admittedly unfinished examination of CitiFinancial, Citi "consummated" the deal last week. ICP and others have, nevertheless, requested reconsideration and rescission of the Fed's approval -- click here to view ICP's request, which inter alia states that "there is an underlying absurdity to the Fed's request for reconsideration procedure in this case: because the Fed imposed no waiting period, on November 7, 2002, Citigroup acquired Golden State Bancorp. It is imperative that, as a policy matter, the FRB impose waiting periods. In this case, the approval should be rescinded and other appropriate actions taken on the above-recounted matters.

    Something we'd initially missed, but report now: AFX's call to the Federal Reserve Bank of New York, inquiring into the possible ramifications of the probes into the involvement of Citigroup's Sandy Weill (who's also an FRBNY board member) in brokerage analyst and other misconduct. " The New York Fed spokesman said it would be up to Weill or Citigroup to establish behavior guidelines, and that the New York Fed " has no guidelines or policies concerning whether its officials and directors should recuse themselves from their Fed duties while they are the subject of outside probes."

    Also, on November 8, ICP filed comments with the Board and Richmond Fed opposing Royal Bank of Canada's application to acquire Admiralty Bancorp. Among other reasons, the Fed last time said that ICP "alleged that an insurance company subsidiary of RBC, Liberty Life Insurance Co. of Greenville, South Carolina ("Liberty Life"), discriminated against African American clients by charging them higher premiums than white clients. This matter is currently under review before the Administrative Law Judge Division of the South Carolina Department of Insurance. The Board will monitor the proceeding and take whatever action might be appropriate based on the determinations of Liberty Life's primary regulator in any final adjudication." 88 Fed. Res. Bull. 385, n.11, emphasis added.

     Since that FRB statement, the judge has ruled "that Liberty Life Insurance Co. discriminated on the basis of race in charging blacks more than whites for certain life insurance policies." See, "Judge Rules Liberty Life Used Race-Based Policies," Charleston (S.C.) Post and Courier, August 24, 2002. Since the Board said that it was monitoring this case and would take appropriate action, we request such action at this time, on this application. For these and other reasons, including RBC's involvements with Enron and reportedly with money laundering, ICP is opposing RBC's expansion application -- click here to view ICP's November 8 RBC comment.

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October 7, 2002

     The Fed and FOIA: last week, Inner City Press received from the Fed a response to a FOIA request it filed on February 11, 2002. The Fed states: "We apologize for the delay in responding to your request." We appreciate the apology, but as they say here in The Bronx (and elsewhere), "what's up with that?" Why would the Fed take more than six months to respond to a FOIA request? On October 3, the Fed faxed to ICP the documents being so belatedly released. The documents reflect that despite the fact that Chinatrust had (and has) a "Needs to Improve" CRA rating in Maryland, Fed CRA staffer wrote, "I glanced at Chinatrust's response to the ICP protest. As responses go, it's fairly comprehensive. I may change my mind upon further review, but, at this point, I have no questions for Chinatrust." The just-released documents also finally reveal that, back in March 2002, Chinatrust acknowledged that "[n]o loans were made in Bronx County." For those interested, the Fed accepted an "unofficial" translation of Taiwan's Financial Holding Company Act, for which Chinatrust requested confidential treatment. Even more than six months later, these documents have not been released...

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August 5, 2002

   At his Senate confirmation hearing last week, Ben Bernanke said that the Fed should consider speeding up the release of "redacted" minutes of meetings of the Federal Open Market Committee. Then he stopped himself. "I would like to have more experience on the board before I make too many concrete recommendations," he said. Sen. Sarbanes, replied: "That would be prudent"... Henry Gonzalez, we miss you...

    Questions have mounted: how could the Federal Reserve even consider approving Citigroup's application to buy Cal Fed Bank given the growing scandal around Citigroup's dealings with Enron, to say nothing of the detailed evidence of predatory lending at CitiFinancial? On August 5, ICP submitted a supplemental comment and additional exhibits to the Fed; click here for a summary. In terms of the Fed's Freedom of Information Act compliance, note that ICP last week received a Fed FOIA determination letter dated July 26 (regarding among other things "records related to the examination of CitiFinancial to which the Board committed itself in its Citigroup - EAB Order in mid-2001") -- but as of August 4 ICP had not received any of the documents purportedly being released. ICP telephoned Fed FOIA staff on August 2 and was told that the documents were sent by regular mail on August 1 (six days after the determination letter). When ICP received the documents, they will be reported on this site.

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May 27, 2002

    The Fed watches its own watchers: on May 21 the Federal Reserve Bank of Philadelphia released its survey of "37 professional forecasters," finding that they've nearly doubled their estimates for average economic growth this year, to 2.7 percent, up from the 1.4 percent rate of growth forecast in mid-February. The average interest rate for 3-month Treasury bills is expected to rise to 2.0 percent in the third quarter -- reflecting an increase in the federal funds rate of just one-quarter to one-half percent through September. A growing number of analysts now expect the FOMC to wait until at least its August meeting before raising rates. By the end of the year the forecasters predict that the 3-month Treasury bill rate will rise to 2.7 percent, which is down from their mid-February forecast of 3.0 percent. It's a circular process: the Fed watches those who study and arbitrage FOMC decisions. The Heisenberg uncertainty principle is clearly at work here...

   On May 23, the Federal Reserve Bank of San Francisco announced that Michael O'Neill of Bank of Hawaii Corporation (f/k/a Pacific Century Financial Corporation) "has been selected by the directors of the [FRBSF] to serve as the bank's member of the Federal Advisory Council in Washington, D.C. for 2002. He succeeds Steven L. Scheid, formerly of Charles Schwab & Co., Inc.." As previously reported, the FAC is an advisory board concerning which the Fed refuses to provide virtually any information, under the Freedom of Information Act. (Following the logic of the item above, the FAC cannot be watched). Some have suggested that the Federal Advisory Committee Act applies directly to the Fed's FAC; the Fed clearly believes this to not be the case...

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April 8, 2002

     Months after it made a FOIA request, ICP has received thousands of pages of documents from the Federal Reserve regarding Bank of Cyprus' application to acquire Interbank of New York. The Fed asked Bank of Cyprus and its counsel at Shearman and Sterling a number of questions, including "please describe the polices and procedures that Bank of Cyprus uses to monitor transactions of Bank of Cyprus (Channel Islands) Ltd, which is operated as an administered banking unit by Royal Bank of Canada (Channel Islands) Ltd... Please confirm (or modify as appropriate) our understanding that BOC has implemented its anti-money laundering policies and procedures at Bank of Cyprus (Channel Islands) Ltd." After asking these questions, the Fed extended its review time for the application. On June 15, 2001, Bank of Cyprus wrote to William Ryback of the Fed, informing his that its agreement to acquire Interbank of New York "expired and/or terminated as of 14 June 2001, according to clauses 1 and 5(B) of the said agreement." Bank of Cyprus withdrew its application. But--

    On June 21, 2001, Bank of Cyprus reapplied, this time to "set up a branch of Bank of Cyprus Ltd in New York." The Fed followed with questions including "please describe in detail the process BOC follows in establishing nominee accounts (including, but not limited to, anonymous accounts). Bank of Cyprus had estimated "that the number of customers holding nominee accounts [is] below 10,000." But BOC (and the Fed) have withheld the basis of that estimate, and any further information about it. BOC had also represented that the "Central Bank of Cyprus is in the process of amending customer identification rules" and that, under the proposed amendments, "banks will no longer be allowed to open accounts without directly establishing the identity of the beneficial owners." So let's get this straight: Bank of Cyprus has "anonymous accounts" for which it did not "establish the identity of the beneficial owners"?

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December 17, 2001

    Not all regulators -- not even all central bankers -- share the current U.S. Fed's positions. For example, Bank of England governor Eddie George, speaking in London on December 12, stated that "at the global level - and it is here that I think some of the peaceful anti-globalization protesters have a real point - many of the poorest, least-developed countries are effectively excluded. We need not just free but fair trade at the international level." Right on, Eddie. Now, could you speak with Sir Alan? Or with the prince-in-waiting, Bill McDonough?

