Inner City Press' Federal Reserve Reporter
Archive 2000 #2 (April - July 17, 2000)
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July 17, 2000
With more than month until the next FOMC meeting (Aug. 22), the Fed last week used its bully pulpit to promote open markets in the developing world, and the attractiveness of Financial Holding Company status in the United States. Chairman Greenspan, in a speech to the Council on Foreign Relations, said that free markets, and not regulations or government programs, are the route that the developing world should take. He inveighed against bail-outs, without mentioning the Feds actions with respect to Long Term Capital Management...
Meanwhile, Fed general counsel James Virgil Mattingly, in a speech to the American Bar Association, promised Fed rule-loosening to make the state member bank charter at least as valuable (that is, deregulated) as the national bank charter. He emphasized that the Gramm-Leach-Bliley Acts provision that Financial Holding Companies can engage in activities that are complimentary to financial activity will be interpreted by the Fed much more broadly than the older incidental to standard. This speech, to the corporate lawyers who give strategic advice to bank, is contrary to Chairman Greenspans earlier cautionary speech that bank holding companies think long and hard before applying to FHC status. The race to the (deregulatory) bottom has begun again. Mr. Mattingly was promoting banks involvement in e-commerce Web sites selling non-financial products. When any of these go under, we hope the Fed actually implements Greenspans advice to developing nations: no bail-outs. But we doubt it...
In nitty-gritty (and, at least to ICP, quite disturbing) Fed news, Governor Gramlich, in a July 11, 2000 letter responding to a Freedom of Information Act appeal, has affirmed an earlier Fed evasion of FOIA. In summary, ICP (and other community groups) were asked earlier this year by Fed economist Raphael Bostic for CRA-related documents. ICP provided documents, as did other groups. ICP submitted a FOIA request, among other things for all non-exempt portions of Mr. Bostics files. The Fed responded that all Mr. Bostic had was files from banks. ICP appealed, noting that this was untrue, on personal knowledge. Gov. Gramlich recites that ICPs appeal was for records including but not limited to records collected or prepared by FRS senior economist Raphael Bostic or his colleagues, then states that I have confirmed that the information withheld from you... is from a person within the meaning of FOIA, was provided voluntarily to the Board, and constitutes information that the person from which it was obtained would not release to the public. Again, since ICP knows (and has informed the Fed) of Mr. Bostics requests to community groups, Gov. Gramlichs response is predicted on the Feds assumption that community groups would NOT release CRA-related information to the public. The same assumption made without evidence by Sen. Phil Gramm in his anti-CRA campaign in 1999. The Fed may have initially simply made an error in its FOIA response. But now, the Fed, through Gov. Gramlich, has compounded the error, and... well, to be kind, mis-spoken. It may not be worth suing the Fed under FOIA to prove this point. But its a shameful FOIA response, for an agency that prides itself on credibility and integrity. ICP has submitted yet another FOIA request, the Feds response to which will be reported in this space.
Among other non-profit Fed watchers: the Financial Market Centers FOMC Watch of June 27-28, 2000 has a fascinating piece about The Federal Reserve as a Work Place. Along other things, it recounts the New York Feds open opposition to any of its employees joining unions. When security guards at the New York Fed contacted a union, this Reserve Bank hired a union-busting firm, Adams, Nash, Haskell & Sheridan. FRBNY General Counsel Tom Baxter gave a speech to employees, arguing that if the union gets elected as your bargaining representative on Wednesday, the union will have even more power over you... Who is more likely to be responsive and get you what you want: someone who wants the same things as you, or, someone like the strangers from Washington who are directing the union campaign?... We part company on the need for a union. I see no need. I see us finding better solutions when we are standing together, shoulder-to-shoulder, rather than sitting apart, separated from each other by a bargaining table.
The union vote lost, 58-58. New York Fed security guards are paid less than $30,000 a year. If nothing else, the Fed-as-employer is certainly doing its part in keeping inflation (and wage demands) down. But the Federal Reserve Banks strange legal status -- apparently government agencies, with votes on interest rates, that are in fact owned by banks -- continues. Much greater oversight is needed...
One positive piece of Fed consumer protection news to note: last weeks report stated that the Fed was preparing to hold hearing on the Home Ownership and Equity Protection Act in only Charlotte and Boston. That is what ICP had heard from sources within the Fed as of its deadline. However, on July 10, Gov. Gramlich announced that HOEPA hearings will be held in Charlotte (July 27), Boston (August 4) and San Francisco (September 7). This was the formal Fed announcement; it still excluded the Midwest, particularly Chicago. At weeks end, source told ICP that the Fed is now scheduling a hearing for Chicago, on August 16...
