Inner City Press' Federal Reserve Reporter

August-September 20, 1999 (Archive #3)

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September 20, 1999 -- Inner City Press Exclusive

     The senior official at the Federal Reserve Board on September 14 expressed surprise that Wall Street is able to securitize high interest rate home equity loans. The Fed Chairman’s surprise is telling, in part because the Board, on May 20 of this year, approved the acquisition of Bankers Trust by Deutsche Bank, in an order that specifically referred to, and rejected, arguments that BT should be held responsible for its role in securitizing such loans issued by Delta Funding Corporation. How could the Chairman (and presumably the other Governors) have voted to approve this order, while not knowing that high rate, arguably predatory loans are being securitized?

    Given the reverence with which the Fed and its Chairman are held by mainstream financial journalists, Inner City Press feels a need to substantiate and “source” the account given above. Interviews with the Fed Governors, particularly its Chairman, are rarely directly reported. The Fed controls the press, by granting access only in exchange for positive, and artificially restrained coverage. Inner City Press files this report with the preface that mid-way through the exchange related below, the Chairman said, “this is off the record.” Black letter journalistic ethics rules provide that discussions are presumed to be on the record unless otherwise noted, and that requests for “off the record” treatment must be made in advance, and do not reach backwards to what was previously said. The significance of which will be made clear shortly.

    On September 14, a dozen community advocates, including this reporter, had a meeting with Fed Chairman Alan Greenspan. For the sake of authenticating / “sourcing” this account, a brief description follows:

    Up our arrival at C Street between 20th and 21st Streets, a security guard stepped out of the Eccles Building to greet us. “I’ll need to see a photo I.D.; find your name on the list and put an initial by your name.” We walked through a metal detector, and into the building’s lobby. To the side of the lobby, toward 20th Street, is a small waiting room. On the wall are cartoons about the Federal Reserve System’s activities. In the corner is a video terminal, flashing slowly “You’re the Chairman.” It is a video game, asking you whether, as Chairman, you would move to raise or lower interest rates under different scenarios.

    The Fed’s Board room, where the meeting took place, is on the second floor, up a marble staircase. On the second floor landing, there are twelve doors, with the name of a Federal Reserve District over each door. The Board room is dominated by a huge, polished table, surrounded by expensive and comfortable high-backed chairs. To the side, toward 20th Street, are fifty or so observer chairs. The walls are covered with thick yellow wall paper. There are framed reproduction of old bank notes. Outside the tall windows, through silk drapes, is Constitution Avenue and the Mall. Other than the main entrance, four doors lead into the Board room. Through one of the two doors on the 21st Street side of the room, the Chairman entered.

    The Chairman did not sit at the head of the table, but rather directly in the middle, his back to the windows, facing the entrance door and the staircase. Mr. Greenspan began the meeting, making no reference to confidentiality or any “off the record” treatment of the meeting. Among the first questions to arise was Mr. Greenspan’s seeming assistance to Senator Phil Gramm (R-TX), in the Senator’s attacks on the Community Reinvestment Act. Mr. Greenspan’s response, in substance, was that the Fed does not get involved in politics, that it has only spoken up about the pending financial modernization legislation because the House version of the bill would render impossible the Fed’s main task, the making of monetary policy.

   Significantly, a request was made that Chairman Greenspan publicly clarify his views on the Community Reinvestment Act. The Chairman encouraged the attendees to use portions of his speeches, including a recent speech given in Grand Rapids, Michigan, as reflecting the Chairman’s concerns about discrimination. With seeming pride, the Chairman noted that he rarely speaks out against any misinterpretation of his speeches, and does not write letters to the editor.

   Other issues arose, including the application of the CRA to Internet banks. The Chairman indicated that this is an emerging issue. When told that the Office of Thrift Supervision has been moving, through speeches and decisions on applications, toward a nationwide CRA assessment area for savings banks that do business nationwide, the Chairman opined that it may be a good thing that different agencies have different views.

