Inner City Press' Federal Reserve Reporter Archive 2000 #3 (July 17-September 25, 2000)

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September 25, 2000

      Alan Greenspan's scholarly exegesis of U.S. bank regulation history, delivered to a star-struck audience at the American Bankers Association conference on September 18, confirmed again Mr. Greenspan's anti-regulatory bent. The only justification for bank examination and supervision is the safety net of FDIC insurance and the Fed's "lender of last resort" status. As the attention of many in the audience wandered, after some initial chuckles at Greenspan's anecdotes about the Pinkerton guards, the gnome slipped this in: "private counterparty supervision remains the first line of regulatory defense." A moment later, he added, "private market discipline, the still most effective form of regulation." This perhaps explains the Federal Reserve's lack of substantive action on predatory lending. Residents of redlined communities are... "private counterparties" to the predatory lenders who impose scarcely-disclosed terms like pre-payment penalties, single premium credit insurance, and balloon payments so large they lead, inevitably, to a quick "flip" of the loan, with the attendant addition of points and fees to the principal owed. Who is being "discipline[d]" in these transactions, the specifics of which are quickly obliterated by securitization by Salomon Smith Barney and others? Not the lenders. The borrowers are being disciplined, not unlike the "structural adjustment" regimes suggested for and imposed on Third World nations by the IMF and World Bank. Mr. Greenspan's ode to market discipline included a plug for the deregulation law: "The Financial Modernization Act is only a flag on the way to future changes. It is a piece of legislation that will bring major changes for the good, I trust, in all respects." The bankers woke up. Only a flag? Are there more goodies forthcoming? Yes, there are.

     The Greenspan Fed plays Congress like a clarinet. The Reserve Banks are purportedly subject to a different form of accountability: the requirement that their Boards of Directors be chaired by "outside" directors. On September 19, the Fed announced each Reserve Bank's chairman and vice-chairman. For the New York Fed, these guardians of the public interest are Peter G. Peterson of The Blackstone Group, and Charles A. Heimbold, Jr., CEO of Bristol-Myers Squibb Co.. The Richmond Fed's Vice Chair is a lawyer with a firm that routinely appears before the Fed, seeking regulatory approval for its clients: Wesley S. Williams, Jr. of Covington & Burling. The vice chairs of the St. Louis and San Francisco Reserve Banks were... left open.

     We'd predicted that the Fed would approve Wells-First Security nearly immediately after the Department of Justice signed off. But it hasn't happened: not immediately, at least. On September 20, ICP received from Wells a copy of its September 8 letter to the Fed, explaining in classic boilerplate fashion its various pretences of fair lending safeguards in place for its high interest rate lending.  There's no explanation for Wells having send copy of its Fed filings to ICP and other comments nearly two weeks late...

      The Federal Reserve Board has been asked, under the Freedom of Information Law, for all records reflecting its recent communications with Citigroup, including about Citigroup's proposed acquisition of Associates First Capital Corp., which owns a bank with a "Needs to Improve" Community Reinvestment Act rating.

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September 11, 2000

     While Federal Reserve golden boys (well, golden elders) like William McDonough claim that the Fed is so politically independent it might act on interest rates even before the November 7 presidential election (see last week's report), we are acting on the assumption that the Fed will hold pat under after election. And so our focus remains on the Fed's bank supervisory role. Last week, two New York State banks, NBT and BSB (parent of Binghamton Savings Bank) announced that the Fed had waived the requirement that they apply to it for their merger -- even though antitrust issues existed, as evidenced by a divestiture required by the Department of Justice. Meanwhile, on Citigroup's just-announced deal to acquire subprime lender The Associates, the Fed will apparently be requiring no application at all. That can be chalked up to the enactment of the (Fed-supported) Gramm Leach Bliley Act, which dispensed with the requirement of applications to the Fed for bank holding companies' "non-banking" acquisitions. The Fed's deregulatory urge, however, is not unlimited: according to the American Banker (9/11), the Fed alerted Rep. Jim Leach to the Treasury Department's rulings allowing national banks to buy the securities of commercial companies. Treasury claims that these apparently illegal purchases are only for "hedging" purposes, and the industry loves the new powers. For a supposedly non-political agency, the Fed sure knows how to push the right Congressional buttons, though…