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But we DO leave in corrections:
A correction from an item we ran last week, chiding the American Banker newspaper for not identifying Robert A. Cook as an advisor to the Federal Reserve. Mid-week, we received the following from Robert E. Cook, of the Fed:
Subj: Error in your CR Reporter Page for 6/5/00
Date: 6/7/00 3:07:53 PM EST
From: email@example.com (Robert E. Cook)
To: [Inner City Press], firstname.lastname@example.org
Paragraph 2, page 1 of the above-captioned report includes the sentence:
"The Banker also quotes lawyer Robert Cook as an analyst, without ever mentioning that he's been the Federal Reserve's 'senior advisor' on fair lending - - a conflicted watchdog if ever there was one."
This is at least the second appearance of this particular error on yourwebsite. You should know that there is a Robert A. Cook, partner in the law firm of Hudson, Cook and, quite separately, myself, Robert E. Cook, a senior attorney specializing in fair lending and employed solely by the Federal Reserve Board. I don't know the other Mr. Cook all that well, but I think it safe to say that we both take as much care to avoid conflicted positions as we do to avoid making erroneous public statements.
We responded to Mr. Cook, an hour after his complaint was received:
Mr. Cook --
Thanks for pointing out the error -- well run a correction, at latest, Monday June 12. Looking back into it, Ive realized the source(s) of the mis-perception:
(1) some references dont include middle initial (for example, an announcement of the Consumer Bankers Associations 1998 conference);
(2) that Robert A. Cook has been on the FRBs Consumer Advisory Council is a coincidence that also made mis-apprehension more likely; and
(3) some references to you state that you are a consultant to the FRB, or an advisor to the FRB:
USA Today, Nov. 16, 1995: ...Robert Cook, senior fair lending adviser at the Federal Reserve...
Regulatory Compliance Watch, Nov. 25, 1996: ...Robert Cook, a fair lending consultant at the Federal Reserve Board....
In retrospect, its these two referenced (as adviser and consultant) that were the source of our misunderstanding. Were you solely employed by the FRB at those times (1995 and 1996)? Why did the two publications identify you as adviser and consultant? (Im assuming that neither reference was to Robert A...).
Anyway, I want to apologize for the error; the June 5th (and the earlier one, which Ill track down) will both be corrected, by June 12th at latest.
You may remember (or have been contacted in connection with) a Freedom of Information Act request we made last year, for fair lending-related documents youd referred to as having to go dig through (thats a paraphrase). We remain hopeful that the FRB, under your advice and consultation, will begin taking a closer look at holding companies involvement in questionable subprime lending, whether as underwriter, trustee / custodian, warehouse lender, debtor-in-possession lender, or as end-purchaser of mortgage-backed securities.
So far, we havent heard back. But, thats the correction...
June 5, 2000
June 2s report that May unemployment rose to 4.1 percent has most analysts now predicting inaction by the FOMC on June 26-27. The Feds hawks, however, continue beating the drum. Al Broaddus, president of the Richmond Fed, said on June 2: `I don't see any definitive evidence that the growth of demand is decelerating in a significant way. In addition, there are signs now across the economy of rising labor costs, which could bring a rise in the inflation rate, Broaddus said.
The Fed Governors, eschewing any comments on interest rates, focused last week on giving assurances that they wont strenuously supervise the non-bank parts of the conglomerates allowed by the Gramm-Leach-Bliley Act. Gov. Ferguson said that the Fed will rely, as much as possible, on the non-bank companies functional regulators -- meaning, most often, state insurance regulators. Given these agencies bungling in recent years (and worse -- see the corruption scandal currently blowing around the California insurance commissioner), the Feds assurances verge on the irresponsible. Gov. Meyer, in Virginia on May 31, said the focus will be on market discipline. The Fed, he said, can contribute to this goal by being clear in word and deed that the affiliation of non-bank entities with a bank does not afford them access to the safety net. Uh - heard of Long Term Capital Management, and the Feds arranged bail-out, any one?
In terms of the Feds own lack of transparency, at weeks end, Inner City Press a response to its April 14 Freedom of Information Act (FOIA) request about the Feds communications regarding the Community Reinvestment Act. The Fed writes: The staff has search appropriate Board records and has found several documents responsive... We will include a copy of a letter dated April 20, to Ms. Dina Ellis, transmitting data requested by Senator Gramm... We have determined that the remaining information... contains staff opinions, recommendations and analysis... Such information will be withheld from you... Approximately 84 pages, consisting of e-mail messages and draft documents, have been withheld in full.... In addition... files contain approximately 60 linear inches of responsive information, consisting primarily of responses to the CRA-related surveys set to financial institutions... No reasonably segregable nonexempt information has been identified.... In the course of searching for records in response to your request, documents consisting of six pages of personal handwritten notes also were located. These notes are not records of the Board and, as such, are not required to be produced. Ah, transparency...