    The Basel Committee on Banking Supervision announced on December 13 an "indefinite" delay in releasing the next draft of its "New Capital Accord." An official at the Federal Reserve Bank of New York (the New York Fed's McDonough chairs the Basel Committee) said that the rationale for delay is "to examine the various proposed changes outlined in working papers issued by subsidiary bodies of the Basel Committee over the past half year and 'see how all the pieces fit together' before issuing a new draft. Seems like the banking industry's griping about the last draft has had its desired effect. One of our suggestions to the BCSB right now is to include notice and comment on merger proposals as part of the "best practices" that are suggested to nation's regulators -- the lack of any comment period on Citigroup's recent acquisition of branches in Kenya is a case in point. One also wonders what, if anything, the Fed is doing in light of the prominence of Standard Chartered in last week's indictment of 9/11 terrorism suspect Zacarias Moussaoui -- click here for more, including the question of why Citigroup -- which hired the Fed's money laundering "guru" Richard Small -- did not appear in the indictment.

     On the more mundane topic of branch closings, beyond the 45 already-announced branch closures in connection with buying Huntington's brick-and-mortar branches, now SunTrust proposes to buy the deposits and assets of Huntington's 40-some supermarket branches, but not the branches themselves. The branches would be closed, but by Huntington, not SunTrust.

    In our November 12 letter to the Fed, we commented on (that is, against) SunTrust's plans "to close at least 45 of these branches." It now appears that SunTrust would close at least 77 branches. SunTrust's counsel's December 12 letter to Fed staffer Daniel Meade states that SunTrust "will not be acquiring from Huntington its Albertson food store branch locations," but that it "will be acquiring from Huntington the deposits book at Huntington's Albertson food store branches." Emphasis in original.

    ICP's new (Dec. 14) comment: for 77 branches to be faced with closure in a deal of this much smaller size militates for an reopening of the comment period... It is also imperative that the FRB address, when it finally rules on this proposal, the issue of responsibility for the proposed branch closures. SunTrust might argue that it would be Huntington that would be closing the branches. ICP disagrees -- SunTrust's cynical proposal to acquire all of the deposits, while leaving Huntington to close the empty shells, threatens to create an ongoing anti-consumer precedent...

    Fed fragments: New governors Olson and Bies, so recently arrived, cast votes at the December 11 FOMC meeting... On December 31, Federal Reserve Board governor Edward Kelley will step down. He wasn't much of a dissenter -- none of 'em are -- but what can we say? Godspeed.

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November 5, 2001

   ...When the Reserve Banks met two days after the September 11 plane bombings, the directors of the Federal Reserve Bank of Cleveland felt that no change was needed "for now," while three others -- Boston, Atlanta, and St. Louis -- decided that a cut of only one-quarter percentage point cut was needed. The full FOMC, however, cut 50 point then, and other fifty points since. Also disclosed last week was the Fed's discount window actions following the plane-bombings, revealing that a record $45.6 billion flowed out through the discount window(s) on September 12.

     What's not flowing is information. The Fed has still not responded to Inner City Press' September 24 Freedom of Information Act request about its anti-money laundering enforcement; ICP has still not received Royal Bank of Scotland's responses to the Fed's correspondent banking-related questions of October 9. What gives?

   Finally, ICP has received more detailed information regarding Citigroup's lobbying against post-S11 money laundering laws. Faced with legislation which would have barred it from doing business with offshore shell banks, Citigroup kicked into high gear. Publicly, the process resulted in a compromise in which only shell banks not affiliated with a "real," onshore depository bank would be targeted. But behind the scenes, Citi tried to go further and expand this exemption to include any shell bank with a "financial institution" as its parent. Any financial institution -- i.e., including brokerages with few money laundering controls, as shown in great detail by the General Accounting Office study of brokerages released last week. While Congressional staffers caught and highlighted the change just in time, it's reputed that the force behind the attempted change was none other than longtime Fed staffer Richard Small, who last year went directly from the Fed to Citigroup. Small world, ain't it?

Midweek update of October 25, 2001:   How seriously does the Federal Reserve take issues of money laundering?  Prior to September 11, the Fed routinely approved applications by Citigroup, despite Congressional findings of lax anti-money laundering safeguards at Citibank.  On October 24, the Fed approved an application involving a bank which had less than two weeks previously settled money laundering changes with authorities in New York State.  The pending case involves the application of Royal Bank of Scotland and its U.S. subsidiary, Citizens Bank, to acquire the retail banking business of Mellon Bank.  The American Banker newspaper of October 25 quotes Fred Goodwin, the CEO of the Royal Bank of Scotland, as scoffing off questions that have been raised about RBS' correspondent banking relationship with institutions on United Nations sanctions lists. In full disclosure, Inner City Press raises these issues to the Federal Reserve Board, citing the Bankers' Almanac.   "The Mellon deal is set to close by yearend, and Mr. Goodwin said it will not be delayed by Inner City Press/Community on the Move. The New York advocacy group wrote to the Federal Reserve after Sept. 11, asking it to look into possible Royal Bank relationships with the Afghan National Bank. 'Absolute nonsense,' Mr. Goodwin said of the allegations."

      A Federal Reserve memorandum dated October 10 (only mailed to ICP on October 17) reads as follows:

To: Files     October 10, 2001

From: Maya Wilson

Subject: Telephone conversation with counsel for the Royal Bank of Scotland plc ("RBS") and Citizens Financial Group Inc.

       On October 9, Reserve Bank and Board staff called Greg Lyons, counsel for Citizens, to ask him to provide the following information in writing to the Reserve Bank: (1) an explanation of RBS's relationship with Afghan organizations, (2) a description of RBS's due diligence process regarding banks for which RBS offers correspondent services, and (3) a list of RBS's correspondent banks. Mr. Lyons agreed to provide a written response to our request. Staff also requested that a copy of the written response be provided to [ICP]

      As of October 24, ICP has not received a copy of any response by Royal Bank of Scotland. "Absolute nonsense" or not, Royal Bank of Scotland is required to respond to these questions.  And a key question, on this policy issue, will be whether RBS seeks to withhold the  requested "list of RBS's correspondent banks;" and whether the Fed will allow such withholding.  

October 22, 2001

     The Federal Reserve Board for many months has had two of its seven seat vacant. On October 17, the Senate Banking Committee held confirmation hearings for President Bush's two nominees: Mark Olson and Susan Bies. Senate sources said that both had been asked privately, before the hearing, about their commitment to the Community Reinvestment Act. It was suggested that questions would be asked at the hearing about predatory lending -- but none were. Rather, the main firework at the hearing involved the National Association of Realtors' opposition to any administrative ruling declaring real estate brokerage to be permissible to financial holding companies, and NAR's request that Mr. Olson recuse himself from that decision, since he served for a time as the president of the American Bankers Association. Mr. Olson indicated that he would seek an ethics ruling and abide by it. If confirmed, Mr. Olson would get the more than eight years that still remain from Alice Rivlin's term; Ms. Bies would inherit the more than ten years that remain on Susan Phillips' term. Governor Kelley is also planning to step down.

    On the regulatory front, while the U.S. Congress has just passed legislation directed as so-called shell banks, which are chartered in a country they are not allowed to do business in, the Federal Reserve on October 17 amended its rules concerning U.S. holding companies' overseas activities, granting even greater powers to Edge Act corporation, which in ICP's view are simply a variant of shell banks. Beginning November 20, the Fed will permit U.S. banks to invest up to 20 percent of capital and surplus in Edge Act corporations. Shameless... but not unexpected.

     On community reinvestment, inquiries into the Fed's consideration of WesBanco's appeal of the "Needs to Improve" CRA rating it received earlier this year were answered by the New York Fed SVP who is the "chairman of the appeal panel." The answer? That "the panel will only consider relevant materials that were available to the examiners at the time the CRA examination was conducted," and is thus rejecting a joint letter from NCRC and the West Virginia community group REDEEM. We question this procedure (and whether WesBanco, unlike the public, will be heard by the panel).

    Item that we sadly must repeat: on September 24 Inner City Press submitted a FOIA request to the Fed for documents concerning the Fed's anti-money laundering initiatives; the Fed denied ICP's request for expedited processing, and as of October 19, had not provided any responsive documents...