       And the Fed is committed to withholding all traces of this reciprocal button-pushing. ICP's June 12 Freedom of Information Act request to the Fed asked for all record reflecting the Fed's communications with the Senate Banking Committee. The Fed provided some documents on July 21, but withheld and redacted many other documents. ICP appealed on August 3. Last week, ICP received Governor Gramlich's ruling on the appeal, which states, for example:

"You also challenge the Associate Secretary's decision to withhold in its entirety a staff memo attached to an e-mail dated May 12, 2000. The withheld memo memorialized a phone conversation between Board staff and Ms. Dina Ellis, majority counsel to the Senate Banking, Housing and Urban Affairs Committee. You assert in your appeal that the withheld memo does not fall within the scope of [FOIA] exemption 5 because the underlying conversation was between Board staff and a Congressional staff member and was therefore neither an 'inter-agency' nor 'intra-agency' document. On review in connection with your appeal, I have confirmed that, although the underlying content of the memo reflects a discussion with Congressional staff, the memo was prepared solely by Board staff, and has not been provided to Ms. Ellis or anyone outside the Board. I have also confirmed that the memo was part of the Board's 'deliberative process' within the meaning of exemption 5."

      A game has developed at the Fed. If this staffer to Senator Gramm had written a letter, or sent an e-mail, to the Fed, it would be subject to FOIA. But by coming in to speak, even the Fed's "memorialization" of the conversation is deemed exempt. The Fed arranges the same kind of sit-downs with banks who are seeking indications of pre-approval from the Fed. In those cases, the Fed claims that notes taken at the meeting are not "agency records," but rather the personal property of the Fed's lawyers. Ah, transparency...

       In its more formal process, on September 6, the Fed acted on, and approved, three Japanese banks' application to form the world largest financial institution, Mizuho. On the predatory lending issues that had been raised, the Fed's Order is laughable: it simply recites, and claims to have considered the issues, without rebutting them. For example, in a footnote on page 15 of the Order, the Fed states that

"ICP contends that DKB, Fuji and IBJ have indirectly supported predatory lending by providing financing to Delta Funding Corporation, Woodbury, New York ('Delta'), Ameriquest Mortgage Company, Orange, California ('Ameriquest'); and PinnFund USA, Carlsbad, California ('PinnFund'). Mizuho represents that the business relationships cited by ICP were limited to equipment leases to Delta and Ameriquest by subsidiaries of DKB and Fuji, and that a credit facility arranged by IBJ for PinnFund expired without being funded. The Board has considered these assertions in evaluating the managerial and convenience and needs factors in this case."

     This avoids the main question raised in ICP's comments: what standards do these companies have, in doing business with high interest rate, subprime lenders? IBJ chose to make funding available to PinnFund. That PinnFund, for its own reasons, didn't draw down the loan does not answer the question that the Fed must consider, under the statutory factors: what safeguards does IBJ have in place in working with subprime lenders? Had PinnFund drawn down IBJ's funds -- would the Fed answer this question? Apparently not: in a half-page footnote on page 9 of the Order, the Fed states that

"ICP's comments include contentions that CIT Group, Inc., Livingston, New Jersey ('CIT'), a subsidiary of DKB, engages in predatory lending by making subprime loans and imposing prepayment penalties more frequently than competitors, and engages in these practices more often in certain metropolitan areas with respect to African Americans than do its competitors. ICP also asserts that CIT has supported predatory lending by purchasing loans from Long Beach Mortgage Company, Orange, California ('Long Beach'). CIT purchased no mortgage loans or had any other business with Long Beach since 1998. The Board has forwarded ICP's comments on CIT to [HUD, DOJ and the FTC], which have responsibility for fair lending law compliance by nondepository companies like CIT and Long Beach. In addition, the Board has considered information submitted by Mizuho on CIT's consumer lending practices, including the processes by which CIT makes credit available to consumer, the compliance procedures established by CIT, the methodology employed by CIT in setting risk-based interest rates, and the relationship of CIT with loan brokers and correspondents."

      Here, the Board says it has "considered information submitted" by the banks, without discussing what that information was. In fact, the banks' submission included admissions that few to no background checks (on brokers, for example) are performed. It is in another footnote, number 24, that the Fed wheels out its overall buck-passing strategy: as long as a bank holding company doesn't "control" a subprime company that it funds, there are no repercussions:

"ICP contends that CIT has supported predatory lending by providing financing to... Cityscape Financial Corporation, Elmsford, New York ('Cityscape'). The only business relationships that CIT had with Cityscape involved two credit facilities totaling $105 million. Mizuho represents that CIT did not control Cityscape's underwriting or lending practices, and the CIT was not involved in Cityscape's credit review process...".