Circulating in Washington is a 25 page draft inter-agency policy statement, about how the regulators including the Fed can use existing law to combat predatory lending. One of the suggestions is that the agencies not give Community Reinvestment Act credit for making or purchasing (undefined) predatory loans. Its an entirely toothless suggestion, since the banks involved in questionable subprime lending, including Wells Fargo, HSBC, Mizuho, Deutsche Bank and others -- dont SEEK CRA credit for these activities. Perhaps more useful is the drafts suggestion that a creditor whose loan products incorporate abusive provisions and who chooses, or targets, prospective customers for such loans on the basis of race, national origin, or other prohibited characteristics...violates the Fair Housing Act." The Federal Reserve currently has before it evidence that Wells Fargo, and the Japanese banks applying to merge into Mizuho, target communities of color, with high interest rate loans impose pre-payment penalties, etc.. What will the Fed do?
The American Banker of June 5 quotes lawyer Robert Cook as an analyst, without mentioning that hes been the Federal Reserves senior advisor on fair lending -- a conflicted watchdog if ever there was one. [See Report of June 12, 2000, above].
Last week, ICP finally received a copy of Wells Fargos answers to the Federal Reserves questions on this issue (ICP was never provided with a copy of the Feds May 3 question letter, and was only given a copy of Wells May 19 response by regular mail from the San Francisco Fed on May 26). The Fed tossed a soft ball:
Describe Wells Fargos programs to monitor compliance with the fair lending laws... Discuss how these programs are implemented at Wells Fargos bank and nonbank subsidiaries... [I]nclude a description of Wells Fargos programs, policies, and procedures to ensure that the subprime lending activities are conducted in compliance with fair lending and consumer protection laws and regulation.
Wells answer is pure boiler plate: All business units are required to develop and maintain Polices and Procedures covering all areas of business, including Fair Lending. To the degree that these entities engage in subprime lending, these fair lending policies and procedures also cover subprime lending activities.
But neither the public nor the Federal Reserve can even assess the fairness of Wells Fargos subprime lending: Wells main subprime unit, Directors Acceptance, mixes its mortgage data in with the larger Wells Fargo Home Mortgage. Requests have been made that Wells break out the data on the subprime loans; Wells has responded that it could do this, but wont. Will the Fed accept this?
The Fed appears to be preparing to accept unprecedentedly high levels of concentration in consumer finance product markets in Alaska. Together, Wells and National Bancorp of Alaska have up to 66% market power, in Juneau and elsewhere. Wells claims to have closed offices; now the Fed is asking (in order to write-off current market share tables) what percentage of Wells loans were made by these now (and only temporarily) closed offices. If the deals approved without divestitures, the Fed will be allowing future merger partners to simply temporarily close offices, until after a deals approved. For shame...
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May 1, 2000
Still two weeks out from the next FOMC meeting, Fed watchers are split between those who predict a quarter point rise, and those predicting a full half point (Merrill Lynch now among them). On April 25, the National Association of Realtors released a study of March home purchases, up 1.5% from February, but down 9.2% from a year ago. In a strange bit of government-on-government punditry, FannieMae economist Orawin Velz, said that NAR's report will likely only confirm the Fed's belief that the economy is growing well above the rate the Fed believes the economy can sustain without triggering inflation. Our predictions still on a quarter point, among other reasons because Greenspan is not as unconcerned about public opinion and/or his legacy as some portray...
For example, its hard to imagine the Fed Governors questioning anything about the Gramm-Leach-Bliley Act (or any of those legislators). Not so at the Reserve Banks, however: Minneapolis Fed President Gary Stern, beyond his recent article in that Reserve Banks journal (saying the GLB Act does not go as far as it could) more recently told Bloombergs Noam Neusner that the GLB Act leave us exposed to more risk-taking, especially on the part of big banks... creditors of the non-banking affiliates of these financial houses may come to believe they're subject to the safety net underpinning banking, in which case you'd get less market discipline, not more. BBN 4/26. While Stern would apparently like to cancel federal deposit insurance altogether, its always nice to see someone at the Fed criticizing Congresspeople other than Democrats.
Another potential micro-rift between the Fed and Senator Gramm: the Federal Register of April 24 contained the Feds Semiannual Regulatory Agenda. In it, as to Gramms CRA Sunshine provisions, the Fed says that it will act by July 1, 2000. Which seems strange, because the requirements go into effect on May 12, 2000. The Fed rushed to put out a regulation allow cross-industry mergers like Schwab - U.S. Trust (which is on the Feds agenda for action on May 1, despite other last-minute Schwab business deals, such as to offer mortgages), but has delayed on the CRA portions of the deregulation law, a delay that may well prejudice the community advocacy groups at which Senator Gramm directed his reporting requirement. Interestingly, the FDIC says it will take action on sunshine regulations in May; the Office of Thrift Supervisions agenda says that action was to be taken in April...