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October 15, 2001

    In an October 11 speech at a St. Louis Fed monetary policy conference, Fed Chairman Greenspan emphasized the downside of making FOMC meetings subject to the Government in the Sunshine laws: "Human nature being what it is, the vast majority of us are disinclined to offer half-thought-through, but potentially useful, policy notions only to have them embarrassingly dissected in front of a national television audience." By that logic, Congress should only debate behind closed doors. Mr. Greenspan claimed: "You've got 19 members of the full [FOMC] committee around a table discussing the economic outlook. Obviously you're going to get 19 different views at a minimum." Somehow we doubt that -- during Mr. Greenspan's tenure, any Governor with a truly different view (for example, ex-Governor Blinder) hits the road. In fact, Greenspan used his St. Louis speech to explicitly reject a suggestion by soon-to-be-ex-Governor Meyer, that a target inflation rate of two percent be set. "A specific numerical inflation target would represent an unhelpful and false precision,'' Greenspan said. What was that again, about nineteen different viewpoints? Mr. Greenspan also said in his speech: "We endeavor to keep the public well informed."

     The Fed has still not provided any documents responsive to ICP's mid-September FOIA request regarding the Fed's enforcement of anti-money laundering laws. The Washington Post of 10/11 reported that "Citigroup executive Rick Small has proposed language that would soften a provision barring U.S. banks from doing business with offshore shell banks that have no physical office and no affiliation with an established bank. Until recently, Small was one of the Federal Reserve Board's top money-laundering experts. He didn't return calls."

    So: Citigroup's public spin was that it was putting its money-laundering past behind it, by hiring the Fed's expert. Now Citigroup uses this hired (Fed) gun to lobby against anti-money laundering proposals.  Click here for more.

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October 8, 2001

      The October 4 Senate Banking Committee meeting discussing and then voting on the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 witnessed the weakened correspondent banking due diligence provisions.  The lobbyist for the Financial Services Roundtable, Lisa McGreevey, said: "We have suggested and supported the elimination of" the section.  The American Bankers Association's chief lobbyist Ed Yingling "agreed that the best way to fix the bill would be to remove the section altogether." 

     Where is the Fed's leadership on the correspondent banking issue? Or on the issue of "concentration accounts" (short-term general accounts banks use to accept deposits going to various business accounts; in money laundering parlance, this is called commingling or layering). Senator Phil Gramm (R-Texas) intoned: "The fact that we don't know why they use these accounts doesn't mean that there isn't a legitimate reason to use them. There are legitimate reasons to keep your name off an account. There are reasons why people want privacy and to assume that the only reason a person would want privacy is to commit illegal acts is an oversimplification."   One would have hoped (or expected) to hear from the Fed on whether there are "legitimate reasons to keep your name off an account." In a Bank for International Settlements / BCBS statement of October 4, New York Fed president William McDonough was quoted: "Systematic customer due diligence is an essential element of banks' risk management. It is critical to safeguarding confidence and the integrity of the banking system. The importance of a rigorous approach has been underscored by the recent terrorist attacks in the United States."

    ICP has been providing the Fed with information on the correspondent relationships of many of the largest banks, information on which ICP continues to await the Fed's action. ICP has also formally requested information on this topic from the Fed, under the Freedom of Information Law, requesting expedited processing. The Fed, which otherwise takes a month or more to provide information, has denied expedited processing, despite the urgency of the issue. The Fed bases its denial on its hair-splitting whether ICP "is primarily engaged in disseminating information," and states that "merely making information available on the Internet does not necessarily equate with disseminating that information."   Hmm... Click here for Yahoo's ongoing coverage and links -- which include a link to Inner City Press's report on just this topic. 

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October 1, 2001

     On September 26, Fed chairman Alan Greenspan, accompanied by Citigroup's Robert Rubin, held a closed-door meeting with the Senate Banking Committee. After the meeting, a Fed spokesperson told reporters that "The Chairman noted that roughly $100 billion might be an appropriate benchmark, depending on the nature of the programs. This number includes the additional $40 billion of spending approved by Congress in the last two weeks." Mr. Greenspan said that any package would have to amount to at least 1 per cent of the US gross domestic product to have "the intended economic effect". The Fed has already cut interest rates eight times this year and is expected to do so again on October 2.

     Scarcely questioned, in the mainstream press, is the propriety of this joint appearance by the Fed chairman and the vice chairman of the largest bank regulated by the Fed, Citigroup. The same day, Sen. Carl Levin testified (in an open session) that Citigroup is a correspondent for Al-Shamal Islamic Bank, which was founded by Osama bin Laden, and was still owned by him in 2000. Sen. Levin pointed to Shamal Bank's web site, noting that it "currently lists an extensive correspondent network including banks in Europe and the United States. Three of the banks are U.S. banks Citibank, American Express, and the Arab American Bank which was recently acquired by the National Bank of Egypt." Among the European banks are ING Bank, Commerz Bank, Credit Lyonnais, and ABN Amro's Saudi Hollandi Bank.

    Immediately the spinning began. Citigroup spokeswoman Christina Pretto said the Al Shamal account has been "dormant for the last several months," and now had only "a small balance" in it.

    But the U.S. State Department had publicly issued a "Fact Sheet on Bin Laden" as early as August 14, 1996, which stated that "Bin Ladin and wealthy NIF members capitalized Al-Shamal Islamic Bank in Khartoum. Bin Ladin invested $50 million in the bank."

      Citigroup, by its own admission, continued to do business with Shamal Bank until "several months" ago, in 2001.  Given Citigroup's business with Raul Salinas, the family of Nigerian ex-dictator Sani Abacha, the daughters of Indonesia's Suharto, and former Venezuelan president Jamie Lusinchi -- all detailed in Senate hearings on November 9, 1999 -- this may not be surprising. [An aside: at that Senate hearing, the head of Citibank's private bank, Shaukat Aziz, defended Citi. Mr. Aziz is now... the finance minister for Pakistan's military ruler.  Also, The Times of London of Sept. 25, 2001 reported that "[t]he Bank of England list includes Ariana Afghan Airlines, the country's national carrier, and its bank accounts. One of the company's accounts is held at the New Delhi branch of Citibank, the US financial giant].

     Last week, regulators in Luxembourg circulated a list of five banks, in addition to the 27 individuals and companies named in the U.S. Executive Order of September 23-24: Al Shamal Islamic Bank, Dubai Islamic Bank, Faisal Islamic Bank, Bahrain International Bank and Kuwait Finance House. Luxembourg has asked its institutions to alert it to any correspondent relationships with these banks. ICP has consulted the Bankers' Almanac, and found the following among the listed correspondents of Kuwait Finance House: Citibank, Chase Manhattan, ABN Amro, Barclays, Bank of Montreal, Deutsche Bank, Dresdner Bank, BNP, National Australia Bank, UBS, Fortis, Bank of Cyprus and Bank of Tokyo-Mitsubishi. Citibank is addressed as greater length below in this Report, which also note Chase's lobbying against previous calls for a crack-down on correspondent banking relationships. ABN Amro owns LaSalle Bank, Bank of Montreal owns Harris Bank, Deutsche Bank acquired New York-based Bankers Trust, etc..

    The Washington Post of Sept. 29 reported that "Bahrain International Bank said it was erroneously listed. David Mathies, president of a U.S. subsidiary of the bank, said Treasury officials have acknowledged privately that U.S. investigators are pursuing another bank in Bahrain that engages in Islamic banking, and not his, which does not. A U.S. government official confirmed that account." ICP has identified three major Bahrain-based Islamic banks: Bahrain Islamic Bank BSC, Al Baraka Islamic Bank BSC, and Faysal Islamic Bank of Bahrain. Among the correspondents of Faysal Islamic Bank of Bahrain are Chase Manhattan, Bank of America, Bank of New York, Royal Bank of Canada, Nat West (now Royal Bank of Scotland), Paribas, UBS, Deutsche Bank, HSBC, and the ubiquitous ABN Amro. The first three are U.S.-based; Royal Bank of Canada recently bought North Carolina-based Centura Bank; Royal Bank of Scotland owns Citizens Bank, and is trying to buy the branches of Pittsburgh-based Mellon Bank, etc.. ICP has now petitioned the Federal Reserve concerning each of the above-named banks. Developing...