      So a new standard is erected: as long as you don't "control," you can freely fund and profit from questionable subprime lending. ICP's sense is that even if CIT HAD exercised some control over Cityscape's lending practices, the Fed would simply come up with another defense, another excuse. Meanwhile, the Fed holds hearings asking the public what is can do about predatory lending... On September 7, the Fed held the last of its hearings on the Home Equity and Ownership Protection Act of 1994. The Fed's focus has remained limited to whether or not it should lower the interest rate and fee trigger to make slightly more subprime loans subject to the HOEPA disclosures. Governor Gramlich, according to ICP sources at the hearing, said that the HOEPA restrictions "don't seem that onerous," so he couldn't understand bank resistance to putting slightly more subprime loans under the HOEPA regime. But with the Fed being such a defender of the industry, why should the industry agree to any reforms?

       Finally, for this week, while Wells Fargo's application to acquire First Security continues to pend at the Federal Reserve Board, Wells announced last week that it's buying the servicing rights to a $35.7 billion portion of the First Union Mortgage Corporation servicing portfolio. Combine this with the $80 billion in servicing Wells is buying from G.E. Capital Mortgage Services, and with the $16 billion in servicing Wells is seeking to acquire along with First Security, and it's clear that an antitrust issue is arisen, one not addressed in Wells' initial First Security application. With these deals, Wells would control 9.3% of the $4.88 trillion U.S. mortgage servicing market. Hello, Federal Reserve -- are you paying attention? Meanwhile, Wells is throwing its weight around, pressuring community groups who commented on its First Security application to recant (one group has already distanced itself from previous comments opposing Wells' application). Same question: Federal Reserve -- are you paying attention?

September 5, 2000

      Last week's round-up on the Fed's Jackson Hole jabberings about globalization was composed without review of the full text of Chairman Greenspan's speech.   A most interesting paragraph:

"Any notable shortfall in economic performance…runs the risk of reviving sentiment against market-oriented systems [which] resonate[s] in some of the arguments against the global trading system that emerged in Washington, D.C., and Seattle over the past year. Although most of these arguments may be easy to reject, those of us who support continued endeavors to extend market-driven globalization need to understand and, if possible, address the concerns that give rise to the desire to roll back globalization."

     The reference, obviously, is to the anti-World Trade Organization protests in Seattle in late 1999, and the protests of the World Bank and International Monetary Fund in D.C. on April 16-17, 2000. And the formulation, "market-driven globalization," is not a bad one. "Corporate-driven" is more accurate, but we won't quibble.

        Compare this paragraph with FRBNY president McDonough's statements to the El Mercurio newspaper on August 28: "I can assure you that the political situation… does not matter to us… It is often said that in our next [FOMC] meeting, we cannot do anything because there are elections. That is a lie. It's all false," McDonough said.

       While McDonough was directly referring to the likelihood of interest rate moves before the Nov. 7 election, the claim that "the political situation… does not matter to" the Fed has become something of a mantra. But how can Chairman Greenspan's open "support [for] continued endeavors to extend market-driven globalization" be portrayed as apolitical, or non-political? The affects of corporate globalization are seen as eminently political issues, in most countries in the world. Organized labor's (unsuccessful) intervention into the Congressional debate around trade with China earlier this year demonstrates that Fed Chairman Greenspan's position is a "political" one, even in the United States. The first step toward democratization of these debates is to recognize the various positions as just that: positions, political positions.

        On an administrative level, all is not well within the Federal Reserve System. As reported by the Financial Market Center, in February of this year, over 100 current and former Board employees filed suit against the FRS for its administration of their pensions. Plaintiffs against the FRS include six people who appear on the masthead of the Federal Reserve Bulletin. Particularly interesting is the involvement of the Fed's "regulatory ombudsperson" (and stand-up Associate Secretary, the author of numerous letters claiming the infallibility of Fed merger approvals), Barbara Lowery. If we'd only known…

     At deadline for this Report, the Fed has announced that it has placed the applications of Fuji Bank, DKB and IBJ to form "Mizuho" on its agenda for consideration on Tuesday, September 5. Some weeks ago, the Mizuho-ites announced, with some arrogance, that their combined company would be listed and begin trading in its own name at the beginning of September. The timing of the Fed's vote is a nice accommodation to the companies -- but disregards their evasive answers the Fed's questions about their involvements in questionable subprime mortgage lending in the United States. In our next installment, we will analyze the Fed's decision and order..