The Feds too busy approving mergers. On Monday, April 24, it was Maines Peoples Heritage, acquiring Vermonts Banknorth Group, even those antitrust concentration levels in the Portsmouth, NH market would rise over the Feds and DOJs supposed antitrust guidelines. As noted above, the Fed has put Schwab - U.S. Trust on its agenda for Monday, May 1. And the Fed seems to be trying to rush the rare hostile take-over proposal thats before it, North Fork - Dime. (Dimes friendly deal with Hudson United, which the Fed has already approved, was finally canceled last week). On April 28, the expiration of the Feds comment period on the North Fork application, the Fed provided ICP with 200 pages of new documents about the Fleet-funded North Fork proposal. The Fed extended the comment period on Fleets application (to May 5), but refused to extend the North Fork comment period. Apparently, the Fed considered giving four hours, to review 200 pages it could have provided much earlier (and did, to Dime) to be due process. And the beat goes on...
April 24, 2000
Still three weeks away from the FOMCs May 16 meeting, well focus on Federal Reserve happenings at the Reserve Bank level, and then some media critique.
Chicago Fed president Moskow was slated to speak before the Iowa Bankers Roundtable in Des Moines on April 20, but was kept away by inclement weather. His prepared speech was released by the Fed in Washington, and said, rather folksily, I dont have a crystal ball, but I think its fair to say that the [Gramm-Leach-Bliley] Act will continue the trend of banking consolidation. Wed add: That, and the Federal Reserve Boards own encouragement and rubber-stamping of mergers.
Most recently, the Fed is considering allowing a joint hostile acquisition in the Northeast: Fleet funding North Fork to take over Dime Savings, with North Fork thereafter to sell back 17 Dime branches to Fleet, and the Fed to pretend that Fleet and North Fork will vigorously compete, despite Fleets controlling stake in North Fork. The Fed delayed two weeks in providing a copy of Fleets application to prospective commenters, apparently not wanting the public to even possibly slow down this banking consolidation trend. Or maybe it was... inclement weather.
Fed Governor Gramlich, fresh off his April 14 speech in Syracuse (reviewed in last weeks Report, below), made it out to San Francisco on the next business day, to deliver a speech about the digital divide. According to the American Banker newspapers summary, Gov. Gramlich called on community groups and banks to bridge the digital divide separating low-income and minority people from the economic and educational benefits created by the Internet. He suggested programs that would give underserved communities computer access and training. Its an increasingly popular thing to say -- the only problem is, the Fed has been the least active of the four bank regulatory agencies in meaningfully applying the Community Reinvestment Act to Internet banks (and thereby encouraging the type of partnerships Gov. Gramlich is now pitching). The Office of Thrift Supervision, for example, at least got E*Trade - Telebank in late 1999 to commit to support some Internet access sites in low income communities. The Fed, on the other hand, rubber-stamped Royal Bank of Canadas acquisition of the all-Internet Security First Network Bank, without obtaining or encouraging any such commitment. Before that, the Fed did the same thing (that is, nothing, on the digital divide) with respect to TD Waterhouses bank. Gov. Gramlich is listed among the governors voting on applications before the Board; lets see how it plays out on the next application to the Fed involving an all-Internet bank.
Unfortunate quoting of Fed personnel: the San Francisco Feds manager of consumer affairs Maria Villanueva was called by a reporter from the Anchorage Daily News, regarding protests to Wells Fargos application to acquire National Bancorp of Alaska. That newspapers April 19 issue reported: The raw numbers confirm that Norwest didnt grant mortgages to blacks or Alaska Natives living in Anchorage during 1998. But the data doesnt paint a complete picture, said Maria Villanueva, consumer affairs manager of the Federal Reserves San Francisco office. It would be reckless to conclude theres discrimination based on the numbers alone because they dont factor in market conditions, the location of a companies branches or other criteria, she said. Inquiry was then made with the SF Fed (pointing out the divergence between Ms. Villanuevas reported statement (reckless, etc.) and the Feds formal position, that HMDA data can be a red flag). Apparently, Ms. Villanueva was mis-quoted, and the SF Fed has complained to the Anchorage paper. Unresolved is whether the statement taints the Feds review of the protested application...
On April 21, the Fed Secretary Jennifer Johnson denied ICPs request for an extension of the comment period on Schwab - U.S. Trust. In support of the request, ICP pointed out that the Feds response to ICPs Freedom of Information Act request for all records reflecting the FRS communications with Schwab and/or U.S. Trust hadnt included any documents about, or references to, an August 18, 1999 meeting that Schwabs and U.S. Trusts April 7 SEC filing disclosed. The letter denying the request (and, one must assume, explaining both the propriety of the Fed-Schwab meeting, and the reasons for FOIA non-response) is in the mail. Developing...