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September 24, 2001

     In the aftermath of the September 11 plane-bombings of the World Trade Center and the U.S. Pentagon, Inner City / Finance Watch has prepared a report on bank links to Al Qaeda and other state- and non-state terrorist groups -- and on what the Federal Reserve has done, and not done, in the recent past on this issue. While initial press accounts centered around Barclays Bank in London, there are many more connections: ABN Amro (owner of LaSalle Bank in the U.S. Midwest) held deposits of Al Qaeda conspirators in India; Deutsche Bank (which bought New York's Bankers Trust in 1999) held millions for a now-incarcerated Pakistani intelligence chief); Fleet is reported to channel money to the Chechen jihad. We have submitted a Freedom of Information Act (FOIA) request to the Fed, for documents reflecting any Fed inquiry into these issues. No inquiry was apparent, as the Fed approved each of these institutions' merger and expansion applications. The Fed will have to take these issues more seriously. Click here to view the whole report.

    Testifying to the Senate Banking Committee on September 20, Fed chairman Greenspan said that "the terrorism of September 11 will, doubtless, have significant effects on the U.S. economy over the short term. Indeed, much economic activity ground to a halt last week... [M]any potential purchasers stayed riveted to their televisions and away from shopping malls." He added: "I would strongly suggest that while there is a strongly desired sense to move rapidly, that it's far more important to be right than to be quick." Treasury Secretary Paul O'Neill told Senators that "[w]e should give ourselves 10 days or two weeks to assess what is going on." Corporate Fed watchers nearly unanimously expect another rate cut at the October 2 FOMC meeting, if not before.

    In Fed CRA news: on September 17, the West Virginia-based bank WesBanco issued a press release that it is appealing the Federal Reserve Bank of Cleveland's conclusion that WesBanco has a "Needs to Improve" CRA rating. Recently, Cleveland Fed staff had stated that the CRA rating appeals process is entirely confidential. But WesBanco wanted to inform the public of its appeal. The September 17 press release stated that "American Bancorporation and WesBanco will evaluate their options under the applicable merger agreement, and determine an appropriate course as the appeal process proceeds." We trust that the appeal will be denied...

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September 17, 2001

    On September 11, when hijacked planed dive-bombed the World Trade Center and the Pentagon, Fed chairman Alan Greenspan was on his way back from Basel, Switzerland. His Swissair flight was diverted back to Zurich. On September 12, a military plane flew him to Washington. The Federal Reserve Bank of New York (a mere three blocks from the WTC) and the Board in Washington both announced that the discount window remained open, and that liquidity would be provided. Speaking from Basel late on September 11, New York Fed president William McDonough said, "Certainly part of our procedure is to provide that liquidity which is needed. I am here [Basel], and I know the Federal Reserve Bank of New York is coping with the situation. But that is really all I can tell you."

    Later in the week, the Fed sold $80 billion (U.S. dollars) to the European Central Bank and the Bank of England. And it lent a record $81.25 billion to banks Friday through repurchase agreements, 16 times the average amount added for the three days prior to September 11. It is assumed that Chairman Greenspan, probably following an FOMC conference call, will further reduce interest rates. In London over the weekend, U.K. Chancellor of the Exchequer Gordon Brown told reporters that central banks will take "whatever action is necessary'' to prevent a slump in the major economies. Morgan Chase's economists have predicted that J.P. Morgan & Co. expect that the Fed's overnight rate will be cut to 2 percent by the end of March.

   Among post-September 11 tasks is to inquire into how attacks like these are financed, how the money is moved. Banks with historically lax money laundering policies will be examined particularly closely. Sometimes, it's been a matter of direct solicitation: the London Observer of December 13, 1998, reported the visit to Afghanistan of Mark Warner, a director with Barclays Private Bank Ltd., to drum up business... In testimony in federal court in Manhattan in February 2001, Osama bin Laden's paymaster Jamal Ahmed Al-Fadl testified that al-Qaeda had various bank accounts, including with Barclays Bank. While Barclays now tells reporters that it is "fully aware of [its] legal obligations," the reports become more specific: the account was at the Barclays branch in Notting Hill, west on London. Re various U.S. banks, the Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations, the Report on Correspondent Banking: A Gateway to Money Laundering, February 2001.

     Meanwhile, two days after the plane bombing, the Fed denied a request to extend a comment period on a pending application, that of Citizens Bank to acquire Mellon's banking business. The standard for such extensions is "extraordinary circumstances;" apparently, events of September 11 did not meet that standard, in the Fed's view...

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September 10, 2001

    On September 6, the president of the New York Fed, William McDonough, gave a speech in London, on the topic of "Connecting Finance with Communities." Traveling with Mr. McDonough was Carol Parry, previously the Community Reinvestment Act officer of Chemical Bank, then Chase Manhattan Bank. While not noted in his prepared remarks, Mr. McDonough in his speech praised Ms. Parry as among "the best U.S. bankers" in terms of community reinvestment. Chase, now part of J.P. Morgan Chase, is the largest bank regulated by the New York Fed.

     In his speech, Mr. McDonough implied that there is no more need for the Community Reinvestment Act, telling the audience that most bankers "say they would continue making these loans and investments even without regulation."   Note to Mr. McDonough: before your next speech claiming that CRA is no longer needed, you might want to read the recent book, The Art of Revitalization: Improving Conditions in Distressed Inner-City Neighborhoods, by Sean Zielenbach, London, Garland Publishing, 2000. Therein -- on page 228, to be specific, you'll find this: "CRA considerations constitute the primary reason for banks investment in neighborhoods such as North Lawndale [in Chicago]. Kristin Faust, the Senior Vice President at LaSalle National Bank, explains that 'CRA is why we're there' [in low-income neighborhoods]... Ed Jacob, a Vice President at First Chicago, concurs with Faust. 'We need loans in Lawndale before of CRA.'" Beyond this book recommendation for Mr. McDonough, his September 6 comments cast a different light on the New York Fed's purported attempts to get community groups' views on how the CRA regulation can be strengthened.

    Speaking of Mr. McDonough, the Bank for International Settlements recently released a report on his (and Mr. Greenspan's) managed bail-out of Long Term Capital Management. Mr. McDonough has been the chairman of the BIS' Basel Committee on Banking Supervision. Nevertheless, even the BIS had to acknowledge that "the results [of the bail-out] suggest that the benefits of Fed intervention may have been lower and costs higher than perceived at the time." The BIS found that after the bail-out, large banking forms began paying lower interest rates for unsecured overnight funds. One explanation for the sudden drop in rates is that markets saw these large firms would not be allowed to fail. BIS Working Paper No. 103, The Costs and Benefits of Moral Suasion: Evidence from the Rescue of Long Term Capital Management.

    In merger-review, the Federal Reserve is considering protests to Citizens' and Royal Bank of Scotland's applications to acquire the banking business of Mellon. ICP's protest was submitted on August 27; the applicants were given until September 10 to respond. The Fed is claiming its comment period can nonetheless close on September 11, despite the Fed's failure to respond to ICP's August 16 Freedom of Information Act request for the full application, and records of the Fed's communications with the applicants. ICP's timely supplemental comments to the Fed on the application are summarized in this week's ICP Bank Beat Report.

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September 4, 2001

    Fed policy-makers and other economists met in Jackson Hole, Wyoming over the weekend; most spoke hopefully about the U.S. economy and the prospect for the continuation of productivity increases. Michael Mussa, former chief economist at the International Monetary Fund, took the opposite view, saying that "some part of the late 1990s productivity gains may not continue.''

     Meanwhile, the Federal Reserve Board staff last week finally provided documents responsive to Inner City Press' Freedom of Information Act request concerning CRA Sunshine, nearly two months after ICP made the request. Among the documents provided were Fed staff e-mails preparing a Fed Web site on CRA agreements. An e-mail of April 4, 2001 proposes "to meet to discuss what's going to happen with the CRA Sunshine Agreements and annual reports once the Secretary's Office received them (press release went out 3/22)." An e-mail of April 27, 2001 refers to a "meeting on Wednesday... about the public website. Jeannie [McLaughlin] forwarded me a page she had drawn up." A May 3 e-mail asks for "comments on the proposed language for the public website for CRA Sunshine agreements," followed by a long paragraph that has been redacted. On May 4, the Fed's Chris Lacey wrote: "I had put together as a design for Pubweb... I included the verbiage you sent. I also tried to make the pubweb version similar to the CRA PE [Performance Evaluation] site." The draft design has been withheld.