     Meanwhile, the Fed has continued is routine resistance to transparency: while the U.S. Freedom of Information Act requires response in ten or twenty working days, to ICP's August 1 request, the Fed had written, on August 30, that "we are extending the period for our response until September 13, 2000, 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." The Fed, on each of ICP's requests in 2000, has unilaterally extended its response time.

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August 7, 2000

   Two weeks out from the FOMC meeting of August 22, last week the director of the Treasury Department’s Office of Macroeconomic Analysis meet with the members of the Bond Market Association who are on Treasury's Borrowing Advisory Committee. The offices, John Auten, gave the BMA-ers his prediction: “the continuation of fairly strong growth, close to the economy's potential, possibly coupled with some mild increase in inflationary pressure.” Auten focused on the Employment Cost Index, which rose a seasonally adjusted 1% in the three months ending in June, Over the 12 months ending in June, compensation costs for civilian workers rose by 4.4%, "up considerably," Auten noted, from 3.2% in the same period a year ago. So non-action on August 22 may not be the slam-dunk that was assumed...

     Meanwhile, the Fed on August 4 held the second of its four hearings on the Home Ownership and Equity Protection Act, this time in Boston. Governor Gramlich’s comments to reporters before the hearing again claimed that the Fed can do very little about predatory lending: “[o]ur authority in the overall scheme of things is a bit limited... We certainly can't do it all,” Gramlich said. But how about doing SOMETHING?

    Bank holding companies involved in questionable subprime lending, like Wells Fargo, continue to be able to take Fed approval of their mergers for granted. Commenting on Wells Fargo’s application to the Fed to acquire First Security has begun (click here to view ICP’s comment, filed August 7). With more and more groups expressing concerns about Wells Fargo’s (and Citigroup’s) subprime lending, one might expect the Fed to finally begin using the “authority” that it has (and that was expanded by the Gramm-Leach-Bliley Act of 1999). But one might be wrong...

    In a pending application proceeding in which predatory lending issues have emerged, the three Japanese banks applying to merge into “Mizuho” have most recent informed the Fed that before the subprimer CIT accepts loans from correspondents, “no Better Business Bureau contact is made and no references obtained for a Correspondent.” The Fed tossed the banks a softball, asking if CIT gives its correspondents copies of the fair lending compliance booklet that CIT described in its previous submissions to the Fed. The banks’ respond that “such a booklet is not provided to Correspondents.” All of this is in the banks’ July 31 submission, responding to a July 26 question-letter from the Fed. The Fed asked if various “assurances” the banks gave, as to CITCNF, “allow appl[y] to CITCNF (NY), CITCNF (TN), and/or CITSF” (see ICP’s initial Mizuho comment for explanation of this torrent of acronyms). Only in response to this last minute question did the banks, on July 31, disclose that “2 percent of CITCNF(NY)’s loans, 1.5 percent of CITCNF(TN)’s loans and a ‘de minimus’ amount of CITSF’s loans are to D credit.” Subprime mortgage lending is often referred to as “B and C lending” (with “A” being prime credits). D loans are at the highest interest rates. The banks had initially claimed, in their May 16 submission, that CITCNF “makes loans almost exclusively to A, B, and C credits... fewer than one percent of its loans are to D credits.” The reality, for CITCNF’s New York subsidiary is double that... Meanwhile, just prior to the Fed’s vote on this application, Governor Gramlich tells reporters that “[o]ur authority in the overall scheme of things is a bit limited... We certainly can't do it all.” But how about doing SOMETHING?

July 31, 2000

     In testimony to the House Banking Committee on July 25, Greenspan continued his dove-like tone: productivity continues to increase, consumer demand is slowing, only energy costs threaten to drive up inflation. Absent changes, look for non-action at the August 22 FOMC meeting.