Now, media review. The New Yorker magazine of April 24 contains a long and (surprise, surprise) laudatory profile of Alan Greenspan. Its in conventional New Yorker style, with casual name-dropping, telling details, and unattributed quotes. Examples of the first two: (1) Rubin told me recently when I visited his office at Citigroup... Rubin tossed a small glass glove from hand to hand; (2) Hes not a monetarist, hes not a Keynesian - hes himself, William McDonough, the president of the Federal Reserve Bank of New York, told me when I visited his office on Liberty Street a few weeks ago. The McDonough quote, combined with another direct quote, from Gov. Roger Ferguson (He strikes me as being completely unfazed by critical editorials, Roger Ferguson... told me recently), raise questions about the Feds (and these next-Chairman contenders) media strategies. Both Ferguson and McDonough were apparently authorized to give on the record interviews for the New Yorkers send-up of Greenspan; the Chairman himself, the article makes clear, did not submit to an interview. Whats the logic? Either Fed officials can speak on the record, or they cannot. Either the Federal Reserve System cooperates with such a profile, or it does not.. The Fed / Greenspan seem to have found a middle way: McDonough and Ferguson, both reportedly candidates to succeed Mr. Greenspan, are allowed to speak, and to compete in their praise of the Chairman. McDonough also gushes, in an Anglophile reference that the New Yorker had to break the quote to explain: He would have been the perfect P.P.E. -- politics, philosophy and economics -- candidate at Oxbridge. Even the Chairmans wife consented to be interviewed, so that the author could work in the ever-cute Greenspan-in-the-bath image: Things do get wet, Mitchell said to me. Im amazed that his staff is able to read his chicken scratches, one word bleeding into the next.
But its through unattributed quotes that the article makes its main point: that Chairman Greenspan is, personally, as libertarian as he was in his Ayn Rand days. Heres a quote from the article, subtly unattributed: During a recent conversation with a fellow-economist, Greenspan insisted that his general view of how the world works has not changed much at all since the nineteen-fifties. He also warned his interlocutor to distinguish carefully between what he believes personally and how he acts as chairman of the Fed. That was sound advice.
First, as to sourcing: the implication is that the New Yorker staff writer got this quote from a fellow-economist who held a recent conversation with Greenspan. The fellow-economist (or economist fellow?) is not named. But since the Fed / Greenspan clearly authorized Ferguson and McDonough to speak to the reporter, ones left to wonder whether this other source was also authorized by the Fed, but only on a not for attribution basis.
Consider another unattributed quote in the article: A couple of weeks ago, I ran into a senior Fed official with more than twenty years experience... the official added another variable to the equation: Weve lost Bob Rubin as Treasury Secretary, and Larry Summers, able man that he is, doesnt have the same credibility or experience. That leaves Alan with his hand on the wheel. he is really exposed. Make that, artfully exposed, by a variety of quotes from his Fed colleagues, some for attribution, some blind. Did the Fed / Greenspan authorize a senior Fed official to bad-mouth Larry Summers? Or is that implication meant to be rebutted by the authors statement that he ran into this Fed official?
To the degree the Fed-spun article, 11 full pages of small type, has any message at all, its crystallized in a quote from Andrea Mitchell: When I asked Mitchell if she thought her husband had even considered retirement, she laughed and said, This is not a man who will ever retire. He is too alive and too interested. The upshot? Perhaps its a message to the Bush campaign....
April 17, 2000
Among the explanations offered for April 14s stock market decline is that many now think the FOMC will go for an increase of 50 basis points, and not the now-common 25, at its May meeting. While some cite data released last week, particularly on Thursday, for this proposition, Gov. Meyer, in Toronto on April 12, and in Oklahoma City the next day, beat the rate-raising drum. His prepared text had him reading, there are limits to monetary policys tolerance for above-trend growth... The balance of aggregate demand and sustainable supply today and the distinct possibility that labor and product markets will tighter suggest an unacceptable risk of overheating, and, therefore, higher inflation in the future. In a Q&A in Toronto, Meyer was more informal, saying We dont see value in surprising markets... I dont want that to be an incredible constraint either. Sometimes you got to do what you want to do. I dont think you want to surprise markets, but sometimes you have to get the job done. So look for 50 basis point in May -- unless April 14ths micro-crash was the job that Meyer was talking about getting done.