    An e-mail of June 14, entitled "CRA Sunshine - intro to examination procedures" states "here's what I put together for the introduction. It might be more than we want, but I figured it would be easier to cut later when we actually know what the examination procedures will be. A few thoughts on what I did--" followed by a redacted paragraph.

   On July 2, the Fed's Kathleen Conley wrote to Fed staff attorney Andrew Miller, "Hoping the Citigroup case is over for you. Just a quick check-in on a few things: If you have comments on the exam procedures, I'll try to combine all Fed comments into one document to send around Friday [REDACTION]. Today I received two items -- an annual report from First Union [REDACTION]. The other item was an agreement from First Midwest Bank [REDACTION].  Policy-making in the sunshine? Hardly.

    As of July 10, 2001, the Fed had received copies of 34 CRA agreements. Seventeen of these were by Baltimore-based AllFirst Bank. Three were from California-based Hanmi Bank. Five were from Chicago-based Northern Trust; three were from First Union, and three from Mellon-owned Boston Safe Deposit & Trust Company. One each from Mellon Bank, Centura Bank, and First Midwest Bank. And that's it, as of July 10, 2001. So it's a tempest in a teapot. But the Fed documents reflect Fed staffers noting inconsistencies between banks' ("IDIs'") and community groups' ("NGEPs'") submissions. Twice, the Fed records that "NGEP only submitted IRS form 990. The names of the IDIs were not provided... NEED."

      It's striking that one of the largest state member banks, Chase Manhattan Bank, apparently did not file any agreements or annual report. This despite Chase's submissions to the Fed in late 2000, stating that Chase had discussed the CRA ramifications of its merger with J.P. Morgan with the members of Chase's "Community Advisory Board," and found that there were no concerns. Those were discussions about CRA performance, with staffers of organizations funded by Chase. The Fed staff's scrutiny of those NGEPs who filed annual reports, while casting a blind eye (according to the documents) on large state member banks like Chase, is striking. Developing...

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August 27, 2001

     The long-time general counsel of the Federal Reserve Bank of New York, who cashed out to AIG in 1999, escalated his rhetoric last week. Still doggedly pursuing regulatory approvals for AIG's proposed acquisition of American General, last week AIG fired off these threats, in purported response to one of ICP's comments to an insurance regulator, "question[ing] the veracity of a sworn statement provided by AIG in connection with a hearing conducted earlier this month by the Arizona Office of Administrative Hearings:"

AIG reaffirms that the sworn statement is true and complete. Defaming the honesty and personal integrity of a member of AIG management, or of any individual, is a serious matter. ICP provides virtually no support for its position, stating only that 'ICP has been informed that the issue was raised to American General in May 2000.' AIG trusts that ICP is not implying that AIG knowingly issued a false statement under oath as ICP has provided no evidence of this. Such a charge would be defamatory and subject ICP to serious potential civil liability and [an ICP member] to a potential disciplinary action in his capacity as an attorney licensed to practice in New York.

    In ICP Fed Reports in previous weeks, we've explained why this individual's advocacy strategies might be attributable to, or reflective of, the Federal Reserve System's view. The above, however, is a new low. The issue concerning which AIG is now making these threats revolves around when American General was informed that one of its predecessor companies wrote insurance policies on slaves. AIG stated that it and American General's EVP for government affairs and general counsel were unaware of the issue until ICP's submission of August 1, 2001. ICP questioned that; above is AIG's response. ICP on August 27 submitted to the Texas Department of Insurance a statement by the individual who raised this matter to American General on May 18, 2000, and a copy of the individual's telephone bill, reflecting four calls on that date to American General. AIG could have just researched and answered the question, but instead chose to threaten litigation and a specious legal ethics complaint...

     The incident has caused ICP to go back and review documents from November 2000. ICP had raised to the Fed public reports that a predecessor of Chase Manhattan had been involved in slave insurance policies. Chase declined to respond -- but then Fed staffers required a response. Chase submitted three paragraphs, dated November 29, 2000:

There have been allegations that the Merchants Bank and the Leather Manufacturers Bank, which were acquired by The Bank of the Manhattan Company ('BMC') in 1920 and 1926, respectively, engaged in certain servicing activities related to life insurance policies issues on the lives of slaves. BMC merged with the Chase National Bank in 1955 to form The Chase Manhattan Bank, which in turn merged with and into Chemical Bank in 1996 under the name The Chase Manhattan Bank.

The allegations are based on a document that purports to be a circular (the 'Circular') issued in 1852 by the apparent issuer of these policies, the National Loan Fund Life Assurance Company of London ('National Life'). The Circular was provided to Chase by a member of the public and has been the subject of at least one magazine article.

Chase has researched its internal archive related to these banks and has found no reference to National Life or the alleged servicing activities. Chase has begun researching external sources, but has not yet found anything relevant to the issue. It is continuing to research these matters. It is not clear from the Circular whether the alleged activities of these banks including insurance underwriting.

    So (for purposes of this Fed Report): while in the employ of the Federal Reserve System, the relevance of this and other issues is begrudgingly acknowledged. But, once gone from the Fed, and representing a private financial institution, the issue is ridiculed, and those who raise it are threatened with litigation and otherwise.

     As noted above, our Report is truncated this week, due to focus on the applications by Citizens Financial Group and its parent, the Royal Bank of Scotland, to acquire Mellon's banking business. ICP's Bank Beat has a summary of issues raised to the Federal Reserve.

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July 16, 2001

    There is, as always, much to be said about the Federal Reserve. But events late last week, in which the Fed coached Citigroup on how to amend its application to acquire Banacci so that the Fed could provide Citi with an unprecedentedly fast approval of the transaction, must be our focus in this Report. When ICP earlier mused that the Fed would do anything for Citigroup, we thought it was hyperbole. Sure, the Fed bent the Glass-Steagall Act in 1998, to allow Citicorp and Travelers to merge. And yes, the Fed rewrote the Community Reinvestment Act (CRA) provisions of the Gramm-Leach-Bliley Act of 1999, so that Citigroup's ownership of a bank with a rare Needs to Improve CRA rating would not, as the GLB Act provides, prohibit Citigroup from certain further expansions. But to date, we've always thought that the Fed's own desire (and need) for credibility provided some checks-and-balances on the Fed's capitulation to Citigroup. We noted the Fed's statement, in its July 2 order approving Citigroup's application to acquire EAB, that it is taking the allegations of predatory lending at Citigroup seriously, and, on July 9, we timely submitted to the Fed, in opposition to Citi's Banamex application, another sworn affidavit, from another ex-CitiFinancial employee, Steven Toomey, detailing violations of law, and of Citigroup's commitments to "reform" its subprime lending.

     Well, in the week following ICP's July 9 submission of Mr. Toomey's affidavit, Citigroup sent a team of auditors and lawyers down to South Carolina, purportedly to investigate Mr. Toomey's sworn allegations of predatory lending. To date, Citigroup has cautiously declined to deny Mr. Toomey's statements (see, e.g., American Banker of July 10); the Fed, notably, has not asked Citigroup a single question about the sworn allegations. ICP is monitoring Citigroup's fast-moving "flying squad," and has made the Fed aware that Citigroup, since acquiring Associates First Capital Corp. on November 30, 2000, has sought and obtained "gag orders" from ex-CitiFinancial employees. Experts consulted by ICP indicate that these gag orders raises issues of "obstruction of the regulatory process," or even obstruction of justice, given the Federal Trade Commission's pending predatory lending lawsuit against Citigroup. But --

    On July 12, Citigroup suddenly radically amended its applications to the Federal Reserve Board to acquire Banamex. Citigroup's July 12 letter to the Fed is quoted, at length, on ICP's Citigroup - Banamex page. The letter makes clear that Citigroup has been having ex parte discussions with Fed staffers, on what it would take to convince the Fed to approval the heart of the Citigroup - Banacci proposal on an unprecedentedly fast time frame: 45 days after the submission of the application. The Fed took more than four months to review a smaller proposal, Citigroup's application to acquire European American Bank (deal announced February 12, 2001, acted on by the Federal Reserve on July 2, 2001). There have been many more comments on opposition to Citi - Banamex than there were against Citi - EAB. But the Fed's willingness to do favors for Citigroup knows no bounds. On July 12 - the same day as Citigroup submitted the above-quoted "amendments" to its Banacci applications -- the Fed put Citi-Banacci on its agenda for action on Monday, July 16. Outrageous....