   Also addressed was subprime, so-called predatory lending. Mr. Greenspan was asked if he would consider lowering the definition of a high interest rate loans under the Home Owners’ Equity Protection Act from ten to eight percentage points above Treasuries. Mr. Greenspan deferred the question to a Fed staff member, who noted that HOEPA only requires disclosure about such loans, and does not prohibit them. A question was then squarely raised: “Most of the companies that issue the predatory loans are not banks, but rather finance companies. However, these loans are securitized...”.

   Whereupon Chairman Greenspan expressed surprise that such loans are securitized, and asked who buys them. Banks and bank holding companies, he was told (including Bankers Trust / Deutsche Bank, whose application the Fed approved earlier this year, in an order that explicitly recited, and rejected, the claim that Bankers Trust should be held responsible for its involvement in the securitized loans). The May 20, 1999 Deutsche Bank Order which Chairman Greenspan and the other Governors voted on states (emphasis added):

"....commenters maintained that BT Corp has engaged in discriminatory lending practices as a result of its relationship to certain subprime lenders including in particular Delta [Funding Corp.]. BT Corp provides trust and custodial services to Delta and other subprime lenders in connection with the securitization of home loans made by such lenders... The Board has considered these comments...

    So -- do the Governors and the Chairman even read the merger approval orders they vote on?

   There followed a discussion of the lack of community and consumer representatives among the Board’s nominees as the C-Class directors of the Federal Reserve Banks. The Chairman among other things acknowledged that the New York Reserve Bank’s board of directors has a concentration on financial markets expertise.

    Mid-way through the meeting, Chairman Greenspan stated that “this is off the record.” This had not been said before the meeting, and, significantly, none of the attendees responded in any way to Chairman Greenspan’s statement once it was made.

   Chairman Greenspan is, it goes without saying, a public figure. The matters discussed at the above-reported meeting were matters of public policy, and of public concern. It seems more than a little strange that the Fed would request that a discussion of such public issues be “off the record;” stranger still that the Fed would assume that such a discussion was off the record even before using these words. Nevertheless, in an abundance of caution / respect, Inner City Press will not report the conclusion of the meeting. Consciously, in the account reported above, Inner City Press has not used quotation marks, or direct quoting. While the Fed seems to demand or expect it, there is no reason that the Fed should be treated differently than other government agencies on these matters. This is a democracy, with a free press. Comments by a government official are not “off the record,” until such a request is made (and agreed to).   Even then... In March 1998, Chairman Greenspan met privately with the chairmen of Citicorp and the Travelers Group, prior to the companies announcing their now-consummated merger. Inner City Press and others sought documents reflecting the content of these meetings, but received nothing in return. In late July 1999, however, the Federal Reserve, under cover letter signed by Chairman Greenspan, provided the Senate Banking Committee with CRA-related documents that were submitted by a bank with an explicit request for confidential treatment.

    The Fed’s “taming” of the mainstream financial press, by conditioning access (which the reporters need, to keep their jobs) on kids-glove coverage -- is inappropriate. On this issue, see, for example., the Washington Post’s John Berry’s report of September 17, 1999: “Since last month’s meeting, a number of Fed officials have indicated, both publicly and privately, that they are comfortable in such a neutral position.” Emphasis added. This appears to be a situation in which the Fed desires and expects reporting of its “private” statements, in order to send a message to stock traders and speculators regarding monetary policy. Similarly, Governor Ferguson (set to be confirmed as Vice-Chairman on September 23) “spoke to reporters on the sidelines of the [Sept. 17] Year 2000 conferences,” and was directly quoted that “If is appears that any of these Year 2000 influences are likely to be short-lived, temporary... then I think it is our job to look through them or to look past them.” Reuters, Sept. 17. Chicago Fed President Moskow spoke to reporters on Sept. 17, reviewing the UAW’s contract settlement with DaimlerChrysler (in which Deutsche Bank has a large stake) -- Mr. Moskow viewed the contract in terms of inflation and interest rate policy, leading up to the FOMC’s October 5 meeting. But the Fed’s bank regulation duties are also important, and Inner City Press rejects the notion that the Fed’s views on bank regulation matters, particularly when not specific to any bank, should be kept “off the record,” particularly after an ineffective, late-made, unilateral statement that “this is off the record.” Hence, the report above.