Meanwhile, the Fed Board will continue with only five of its seven positions filled. Senate Banking Committee Chairman Phil Gramm told Bloomberg on April 13 that his Committee wont even move to have a vote on the nomination of ex-Chase executive Carol Parry. Its probably wise to wait and have an election, and allow the new president to appoint his person, Gramm said. When youre at the end of an administration, and youre looking at 14-year terms, that becomes a factor. Parry was also interviewed by Bloomberg, and said I still think that if Senator Gramm were to take the time to sit down and talk with me, I think that he would find that Im a well-qualified nominee. White House spokesman Jake Siewert said, We spent a lot of time trying to recruit [Parry] for this position. Who Al Gore would nominate to the Fed... is not yet clear.
On consumer compliance and predatory lending, the Fed continued to express concern and yet rationalize inaction. The industry publication National Mortgage News reports that fully eight of the largest subprime lenders in the United States are banks or bank-affiliates. But consider Fed Governor Gramlichs statement on April 14:
HUD compiles an annual list of the subprime lenders that report dataunder the Home Mortgage Disclosure Act (HMDA). For 1998, this list showed 239 subprime lenders, of which 168 were regulated only by the Federal Trade Commission (FTC). Thirty-six of these institutions were banks or subsidiaries of banks and savings and loans that were regulated, and the remaining thirty-five were banks or subsidiaries of bank holding companies, where the holding company was regulated but the subsidiary operated with some freedom from the holding company and its regulator.
The Fed seems to be saying that since 168 of the 239 companies that HUD deemed to specialize in subprime loans are not affiliated with banks or bank holding companies, theres little the Fed could or should be doing. Gov. Gramlichs presentation is misleading, however. The very HUD study he cites (the full title is 1998 HMDA Highlights, by Randall M. Scheessele, U.S. Department of Housing and Urban Development, Housing Finance Working Paper Series HF-009, 1999) makes clear that the list of 239 lenders includes only those HMDA-reporters which specialize (or are limited to) subprime lending. The report, in the introduction to the list Gov. Gramlich refers to, says that since HMDA does not identify... subprime loans, we were unable to separate out the... subprime loans of lenders that do not specialize in those loans. For example, First Union [and] Norwest have been active in the subprime market.
First Union is in such weakened state -- its shares have fallen 38% in the past year, and many analysts expect it to be taken over in the coming year -- that we will focus on Norwest, which acquired Wells Fargo and took its name in late 1998 (too late, apparently, for the new name to appear in the HUD report). The loophole here (and the omission in Gov. Gramlichs presentation) is that Norwest Mortgage, for example, has a subprime business unit called Directors Acceptance, which National Mortgage News lists as one of the largest retail subprime lenders in the country. But its loans, its HMDA data, are reported mixed in with Norwest Mortgages other HMDA data. Norwest Mortgage doesnt (only) specialize in subprime loans, and so is not including in HUDs list of 239 subprime lenders. The Federal Reserve, since it regulates the bank holding company Wells Fargo, has jurisdiction over Norwest Mortgage and Directors Acceptance. The Feds jurisdiction over (and responsibility for) that part of subprime lending that is predatory is larger than Gov. Gramlich present it. More on Wells/Norwest further below in this weeks report.
Gov. Gramlichs quotation, above, ends by discussing the remaining thirty-five were banks or subsidiaries of bank holding companies, where the holding company was regulated but the subsidiary operated with some freedom from the holding company and its regulator. What Gov. Gramlich doesnt say is that this freedom from the regulators is one that the Fed itself has DECIDED to give. The Fed can conduct examinations, including fair lending examinations, of any bank holding company subsidiary, including subprime lenders. In fact, the General Accounting Office, in November 1999 released a report, Large Bank Mergers: Fair Lending Review Could Be Enhanced With Better Coordination (GGD-00-16, Nov. 3, 1999), which urged the Fed to begin doing such exams, of BHC-subsidiary subprime lenders.
Fed Chairman Greenspan signed a September 20, 1999 letter to the GAO expressing the Fed disagreement with the GAO Reports recommendation (that the Board monitor the lending activities of nonbank mortgage subsidiaries of bank holding companies and reconsider [its] policy with respect to routine examination). Chairman Greenspan stated that [t]he matter is one that we recently studied at length. The GAO 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. The Feds decision not to examine BHC subsidiaries has let off the hook not only the 35 companies (on the HUD list) that Gov. Gramlich referred to, but also the subprime PARTS of other BHC-subsidiary lenders, like Norwest Mortgage / Directors Acceptance. This is also true of the subprime lender Chase Home Finance, which mixes the data on its high interest rate loans in with the data of the larger Chase Manhattan Mortgage Co., which is not a pure subprime lender, and therefore does not show up on the HUD list.