     Chairman Greenspan is slated to testify to the House Financial Services Committee on July 18. Will the Fed's shameful record of favor to Citigroup, exemplified by its recent actions in connection with Citigroup's proposal to acquire the second-largest bank in Mexico, be raised? Might be time to review Citigroup's campaign contributions to the members of this panel...

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May 14, 2001

       Chairman Greenspan spoke in Chicago on May 10, and steered clear of any discussion of interest rates or monetary policy. Instead, he focused on one of his favorite topics: deregulation. Bloomberg summarized him saying that "bank regulations such as deposit insurance and capital standards need to be overhauled to reduce the costs they pose to the economy... Regulators must move toward a system in which market forces play a greater role in oversight of banks' financial condition." This deregulation has apparently already begun, with respect to the largest banks: The Fed last week finally answered one of ICP's Freedom of Information Act (FOIA) requests, and provided, among other things, a copy of a March 6, 2001, e-mail from the Federal Reserve Bank of New York's chief of supervision, William Rutledge, to various FRBNY big-shots, including Bill McDonough. Mr. Rutledge writes: "Carl Howard of Citi just called to tell me that the FTC has filed a civil complaint against Citi -- alleging unfair and deceptive practices in lending (predatory lending) and credit insurance. Carl's understanding is that the complaint focuses exclusively on practices up to the date of Citi's acquisition (11/30/00)...". After that, the Fed redacts an entire paragraph.

      In another Fed e-mail, the Fed opines that various comments on Citi - EAB "were prompted by ICP's web site;" all discussion of whether or not to hold a public meeting on the now-sued Citigroup has been withheld. Citigroup's applications to acquire EAB continue pending at the Federal Reserve Board ICP last week received documents from the Fed, showing the continuing review. On May 9, the Fed asked Citigroup a series of 12 questions, to be answered by May 17, 2001. The Fed's questions essentially ask for updates on Citigroup's claim to have imposed its "compliance programs" on the operations (and 800 offices) it acquired along with The Associates, last Fall. Notably, the Fed has not yet asked Citigroup to explain the position it has taken in federal court in Atlanta: that Citigroup is not responsible for The Associates. Unless the Fed has entirely capitulated to the largest institution it "supervises," or has immediately implemented Mr. Greenspan's May 10 speech on deregulation, we expect another round of Fed questions, including this one.

    Question of the month will be whether the Fed breaks out of its two-and-a-half-year lull in holding public meetings on bank mergers, and holds one on First Union - Wachovia.  (The highlighted page has been updated based on SunTrust's May 14 hostile bid for Wachovia -- developing...).   A question is whether the Federal Reserve will break out of its two-and-a-half-year lull in holding public meetings on bank mergers, and holds hearings on First Union's (and/or SunTrust's) proposal(s).  The Fed did hold a public meeting on First Union - CoreStates, and a few other public meetings, in 1998. Since then, nothing...

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April 2, 2001

   ...The Fed has distributed its draft of an Advanced Notice of Proposed Rulemaking, for the review of the CRA regulation scheduled for 2002. Since it will be an inter-agency ANPR, the Fed's version is not final -- but it has raised concerns. The Fed's draft reportedly asks for comments on whether the CRA investment test should be abolished, whether the CRA lending test has become "too numerical," and whether the Fed has any authority to consider predatory lending by a bank's affiliates, in connection with the bank's CRA exam. We will report on the inter-agency ANPR, when it is released.

     In it merger review role, the Fed on March 23 denied requests for any extension of the comment period on Citigroup's applications to acquire European American Bank. This despite the fact that Citigroup inappropriately withheld portions of its application, that Citigroup has refused to answer comments filed against the deal, and has yet to answer the Fed's March 21, 2001, questions..

March 26, 2001

   Speaking of global, semi-Fed-regulated HSBC is bidding on Turkey's Demirbank TAS, which was taken over by the government in December. Another semi-Fed-regulated institution, Deutsche Bank, announced on March 20 that its buyout fund will buy U.K.-based Whitbread Plc's 3,000 pubs (for American readers, bars) for $2.3 billion. Deutsche Bank says it plans to sell bonds backed by future food and drink sales -- that is, securitized drinking. Ah, "merchant" banking. Will financial innovations never cease? Deutsche Bank last week also obtained E.U. approval to buy Axa SA's Banque Worms.

     Back on Earth, Fed Governor Gramlich on March 23 delivered a speech about predatory lending, at Cleveland State University. It was largely re-heated, and emphasized the Fed's proposed changes to the HOEPA and HMDA regulations. Of the former, Gov. Gramlich stated: "because HOEPA loans are already more costly to make and they carry a stigma in the secondary market, these changes may also constrict lending in the very high cost segment of the subprime market. Many consumer advocates have said that they are aware of this possible tradeoff and accept it. Now that the proposed revisions to the regulation are out for public comment, we will be able to examine the responses in more detail." Emphasis added. The speech was given March 23; the comment period on the Fed's HOEPA regulations closed on March 9...

     After Governor Gramlich's speech, the Financial Times' Abigail Rayner interviewed him. The FT's article (3/26) quotes ICP that "[b]anks have complianc[e] tests every two years but their affiliates like Citigroup's CitiFinancial don't. The FTC action against Associates should be a trigger to say the Fed should be examining some of these affiliates," then reports: "'There is a bit of a hole there,' admitted Mr Gramlich. 'The question of compliance exams is a different issue and its not in anything we've done,' he said, adding that such finance arms were under the jurisdiction of the FTC and the state. Consumer groups would argue that the FTC has limited resources. 'The FTC has less staff, they can't do the kind of examinations that the Fed could,' said [ICP]."

     Gov. Gramlich March 23 prepared speech stated that "[o]ther steps may need to be taken, and may be taken, to deal with predatory lending. But these proposals should represent important first steps." This is a position echoed -- and used -- by the American Bankers Association's report, released on March 22, which opposes any further anti-predatory lending legislation at the state or local level. The ABA paid the Brookings Institution's Robert Litan to prepare the report, the main argument of which is that the Fed's proposed amendments to the HOEPA and HMDA regulations are sufficient steps. Litan advises that no level of government legislate in this area until this new data is available and can be analyzed. But the Fed's HMDA proposal is just that -- a proposal, still not final, still not the law. Even if it were finalized, and published in the Federal Register, tomorrow, it would, at earliest, cover loans made in 2002, data concerning which would not become available until mid-2003, more than two years from the date of Litan's suggestions (for inaction).

    Litan's study treads lightly over the question of discrimination in subprime lending: the degree to which subprime lenders target communities of color, and presume that all residents are worse-than-normal credit risks. Litan does not even mention the question of "referral-up": that loan applicants with prime credit histories should be given prime-priced loans, by the lender they apply to, or one of its prime-lending affiliates.

    This question of "referral-up" is particularly important in a conglomerate bank holding company like Citigroup, which now owns the large subprime lender, Associates First Capital, having merged it into Travelers Insurance's old subprime unit, CitiFinancial. But Litan, while citing the Treasury Department's and HUD's 2000 study of predatory lending, makes no mention of this study's recommendation, which included that the Federal Reserve should begin conducting consumer compliance examinations of bank holding company subsidiaries which engage in subprime lending. The General Accounting Office made this same recommendation, in 1999; its report, at 14, stated that "[a]ccording to FRB officials, a long-standing FRB policy of not routinely conducting consumer compliance examinations of nonbank subsidiaries was formally adopted in January 1998." Litan suggests increasing enforcement agencies' budgets -- but if the agency with jurisdiction (here, the Fed) is unwilling to conduct onsite examinations, an increased budget is not the solution.

    The American Banker of March 26 quotes "[a] Fed lawyer, speaking on condition of anonymity, [that] the agencies... may try to determine whether regulators have any authority to probe a bank's nonbank affiliates that make loans, such as mortgage companies, but do not take deposits." This is again misleading. Of course the Fed has "authority" over bank holding company subsidiaries. The only argument the Fed's been able to come up with is that it thinks that the FTC and DOJ have explicit enforcement jurisdiction, under ECOA and/or the Fair Housing Act. Note that that's "explicit," not "exclusive," and that the Fed could bring enforcement actions against BHC subsidiary lenders under other legal theories (including safety and soundness and reputational risk), and/or make referrals to the Department of Justice...