   By the way, Chairman Greenspan’s September 8, 1999 Grand Rapids speech did not even mention the words, “community reinvestment.” Rather, in that speech Chairman Greenspan stated that:

“The extraordinarily complex machine that we call the economy of the United States is, in the end, made up of human beings struggling to improve their lives. The individual values of those Americans... will continue to influence the structure of the institutions that support market transactions, as they have throughout our history.... While we have achieved much in this regard, more remains to be done. Considerable progress, for example, has been evident in recent decades in the reduction of racial and other forms of discrimination. But this job is still far from completion. A free-market capitalist system cannot operate fully effectively unless all participants in the economy are given opportunities to achieve their best. If we succeed in opening up opportunities to everyone, our national affluence will almost surely become more widespread. Of even greater import is that all Americans believe that they are part of a system they perceive as fair and worthy of support. Our forefathers bestowed upon us a system of government--”

--that is called a democracy, with a free press. “Off the record,” of course...

* * *

    A developing story on the Federal Reserve Watch involves recent revelations that Republic New York Corporation’s Section 20 subsidiaries’ futures division did 90% of its business with Martin Armstrong, who was arrested on charges of a $1 billion fraud on September 13. RNYSC wrote over 200 letters mis-stating the net asset value in the accounts of Armstrong’s “counter-parties” in Japan. The letters are dated as recently as August 16, 1999 -- after the Fed’s comment period on the HSBC - Republic merger closed. The complaint states that Republic’s “confirmation letters falsely overstate the value of assets... from a few thousand dollars to as much as approximately $46 million.” At press time, 27 Japanese companies have been public their losses to Armstrong; yogurt-maker Yakult is already threatening litigation. Question: what does the whole episode say about the Federal Reserve Board’s supervision of the Section 20 subsidiaries that the Fed began allowing in the late 80s? The Fed (and HSBC) have declined to date to provide copies of any of HSBC’s and/or Republic’s submissions on this issue, which, under the Fed’s own Ex Parte rules, must be provided. Developing...

    Meanwhile, back on the revolving-door front, on September 16, Deutsche Bank announced with fanfare its signing of Peter Hooper “formerly at the Federal Reserve in Washington.” Deutsche Bank issued a statement which gushed that Mr. Hooper will “clearly be the Street’s most experienced Fed watcher,” and that Hooper has attended FOMC meetings since 1985. See Reuters of Sept. 16. This is called the Fed’s unregulated revolving door: you can get a high paying job, explicitly because you’ve attended FOMC meetings, and can now share your “insight.” But, as noted in previous weeks, the FOMC constructively denies the public access to the records of the FOMC, allegedly because the public simply wouldn’t understand, and might mis-report, the significance of the documents. What was that Chairman Greenspan said in Grand Rapids, about our system of government?

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

August 30, 1999

   They raised rates, maintained a neutral bias, then headed west to Jackson Hole, where leaks like fish were jumping.  The friendly press (John Berry of the Washington Post, Louis Uchitelle of the New York Times, etc.) confined their reporting to Greenspan’s speech. Reuters, however, was the recipient (and transmitter) of a desperate stream of “off the record” officials.  On August 27, Reuters reported the views of “a top Fed official... speaking on condition of anonymity... Another conference participant, speaking after a series of private chats with some of the Fed’s top brass, said, ‘They are watching it closely, but my impression is that they are not overly concerned about it.” The “it” being widening spreads on corporate bonds. On August 28, Reuters’ Knut Engelmann ran a longer piece about the Fed’s desire to be more transparent, quoting “one top-level Fed official” that “It’s a work in progress... We’re not quite happy with how it works yet.”