But, again in light of the Feds statements that there is little it can or could do about that part of subprime lender that is predatory, lets further consider Wells Fargo / Norwest (ICP has been conducting this study, in collaboration with Alaska groups, in connection with Wells Fargos proposal to buy the largest bank in that state: click here to view the full challenge, filed April 17).
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April 10, 2000
With no FOMC meeting until May, well focus this week on the strange stance toward CRA of the Federal Reserve Board governors, present and past. Then we'll consider the fairness of the Fed's merger review process.
Two weeks after Fed Chairman Alan Greenspan said that the Fed is concerned about abusive lending practices, and is committed to addess[ing] them, Fed governor Edward Gramlich provided details about the Feds (industry-friendly) approach: all thats needed is consumer education. Gramlich spoke before a group devoted to improving financial literacy among teenagers, and said that there are problems that would not exist if potential borrowers understood the details of their credit contracts. People dont understand what a balloon payment is, for example. If people understood the terms, they wouldnt agree to it.
If the Fed knows that no well-informed consumer would agree to a balloon payment (on an already high-interest rate home equity loan) -- why not simply outlaw those provisions? To claim that all that should be done is some education programs (using the current buzzword, financial literacy) is like saying there wouldnt be push-in robberies if people just didnt open their doors to strangers. Consumer education is all fine and well, but theres a need, in this field, for laws.
Further on predatory lending: many activists are now hopeful that the Securities and Exchange Commission will begin to examine the duties of the companies which securitize pools of subprime, sometimes predatory loans. Its being implied that only the SEC can deal with this side of the problem. But thats not true -- the Federal Reserve Board fought and lobbied, long and hard, to be confirmed as the umbrella regulator of financial holding companies, under the Gramm-Leach-Bliley Act. The Fed is the one that should impose duties on the securitizers of predatory loans (most of whom the Fed already regulates). But the Fed has refused to take action on this, even when its been directly raised, as to Bankers Trust-now- Deutsche Bank, Republic-now-HSBC, and others. Some umbrella...
We would review future Fed governors, except that its become clear that Senate Banking Committee chairman Phil Gramm (R-Tx) will not act on any of President Clintons nominations. Like Bill Gates, Gramm is expecting that the Republicans, in the form of George W. Bush, will win the White House this November. So lets consider the views of a past Fed governor, Larry Lindsey, who was the Feds point-man on CRA for most of the 1990s, and who is now a chief economics adviser to Mr. Bush Jr..
Mr. Lindsey recently articulated the corporate and compassionately conservative view of the Community Reinvestment Act in an article he wrote for the NeighborWorks Journal (Winter 2000, page 54-55). In his piece, entitled Community Development at a Crossroads, Mr. Lindsey attacks three community organizations (which he leaves unnamed). More insidiously, however, Mr. Lindsey implies that the community development movement (of which he claims to be a part, while holding a lucrative position at the pro-business think tank, the American Enterprise Institute) needs to leave behind all forms of protest, and even advocacy, in order to protect its reputation and even brand name.
First, why is it even worth considering Mr. Lindseys vague and jumbled allegations? Well, hes the main economic adviser to the Republican Partys presidential candidate. Hes portrayed as being one of the compassionate conservatives that would moderate the Texas governors more right-wing instincts (exhibits at Bob Jones University and elsewhere this year). Also, since Mr. Lindsey was the Federal Reserves point-man on the Community Reinvestment Act for a number of years, his views may provide insight into how our central bank views the CRA. Finally, NeighborWorks Journal is published by the Neighborhood Reinvestment Corporation, which is funded (to the tune of $70 million a year) by the Congress, and whose board of directors is made up of current Fed governor Gramlich, HUD Secretary Cuomo, and the heads of the other bank regulatory agencies. So what Mr. Lindsey says in this publication is worth evaluating, in some detail.
Lindsey presents the following dichotomy: two faces of community development: noisy protest and quiet accomplishment. His provides three examples of noisy protesters, beginning with a demonstration in early 1999, in which grassroots activists arrived at the house of Senate Banking Committee Chairman Phil Gramm and trampled his garden and lawn, banged on his windows, harassed his wife, and left his property strewn with litter. Before providing any more examples (he only has two more examples, as it turns out), Lindsey intones against rip-off artists who seek to prey on the unsuspecting. Apparently, Senator Gramm, then and now intent on repealing the CRA, is an unsuspecting victim. One can, of course, disagree on tactics. But Mr. Lindsey takes it further, using this example to write that some groups dont meet the most minimal standards, and some arent really interested in community development at all. All of us know they exist. They specialize in shakedowns. They threaten to picket a financial institution or lodge a CRA protest unless some demands are met.