    In fairness, the Fed on March 21 asked Citigroup a series of 19 questions, several having to do with fair lending, subprime lending, marketing, HMDA reporting, referral-up. (Some of the questions are quoted in this week's ICP Community Reinvestment Reporter).   It is unclear when Citigroup will respond -- since only one week remains in the Fed's comment period on Citigroup's application to acquire European American Bank, it appears possible that the public will be given no right to comment on Citigroup's responses. An extension of the comment period, and a hearing, have been requested from the Fed.

     On March 25, ICP received from the Fed's Freedom of Information office (working on Sunday, yes) some of the documents response to ICP's March 1, 2001, FOIA request about Citigroup-EAB. Included is a copy of a February 12 e-mail from the FRBNY's William Rutledge, stating that Citigroup lawyer "Carl Howard just called to say that Citi was the winning bidder for EAB -- will fold it into the lead bank, although it is possible it will first be acquired under the BHC and later merged into its affiliate." This is followed by a redacted e-mail of February 26, from Fed staffer Lily Tham, forwarding a Feb. 14 FRBNY e-mail: "Citi/EAB: I spoke today with Ed Handelman in Citi's Legal/Regulatory Affairs Group. He advised that while the transaction could be structured as a holding company acquisition followed by a bank-to-bank merger, it was more likely that it would be a bank-to-bank merger right at the outset, and that it would not require an application to the Fed." Since Citigroup then did apply to the Fed, on February 28, something had changed, by then. To the degree that the Fed resisted given Citigroup a waiver of the need to apply, it's to be applauded. Now, the question is what the Fed will do, on Citigroup's application, the same month Citigroup's been sued for predatory lending by the FRB...

     Finally, for this week, while the Fed accepted Fleet's answer, earlier this year, that it "didn't know" which branches it would close if the Fed allowed it to acquire Summit, on March 23, Fleet proudly announced that it will be closing 80 branches: 33 from the old Summit, and 47 from Fleet itself. "And they said they didn't know...". We'll see if the Fed allows Citigroup to play this "now I don't know, now I do" game, in connection with the Citigroup - EAB proposal....

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February 5, 2001

     To the surprise of no one, the FOMC on January 31 dropped interest rates by 50 basis points. Already, most observers expect another 25 basis point drops, at the March FOMC meeting, or before.

     Meanwhile, the Fed last week sent Inner City Press long-delayed responses to a number of pending Freedom of Information Act requests, including ICP's December 14, 2000 request for all records reflecting the Fed's communications with Congress regarding the Community Reinvestment Act and related issues, since August 1, 2000. The response consists of several thousand pages, but, even then, is not complete. The Fed's determination letter states: "Our response includes all correspondence with the House and Senate banking committees and documents related to this correspondence. Board staff continues to search for other documents that might be responsive to your request, and we will make a separate determination promptly on any additional documents located."

      What the documents that the Fed has provided make clear is that Senator Phil Gramm (R-TX) has continued to demand, and the Fed has continued to quickly provide, the complete files on every CRA-protested application, and every application on which the Fed considered "CRA investment test issues." The Gramm staffer leading the charge on (that is, against) the CRA investment test is Linda Lord. The Fed had previously responded to Sen. Gramm about the investment test, on May 1 and June 1, 2000. Ms. Lord asked eleven questions about the Fed's response. Three of the questions focused on "protests" and "protesters." For example: "How many of these applications were protested for any reason?" "Please indicate whether the investment issue were raised by commenters or by Federal Reserve staff." "Are there any other cases were investment test issues were raised by Federal Reserve staff rather than protesters?"

        Sen. Gramm's inquiries seem to be having their intended effect. The Fed's September 8, 2000 response to Ms. Lord's questions reports, under the heading "Banks with Less than Satisfactory Investment Test Rating," that there were 13 such banks in 1998, 16 in 1999 - and, in the first eight months of 2000, only two. It would appear that under Sen. Gramm's watchful eye (or, more cynically, with Sen. Gramm's tacit approval), the Fed has become notably less aggressive in evaluating banks' compliance with the CRA investment test. The year-to-date 2000 figure, annualized, come to THREE less than satisfactory ratings: an 80% drop off in such ratings from 1999.

      In a table headed "Applications Having CRA Investment Issues, January 1, 1996 - March 15, 2000," the Fed lists only ten such applications. In four of these ten cases, the Fed's table notes that "staff review" raised investment test issues. In three of these four cases (including one, Toronto Dominion, analyzed in more depth below), investment test issues were also raised in public comments. In the fourth case, regarding BanPonce, the issue was only raised by staff review -- and the application was approved on a "delegated basis," by the Reserve Bank, with no formal order by the Board of Governors. Since the Reserve Banks ONLY have authority to approve, but not deny, applications, it seems clear that communities are better served by commenting on bank applications than by remaining silent, and counting on the Federal Reserve System to fully review CRA matters, whether or not comments are filed.

    Even after the Fed's extensive September 8, 2000 response, Ms. Lord telephoned the Fed (Win Hambley, Beverly Smith and others). As memorialized in a September 15, 2000 e-mail from the Fed's Beverly Smith, Ms. Lord "wants... those portions of the memos which discuss 'CRA investments issues' where the staff reviewed the concerns flagged by examiners (or commenters) and how the issues were resolved in the application... She wants it by Monday." The Fed redacts five lines from this e-mail; we will be appealing, once the Fed completes its (initial) FOIA response. In another e-mail, later on September 15, Ms. Smith writes of "expedit[ing] the redactions of our memos on the 4 cases where staff raised the investment issues."

     These memos were provided to Ms. Lord on September 18, 2000. One of the four cases was "Toronto-Dominion Bank to acquire Waterhouse Investor Services (approved 9/30/96)." This memorandum is particularly interesting. It recites that, after being challenged, Waterhouse National Bank purchases three bonds, but that subsequent "[d]etailed review of these investments indicated that the New York Housing Development Corporation bond for housing for the Beth Israel Medical Center did not meet the qualified investment test because there was no income limitation for the projected residents of the facilities.... On August 9, Waterhouse National sold the Beth Israel Medical Center Housing bond ($1.8 million) and purchased a newly-issued New York City Housing Development Corporation bond for $2 million." The memo goes on: "ICP notes that such investments were not made until the application process was well underway, and concludes that the purchases were undertaken in order to obscure the fact that Waterhouse National had no CRA program in place. ICP further observes that Waterhouse National replaced two of the three bonds shortly after ICP submitted a comment letter challenging management's claim that the bonds qualified as community development investments...". The memo's conclusion has been redacted; ICP will be appealing. There follows a detailed "timeline," showing the bond purchase on July 29, 1996, the bond sale on August 9, 1996, an August 21 "interagency CRA meeting" (including the OCC), and an OCC grant of "limited purpose designation" to Waterhouse National on August 30, 1996. This designation allowed a sufficient evasion of CRA for the Fed to approve the application, on September 30, 1996.

     On December 6, 2000, the Fed's Winthrop Hambley wrote to Sen. Gramm staffer Dina Ellis: "In response to your standing request... enclosed is information relating to CRA-protested applications processed by the Board during the third quarter of 2000." This consisted of six applications: Wells Fargo - First Security; Mizuho; FleetBoston - North Fork; North Fork - Dime; Countywide Credit Industries' (still-pending) application to get into banking, by acquiring Treasury Bank, Limited, Washington, D.C.; and Queens County - Haven Bancorp. In this (Queens-Haven) file is an Office of Thrift Supervision letter, dated August 30, 2000, stating that:

"OTS examiners have raised an issue concerning whether a group of five commercial mortgage loans totaling approximately $77 million comply with the lending limits of 12 U.S.C. Section 1464(u) [and] 12 U.S.C. Section 84. CFS Bank, which purchased the loans from Queens County in July 2000, simultaneously entered into a repurchase agreement that provides, among other things, for Queens County to repurchase the loans if the subject merger is not consummated... The OTS is reviewing the issue and has not reached a final determination as to whether the loans comply with the lending limits... Please be further advised that this office has reservations about this proposed transaction. The supermarket branches were one of the areas noted in the 1999 OTS Report of Examination for underperformance and continue to be an area warranting supervisory concern. This office is not prepared to accept the supermarket branch federal saving bank model unless we are fully satisfied as to our immediate concerns regarding the operating performance of the supermarket branches, as well as the possible need for additional capital."