    Previous leaks to Reuters (most notably to reporter Isabelle Clary) resulted in gag orders on the Governors from Chairman Greenspan. These more recent loose lips don’t appear to be suffering penalties -- yet. Seems the Fed is experimenting with transparency -- for a select crowd at the KC Fed’s annual conference. Among the presenters was Bank of England deputy governor Merlin King, who quoted from Walter Bagehot’s Lombard Street (1873): “Nothing would persuade the English people to abolish the Bank of England; and if some calamity swept it away, generations might elapse before at all the same trust would be placed in any other equivalent.”

    The U.S. experience with “central-bank-in-literature” is different. See, e.g., Paul Erdman’s “The Set-Up,” where an ex-Fed Chairman is accused of insider trading, and his replacement at the Fed doesn’t lift a hand to help him. This pulp thriller may be unrealistic -- but who’s tracking the trading of the attendees of the Fed’s by-invitation-only Rocky Mountain shindig?

    At the top level, there’s a least disclosure. Reports circulated on August 26 of Greenspan’s most recent financial disclosure. The mass media tittered that Greenspan’s portfolio declined from $3.4 - $7.7 million in 1997, to $2.5 - $6.4 million in 1998. The portfolio of his wife, NBC’s Andrew Mitchell, increased from $595,000 - $1.5 million in 1997, to $922,000 - $2.2 million at the end of 1998. After Greenspan’s 1997 marriage, he liquidated the “blind trust” he’d established upon his appointment to the Fed in 1987, “so the couple could make joint financial plans,” Fed official have said. Ms. Mitchell’s holdings are not limited to, or even tipped toward, Treasuries, but include stakes in Abbott Laboratories, H.J. Heinz Co., American Greetings Corp. and Anheuser Busch Cos. Inc.. Greenspan himself sold a Norfolk Southern bond last year.

    The above is memorialized simply in the spirit of transparency. But the question remains: what other Fed officials should be required to disclose, and who watches the trading of “outsiders” who are invited to the Fed’s loose-lipped conference in Jackson Hole, and other venues?

   Back in D.C., the Fed is hardly a model of transparency. The Fed continues to delay in providing documents about its lobbying on financial modernization (while providing documents to Sen. Phil Gramm, R-TX, within days of his requests). In an August 18 letter, the Fed purported to release more of these documents to ICP, stating that its FOIA office “will provide you with a copy of the documents being made available to you pursuant to this authorization under separate cover.” As of August 29, the Fed had still not provided the documents. There’s no rush on transparency, apparently. As the above-quoted anonymous “top-level Fed official” said: “It’s a work in progress... We’re not quite happy with how it works yet.” Neither are we.

August 23, 1999

    Leading into the Federal Open Market Committee’s August 24 meeting, the ex-Governors were all over the map. On August 19, ex-Governor Sue Phillips opined that the FOMC would raise interest rates by 25 basis points, in order to do it before the Y2K quadruple witching day arrives. The next day, ex-Governor Lyle Gramley returned fire, predicting that the FOMC would NOT raise rates, but only (re-) adopt a tightening bias. Mr. Gramley now lays odds on the Fed, stating that there’s a 60% change that rates will be raised in October. Lawyers are precluded from laying these kind of odds on outcomes -- but ex-Fed Governors are apparently not so precluded. Why doesn’t the Fed institute a rule precluding ex-Governors from announcing their insider insights, for pay or otherwise?