Lets review: while the CRA is only enforced when the regulators consider banks expansion applications, and comments thereon, ex-regulator Lindsey describes those who lodge a CRA protest as shakedown artists, uninterested in community development. Again, while one can disagree on tactics, it seems probably that those who protested Senator Gramms attacks on the CRA are more interested in community development than a hired gun for a pro-business think tank.
Lindsey goes on to address the readers directly: What is a politician to think of the community development industry when his only experience is people littering his front lawn and threatening his wife? What is a banker to think of the integrity of the people in our industry when his colleagues experience is that they are extortionists? Whats most striking is Mr. Lindseys insinuation of himself into the community development industry, which he calls our industry. This is indeed a crossroads. Community-based organizations are being told to bad mouth local residents who seek to raise their grievances through direct action and non-violence civil disobedience, and to align themselves with the comfortable Republican think-tank pundit. Lindsey cynically tries to explain his fellow Republican Phil Gramms opposition to the CRA as growing from this littering of his lawn experience. But Sen. Gramm had already, on the floor of the Senate, called the CRA nothing but extortion, before any protesters went to try to speak with him at his house. They went there because of his attacks on the CRA. Lindsey reverses the historical sequence, trying to convince community development professionals that the reason the Republicans are attacking CRA is because activist groups have actually used (and tried to defend) it.
Its entirely unclear on what basis Mr. Lindsey claims to be a part of community development movement. He makes other attempts to situate himself, at least in the past, as part of some movement, writing: Of course many of todays corporate and political leaders spent their college days in protest marches. One can act one way at age 20 and another at age 40. It is called growing up. In Lindseys view, protest is something that middle- and upper-middle class people do during their college days. What Lindsey ignores is that, in low income communities of color, the reasons for protest dont end at age 20. Banks and insurance companies continue to redline and discriminate; police sometimes shoot and kill unarmed people. Protest is based on ones daily experience, not ones age. But Lindsey, in a (light) touch of humor, writes: The protest banner can still be held reverently in our box of momentos, along with the love beads, peace signs, and (for those a bit younger) disco shoes. What Lindsey does is conflate fickle middle-class protest (limited to the college years) with the just and unmet demands of low income communities of color for fairness. Mr. Lindsey can afford to confine his protest banner (if he ever had one) to his box of mementos. Thus it is for a former Fed governors, now paid by a right wing think tank, and advising a Republican presidential candidate. But if community organizations were to take Mr. Lindseys advice (essentially, a rousing call to apathy, in the face of mega-mergers and financial deregulation) it would be taking the wrong path at the crossroads...
Mr. Lindsey declines the name the organizations that his article attacks. One might assume that this represents discretion and tact (or a slick strategy to avoid a libel lawsuit). But on close inspection, it may only represent that Mr. Lindsey doesnt know what he is talking about. Another of his three examples is presented thus: consider another community groups alleged success. They had been criticized as extortionists by the president of a major bank. The community group began filing CRA protests at every opportunity against the bank. The finally relented after being paid off -- and by getting the bank to write a formal letter to members of Congress disavowing the comments of the banks president. Unfortunately, this story is now widespread in both banking and political circles.
Last year, Phil Gramm on the Senate floor raise this story, and referred to a letter he had gotten from First Union Corporation, expressing support for the CRA. As it turned out, First Union had, in seeking agreements with Philadelphia community groups when it acquired Corestates, committed to write the letter. But the rest of Mr. Lindseys story is inaccurate. First Union chairman Ed Crutchfield has referred to the CRA as extortion many years previous, when his bank was first expanding into Florida. The Philadelphia groups who protested the acquisition of their citys biggest bank had never before challenged First Union. Mr. Lindseys story again inverts historical fact, implying that Philadelphia groups protested BECAUSE the bank president had called them extortionists. But the record shows that they protested because they were concerned that First Union, a known subprime and predatory lender, which has closed hundreds of bank branches after previous acquisition, was taking over the last remaining large bank in Philadelphia. Strangely absent from Mr. Lindseys presentation is any questioning of why the CEO of a $200 billion corporation would agree to write letters to Congress, would be so desperate to reach agreements with community organizations in order to shepherd through an ill-planned acquisition that resulted in a dramatic fall in his companys stock price. What leverage did the Philadelphia community groups have? The possibility that the Federal Reserve would deny First Unions application? It seems unlikely.
Mr. Lindseys anecdotes are full of inaccuracies (perhaps attributable to some intern at the American Enterprise Institute, or to Mr. Lindsey being distracted by his position on George W. Bushs kitchen cabinet) -- one hopes that Lindsey was a little more rigorous, when he played a role in setting monetary policy for the United States. If Mr. Lindseys credibility with community organizations spring only from his previous position on the Federal Reserve Board, perhaps it is time to confine that credibility, along with the protest banners and disco shoes, to Mr. Lindseys box of momentos...
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