     Rep. Maloney (D-NY) asked the Chairman about what actions the Fed has taken since May on predatory mortgage lending. Greenspan began by praising subprime lending in general, then referring to Governor Gramlich: “he mainly, has been focused on this issue quite assiduously in recent months.” The main “action taken,” then, is the scheduling of four hearings on the Home Ownership and Equity Protection Act of 1994. At the first hearing, July 27 in Charlotte, NC, Gramlich said that the Fed “want[s] to encourage the growth in (the market for loans to people with spotty credit histories), but we don't want to encourage the abuses.” That’s the wrong standard for the Fed to apply: it will only change its practices if they can be shown to “encourage the abuses.” Gov. Gramlich left the hearing before the session on fair lending and the Community Reinvestment Act. Unfortunately, because a major problem is the Fed’s refusal to conduct fair lending exams of the bank holding company subsidiaries engaged in questionable subprime lending: Citigroup’s Citifinancial, Bank of America’s EquiCredit, Wells Fargo’s Directors Acceptance, , etc..

      Wells Fargo is about to be raised to the Fed, again, in connection with Wells’ proposed acquisition of First Security. A concern that many community groups share is Wells’ mixing of the mortgage lending data of its subprime Directors Acceptance subsidiary with the larger Wells Fargo Home Mortgage. Concern also exists about how the proposed acquisition of First Security would give Wells an anticompetitive market share. As provided to ICP, Wells Fargo’s application states that it proposes to “divest $1.4 billion in deposits and 37 branches in the following markets: Albuquerque, NM; Blaine, ID; Boise, ID; Box Elder, UT; Carson City, NV; Las Vegas, NV; Park City, UT; and South Lake Tahoe, California-Nevada.” The table beneath this sentence, which contains the specified, is repeatedly stamped “REDACTED, “REDACTED.” Certain lines of data are left: for Albuquerque, the unredacted line states that Wells proposes to divest 21 branches, and $720 million, still leaving an anticompetitive “HHI” index of 2,250. In Boise, Wells proposes to sell three branches, leaving an HHI of 2,478. In Las Vegas, Wells proposes to sell seven branches, leaving an HHI of 2,142. Why the other above-named markets are redacted -- is unclear. As is why the Federal Reserve Bank of San Francisco is attempting to charge ICP $97.40 for a copy of the application, when the Board grants ICP fee waivers.

    Another application involving questionable subprime lending continues pending at the Board: the application by three Japanese banks (each involved in subprime lending, in different ways) to form Mizuho. last week, ICP received a copy of IBJ’s lawyers’ response to Fed questions of July 19. The Fed asked:

“Page 6 of Mizuho’s May 16 submission refers to three securitizations of certain mortgage loans, for which [IBJ] acted as arranger. Explain more specifically the role played by IBJ in these securitizations, and the extent to which IBJ was involved in the origination of the mortgage loans involved in the securitizations.”

       ICP note: here, the Fed is asking the wrong question(s). Underwriters of pool of mortgage loans, particularly subprime mortgage loans, should perform due diligence on the fairness of the loans whatever their involvement in the originations. But in this case, IBJ’s involvement went further. It’s response states that “IBJ’s New York Branch is the manager of WCMC pursuant to an agreement for which it receives a management fee.” The response refers to “short-term arrangements to ‘warehouse’ mortgage loans until the time that the lender could arrange longer-term funding. IBJ’s role in connection with these facilities was as an arranger, for which it received a structuring fee.” IBJ’s presents its due diligence as having been limited to “weighted loan-to-property values and borrower credit characteristics” -- not fair lending, or any review of prepayment penalties, even compliance with HOEPA. For shame...

      Also last week, ICP received documents from the Fed in response to ICP’s June 12 appeal of the Fed’s withholding of documents under the Freedom of Information Act. On appeal, the Fed provided several dozen pages it had previously withheld, including a letter, dated before the Mizuho applications were even filed with the Fed, in which the banks’ lawyers met with Fed officials to discuss the applications behind closed doors. ICP contends that such meetings, and withholding all documents (beyond the scheduling letter) are unfair. The application is subject to public comment, and the Fed’s “Ex Parte” rules, prohibiting communications between the Fed and either party to the dispute. The Fed now holds its ex parte communications before the application is even filed. It’s as if a party about to file a lawsuit went in to meet with the judge, the day before filing (and then adhering to the rules of due process and against ex parte communications). Governor Ferguson’s July 26 letter to ICP states that “notes were taken at the meeting,” but they are “not required to be produced.” The increasingly routine unfairness of the Fed’s procedures needs to be challenged...