    The Fed likes to compare itself to a court (most often, to the Supreme Court, which is similarly secretive -- but see below). For example, Fed Secretary Jennifer Johnson wrote ICP a letter on August 18, stating that the Fed’s rules “establish a framework, based on the schedules followed by many courts, that limits the iteration of responses between applicants and commenters.” There’s a difference, of course -- courts don’t allow one side to turn in a pleading without giving a copy to the other side (which the Fed has been allowing HSBC, for example, to do). Even making the well-worn comparison between the Supreme Court and the Fed, there’s a major difference: while the Supreme Court Justices are tight-lipped about their deliberations, when their decision comes down, it contains dissents and concurrence, which explain the positions of the various Justices. With the Fed, however, there’s no such transparency. Merger rulings are almost invariably unanimous -- in fact, the Governors simply vote on long, boiler-plate orders written by the Fed’s Legal Division. Sometimes they don’t even meet to do this -- they unanimously approve the drafted order, by “notational voting.” Last week, the Washington Post attempted a profile of the new Vice Chairman, Roger Ferguson. No hobbies, no heroes, simply the Harvard - Davis Polk - McKinsey pedigree. No dissents, either.

   Given the sanitized (or vacuous) nature of the Fed’s order, one might believe that the Freedom of Information Act, which applies to all documents in their possession (except, the Fed claims, anything that’s a “handwritten note”), might illuminate the operations of this agency. But the Fed is becoming increasingly resistant to FOIA. The Fed has still not responded to a months’ old request for documents about the Fed’s communications about financial modernization legislation. Most recently, the Fed has again denied the expedited processing of FOIA requests that Congress provided for in the 1996 E-FOIA amendments. While the FDIC, for example, has deemed Inner City Press to be “news media,” the Fed’s Secretary wrote ICP a letter on August 18, once again denying this status. In April, then-Vice Chair Rivlin denied the status, due to a lack of a statement of the Inner City Federal Reserve Reporter’s main activities. This was responded to: “The main activity of the Inner City Federal Reserve Reporter is collecting and disseminating, including by publication on the Internet, information regarding the operations, decisions and actions of the Federal Reserve System, its current, past and prospective Governors, and thereby illuminating the operations of this important government agency.” Seems to be the requested description of the main activities of this Reporter, no? No. Fed Secretary Johnson writes: “Your letter does not, however, provide any information about the form and organization of the Reporters... I note that the address, telephone number, and facsimile number for both Reporters is the same as those for Inner City Press/Community on the Move...”.

    Ah, we have a new legal standard: the requirement of a separate mailing address, telephone and fax number for a disseminator of information. The FDIC, of course, simply deemed ICP “a representative of the news media.” But the Fed is more (false) thorough, more abstract, delving into “form and organization.” As ICP has previously pointed out to the Fed, NBC, for example, is owned by General Electric. Does that mean that NBC is not the news media?  Or that the Fed would conduct a similar inquiry into the “form and organization” of NBC? NBC, of course, would report that “It was another love fest, today, for Alan Greenspan on Capitol Hill.” Mr. Greenspan’s wife, herself a reporter, recently called in to the Imus in the Morning radio program, to opine about tensions between China and Taiwan, and increasing Republican interest in a Chinese contract to administer containers at the Panama canal. How about THAT “form and organization”? Contempt for the press, contempt for the FOIA. One could infer: contempt for the public.

   But not, at least temporarily, contempt for the majority in Congress, at least not Committee chairmen. Let us compare: in response to identical requests, the FDIC provided Senate Banking Committee chairman with 2,750 pages of documents concerning the Community Reinvestment Act, and public comments thereunder. The Fed, on the other hand, “fed” Gramm over 35,000 pages. While the FDIC, in a FOIA response to ICP, states that “some of the documents provided to the Senate Banking Committee may have been redacted by the FDIC prior to delivery to the Senate Banking Committee,” the Fed turns over to Gramm even documents that the Fed is legally precluded from giving to the public. The game appears to be that if Gramm then releases them, the Fed’s hands are clean. We’ll see...