    The Board nevertheless approved the transaction, after obtaining a letter from Queens County's counsel about the $77 million in loans. ICP at the time the application was pending received this cursory letter, but not the OTS' objections. And the issue was not squarely addresses in the Board's approval order.

* * *

      In another proposal pending before the Board, MetLife's application to get into banking, an OCC letter dated January 29 recites that ICP's

"concerns were centered on two main points: (1) it did not believe that the pro forma bank was eligible for a requested wholesale designation under the CRA; and (2) it cited an alleged record of racial discrimination in MetLife's existing insurance operations... Negating the first issue, on December 22, 2000, MetLife withdrew its previous request to the OCC... for the Bank to have a CRA wholesale designation under its acquisition. With respect to the second issue, while this is a matter of great interest to the OCC, the Federal Reserve System will evaluate this issue as part of its review of MetLife's pending application to become a bank holding company and financial holding company through its acquisition of Grand Bank."

     We'll see what the Fed does on this "second issue." But it is significant the MetLife withdrew its (bogus) request for "wholesale bank" status under CRA. Relatedly, ICP has submitted a second round of comments on Schwab / U.S. Trust's application to acquire Resource Trust Company, opposing "wholesale bank" status for U.S. Trust's banks. (The FDIC extended its comment period on this application; the Fed, as is its wont, has yet to respond to ICP's request to it, which is identical to the request that the FDIC granted). This "wholesale" loophole to CRA must be closed, for banks (like Schwab's / U.S. Trust's) which explicitly say that they serve only the affluent, with mortgages, etcetera. Developing...

     But back to the Fed's obsessive secrecy: in U.S. Bancorp - Firstar (which appears to be moving to "end-game," on U.S. Bancorp - Firstar, now that U.S. Bancorp has "forfeited" its warrants in the subprime lending New Century -- ICP contends that the Federal Reserve Board must still address the New Century issues, including because U.S. Bancorp "controlled" this company, from 1998 to January 2001): in a January 31, 2001, letter to the Fed, the banks' counsel "commits that prior to the consummation of the Merger, Firstar will execute a sale agreement with a purchaser determined by the Board to be competitively suitable. Firstar further commits that in no event will Firstar enter into such an agreement with Wells Fargo & Company... The sale agreement will provide for the sale of eleven branches located in the Minneapolis, Minnesota banking market and two branches located in the Council Bluffs, Iowa banking market. These branches are listed in the Confidential Exhibit hereto... On behalf of Firstar, I hereby request confidential treatment for the branches listed in the Confidential Exhibit. The information set forth therein is not publicly available and would cause competitive harm to Firstar if disclosed at this time."

[Some archival material cut to save server space - with questions, contact us]

January 8, 2001

       Finally, for this week, two issues raised by, and relevant to, pending Fed proceedings. In the ongoing Firstar-U.S. Bancorp proceeding, the banks' on January 2, 2001, submitted to the Fed a response on the subprime issues that ICP's Dec. 4, 2000, comment had raised. Among other things, the banks' write:

"Firstar has corporate lending outstanding to the following companies that engage in subprime lending: Burt Commercial Finance, Security National Finance Company, Oxford Commercial Funding, Conseco, Inc., Advance America, Finance Supervision Company, Globe Loan Company, USA Check Advance, LLC, Bob Fays Rent to Own, AAA Cash Advance, Messanie Payday Loans, LLC, and Easy Money Express Company."

     Firstar's extensive links, through loans, to pay-day loan and other companies has not been addressed in the Fed's proceeding. Developing...

      While banks invest in pay-day lenders, inner city communities continue to be stripped of access to normally-priced credit. Inner City Press has heard from Detroit that Fed-supervised Comerica is moving to close its branch at 19222 Van Dyke, near the intersection of Seven Mile Road, in Detroit. This is the same Comerica that's applying right now to buy Imperial Bancorp in California, and that, in May 2000, announced grandiosely a reinvestment plan in the Motor City, its headquarters. The planned branch closure is in an LMI census tract (70% "minority," according to the most recent census). Yes, a law (12 U.S.C. 1841r-1) and policy statement (Federal Register of June 29, 1999) exist, under which the Fed, Comerica's supervisor, might have to hold a public meeting. But that law has no provision to stop a branch closure -- a fact never mentioned in the Fed's merger approval order's citation to this law, as a way of avoiding dealing with branch closing issues during merger applications.

    The Fed's orders also often say that any fee is OK with them. Consider this, from this week's mail bag:

Subj: Fleet punishes customers for good credit
Date: 1/5/01 5:07:56 AM Eastern Standard Time
From: [ ]
To: FleetWatch [at]

My husband and I have been married for two years, just had our first baby and are saving like crazy for a new house. One of the things we've been doing to ensure that we qualify for the best possible mortgage rate is to close our credit card accounts.

When I called [Bank X] to cancel my card, they graciously offered to lower my interest rate to match other offers I had received. Of course this incentive was proposed to keep my business, but in turn also will save us money and allow us to pay off the balance sooner than expected. However, much to my outrage, Fleet Bank offered just the opposite. They stated that those closing credit card accounts with an outstanding balance would be subject to a percentage rate of 29 percent! Unbelievable, sneaky and just plain dirty-rotten.

Fleet may have earned a few hundred dollars in interest on our credit card balance, but they'll be losing two loyal bank members of over 15 years and all of the money we would have invested and spent over a lifetime as we'll be closing ALL of our accounts with them.

Thank you for your time...

     Note: we have "redacted" the name of the author -- unlikely Fleet, we respect consumers' privacy...

* * *

January 2, 2001

     On the regulatory front, during the holiday lull, the Federal Reserve concluded its de-fanging of the one pro-Community Reinvestment Act provision of the Gramm-Leach-Bliley Act (in what amount to yet another Fed "gift" to Citigroup), and fully-fanged that law's "CRA Sunshine" requirement. As to the first, As recounted in last week's report, below, the Federal Reserve Board on Dec. 21 gave Citigroup another favor: twisting the Gramm-Leach-Bliley Act of 1999 so that Associates National Bank's Needs to Improve rating under the Community Reinvestment Act has no effect on Citigroup. Twisting the law is one thing, and secrecy (about twisting the law) is another. Last week, Inner City Press finally received a response from the Fed to its Freedom of Information Act request -- but it's simply a request (unilaterally) for more time: "the Board received your request... for records... reflecting and/or related to any communications between Board personnel and Citigroup... or Associates... related to Citigroup's proposal to acquire Associates First Capital... or any other Citigroup acquisition proposal since September 5, 2000.... we are extending the period for our response until January 5, 200[1], in order to consult with another agency or with two or more components of the Board having a substantial interest in the determination of the request." Yep, hold that information back as long as possible -- probably, until after the Fed publishes its Citigroup-gift GLB Act regulations in the Federal Register...

     In another proceeding at the Fed, the proposed Firstar-U.S. Bancorp merger, by letter dated Dec. 22 (a copy of which ICP received last week), the Fed has asked the banks nine more questions. The questions largely request "commitments" from the banks, including that the proposed "New U.S. Bancorp will divest U.S. Bank National Association, North Dakota within two years of Firstar's [proposed] merger with U.S. Bancorp, in accordance with North Dakota Century Code Section 6-08.3-13 and Wisconsin Stat. Section 221.0901(8)." This implies that the "Dakotas problem" (described below on this page) has not been solved, but that the Fed (as it did on the Travelers-Citicorp merger in 1998) reserves its right to waive virtually any law, for two years. Citigroup used the two years to... lobby to change the law, the Glass-Steagal Act; these banks would probably just find a way to merge the North Dakota bank into another entity, eliminating the need to "divest" it. When you're the Federal Reserve, who cares about state laws? Or Federal laws? Or international laws?

     For or with more information, contact us.

   Click here to view ICP's current Federal Reserve Reporter.

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