        Against this backdrop, the Federal Reserve last week provided Inner City Press with documents responsive to ICP’s June 12, 2000 Freedom of Information Act request about the Fed’s communications with Congress regarding the Community Reinvestment Act.

     Of the seven-hundred some pages provided, the vast majority involve the Fed responding to the requests of Senator Phil Gramm (R-TX) for information, in “real time,” reflecting CRA protests and the disposition of expansion applications which raise CRA issues. In the time-frame of ICP’s request (April 14-June 12, 2000 -- ICP has already submitted a new request), Sen. Gramm wanted the files on all CRA-protested applications in the first quarter of 2000, as well as information about the CRA investment test.

    The Fed’s May 18, 2000 letter to Sen. Gramm’s staff refers to “your standing request [for] CRA-protested applications processed by the Board.” In fact, only one CRA-protested applications was acted on by the Board in the first question of 2000: an application by Valley View Bancorp in Kansas City, Missouri. But the Fed went out of its way to be helpful to Sen. Gramm, providing him with the files on two applications decided in the second quarter: Dime - Hudson and Schwab - U.S. Trust.

    The Fed approved all three of these applications. In fact, given the reference to Sen. Gramm’s “standing request,” the main thing the Fed appears to do with comments from community groups is bundle them together for submission to Senator Gramm. Despite the anti-CRA hoopla raised by Sen. Gramm, in the first five months of 2000, only three applications were commented on.

    The Democrats in Congress have not made any “standing request” for this information; the only Fed response to a Democrat was a May 16, 2000 transmission to Democratic Senate staffer Patience Singleton of the Fed’s “revised 1998 CRA Protest List.” In 1998, 26 applications were protested. The comparison to 2000 (three protests in five months) is striking. Also striking are the Fed’s revisions to the 1998 list: enumerating the number of comments received on applications, and the percentage “for and against” the underlying mergers. For example, the Fed reports that on First Union - CoreStates, “more than 200.. submitted comments, of which slightly less than half opposed of were critical of the acquisition.” NationsBank - BankAmerica generated 1,600 comments; “slightly less than one-half opposed this transaction, which most opponents from California.” Of Bank One - First Chicago, the Fed writes that “[a]pproximately 330 organizations and individuals submitted comments, approximately 45% of which opposed the proposal.” Of Travelers-Citicorp, the Fed states that “[a]pproximately 25% of the 425 organizations and individuals commenting on the proposal expressed some degree of protest or concern.” Finally (of the mega-mergers), of Norwest - Wells Fargo, the Fed writes that “[a]pproximately 59% of the nearly 150 total submissions from various community groups and individuals were protests or voices some degree of concern.” So we can make a chart:

                                                # of                        %
                                           Comments              Opposing
First Union-CoreStates             200                       45%
Travelers-Citicorp                    425                        25%
NationsBank-BankAmerica   1,600                        45%
Bank One - First Chicago         330                        45%
Norwest- Wells Fargo              150                         59%

          What does this mean? That Citigroup has the most support, of these banks, and Wells Fargo the least? Hardly. The Fed has included, in its reports on these applications, comments (most of them favorable to the banks) that had nothing to do with CRA. Travelers generated letters from symphonies, youth arts programs, hospitals and opera houses. Norwest, despite paying for pro-bank groups to travel to the public meeting in Minneapolis, apparently did not solicit such extraneous comments. But if the Fed’s going to count, and report to Congress, only the raw numbers -- why not?

     The Fed provided ICP with the response it made to Sen. Gramm’s March 24, 2000 inquiry into the CRA investment test (Gramm’s letter is set forth in full in the archive to this Report). On May 1, Fed Chairman Greenspan transmitted to Sen. Gramm a Fed staff memorandum, a list of state member banks with less than satisfactory investment test ratings, and a list of applications involving CRA investment test issues.

     The memorandum states that “[t]he Federal Reserve had ten cases between January 1, 1996, and March 15, 2000, where a protester raised concerns about an institution’s CRA investments.” Interestingly, the last of these cases was resolved on April 1, 1999 -- more than a year ago. In chronological order, the investment-challenged applicants were:

National City Corporation, Cleveland, Ohio
Morgan Guaranty Trust, New York, New York
Toronto-Dominion Bank, Toronto, Canada
AMCORE Financial, Rockford, Illinois
BanPonce Corporation, Hato Rey, Puerto Rico
Mercantile Bancorporation, St. Louis, Missouri
HUBCO, Mahwah, New Jersey
NationsBank, Charlotte, North Carolina
Sun Trust Banks, Atlanta, Georgia
Banco Santander, Madrid, Spain

     The Fed’s memo to Sen. Gramm notes that BanPonce was a “ratings case; all other cases were protested cases...”. BanPonce’s application (to acquire Seminole National Bank of Sanford, Florida) was approved on a delegated basis, with no Board Order. All the rest of the cases resulted in a Board approval Order. So the case in which regulators themselves had determined, by examination, that there was a CRA problem - the Fed approved automatically, with no publicly available reasoning for the approval. In this light, it should not be surprising that community groups comment on banks’ application when they have a concern. Otherwise, the issues are never aired, even if the bank has an adverse rating...

         The Fed’s memo also provides the following table:

                                                                  1996     1997    1998    1999     2000
Banks with Less than Satisfactory
Investment Test Ratings                            1         9          13        14         13

Banks with a Less than Satisfactory
Rating for both the Investment Test

and Overall Composite CRA Rating          0         1           1          0         0

     What does this mean? That of the fifty instances in which banks got Less than Satisfactory CRA Investment Test ratings, only TWO banks were awarded overall less than satisfactory CRA grades. Clearly, the Fed is already largely dismissing the results of the CRA Investment Test. What then is Senator Gramm clamoring about?

      On the Fed’s list of banks that received less than satisfactory CRA investment test ratings are subsidiaries of SunTrust, M&I, and Fifth Third. The Fed has allowed all these three companies to expand, most often without even issues Board orders explaining the approvals. Again, what then is Senator Gramm clamoring about?

     The Fed also withheld 42 pages responsive to ICP’s FOIA request, redacted portions of many pages, and declined to provide “two pages of handwritten notes” that it located “in the course of searching for records in response” to ICP’s request. ICP is appealing these withholdings, and is submitting a new FOIA request, for documents since June 12, 2000.

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June 19, 2000

    The consensus of corporate Fed watcher now seems to be no hike on June 27-28, but continuing hikes thereafter. Kansas City Fed president Hoenig, in a speech June 14, said while there have been some signs of slowing, “we need more information.” “Are we done?” Hoenig asked. We think not...

    Last week in Washington, Congress members from both parties criticized the Fed for not have gone even further, in allowing banks to get into “merchant banking” -- investing and becoming intertwined in non-financial businesses, for their own account. It’s more than a little irony (and misleading) hat the Fed, which twisted then-current law to allow insurers and banks, and banks and securities firms, to begin combining, would now be accused of being too cautious. Within the stone temple on Constitution Avenue, this provides ammo to those who want to (even) further de-regulate. Perhaps the whole charade is about further legitimate the Federal Reserve System as (apparently) politically independent. The banks are hardly constrained by the Fed’s interim merchant banking rules. For example, in the last week, Chase Manhattan has announced its owning up an incubator for Internet companies in Brooklyn, New York, and investing in an on-line music service in Argentina. If and when these dot coms flop, there’ll be hand-wringing about the federal deposit insurance safety net -- and then, if the injured company is large enough (like, for example, Long Term Capital Management), a Fed-arranged bail-out. It’s a game of speeches and desk-thumping, a game which the largest banks continue to win at.

    ICP filed two Freedom of Information Act appeals with the Fed last week -- in both cases, it became clear that the Fed either “mis-spoke” in its FOIA response, or withheld obviously public portions of applications, until the comment period(s) closed. In response to ICP’s April 14, 2000 Community Reinvestment Act-related FOIA request, the Fed claimed that “after consultation” with a particular Fed senior economist, it determined that his filed were entirely exempting, consisting of banks’ responses to the Fed’s CRA survey. But ICP has first-hand knowledge that this Fed staffer collected documents from non-banks: community groups and others. How the Fed will explain the mis-statement, in its required response to ICP’s appeal, will be covered in this space. In the other case, the Fed withheld even the safe harbor / “non-comforming” period that the Japanese banks applying to form Mizuho are requesting. If the application is legally subject to public comment, how can it be that what the applicants are requesting is secret? This to, will be updated in this space, when the Fed responds...

     Until next time, for or with more information, contact us.

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

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