   The more immediate scandal concerns the rash of reports of money laundering at the Bank of New York, and how this happened under the Federal Reserve’s “supervision.” Local reports reveal that the Fed in 1996 considered a letter from Bank of New York senior vice president Natasha Gurfinkel Kagalovsky, supporting a proposal by Russia’s Inkombank to open an office in New York. The letter was written after Russian banking authorities had issued a report changing Inkombank with criminal activities. It seems clear that the Fed did nothing on this issue, because Bank of New York continued doing business -- charging fifty dollars a pop for thousands of wire transfers every month -- with Inkombank until October 1998, when it went out of business. Now Natasha Gurfinkel Kagalovsky, who wrote the April 1996 letter to Fed Chairman Greenspan, has had her office in Bank of New York’s Wall Street headquarters searched, pursuant to a warrant. The investigation has expanded to include one of the joint ventures the Fed has signed off on, each time BONY has submitted an application subject to Fed review: Bank of New York-Inter Maritime. The issues the Fed allows to slide through, without taking action, in Fed applications proceeding -- sometimes blow up later. Like here.

August 16, 1999

     Wall Street’s eyes are on the Federal Open Market Committee’s upcoming August 24 meeting, and on the Consumer Price Index data that will be released on August 17. While the Fed Governors have remained tight lipped, Dallas Fed President Robert McTeer on August 10 told reporters that low unemployment and other indicia of economic growth should not automatically trigger interest rate hikes by the FOMC. “If you are worried about inflation, the most important statistics to look at are the statistics on inflation,” McTeer said, in a burst of breath-taking common sense. New York Fed Director of Research Stephen Cecchetti on August 9 mouthed the same line, claiming that Gross Domestic Product and unemployment data have proven “very unstable” and not useful for monetary policy.

      Within the Fed, concern is just as high about the pending financial modernization legislation, which the Fed is trying to influence so as to expand its turf, rather than see new activities be allowed in Treasury-supervised operating subsidiaries of national banks. Recently, Sen. Lott and Rep. Hastert met with Fed Chairman Greenspan and Treasury Secretary Summers, urging the two to reach a compromise. Informed observers note that there is “little incentive for Greenspan to compromise [since] it looks like the conference committee has the votes to pass a pro-Fed version.” That, as of the White House’s most recent statements, would trigger a veto...

      The Fed has still not responded to ICP’s April 12, 1999 Freedom of Information Act request for documents regarding the Fed’s lobbying on the financial modernization bill. Watch, however, for the Fed’s next (required) Annual Report under the FOIA to claim that the Fed “strictly complies” with FOIA’s timelines. Perhaps the Fed’s defense will be that it has had to devote FOIA staff to “feeding” Senator Gramm documents that Gramm uses to attack the Community Reinvestment Act (see below).

     On a supervisory level, Fed staffers have been asking merging banks some questions. They’ve asked HSBC about Republic National Bank of New York’s purchase of securities backed by high interest rate mortgages issued by Delta Funding, even after Delta was charged with discrimination and predatory lending by the New York Attorney General.   HSBC’s most recent response on this issue is evasive: HSBC emphasizes that Republic was not in a position to get Delta to change its practices, rather than explaining why it continued to buy these securities backed by predatory loans after it knew or should have known of Delta’s violative practices.

    HSBC states that Republic “is not in a position to negotiate any terms or conditions in such transactions other than price... It is the convention in such transactions that the terms and conditions governing the transaction are established by the underwriters, brokers, or institutional holders of the securities...”. But Republic is an institutional holder of these securities, and under the law, has as much responsibility (and liability) under the fair lending laws as an underwriter does...

    Finally, for this week on the Fed Watch, long-time Fed FOIA staffer Susan Mitchell retired on August 13. We wish her well.

* * *

August 9, 1999

      Our focus this week is on the Federal Reserve’s ongoing “feeding” of documents related to the Community Reinvestment Act to Senate Banking Committee Chairman Phil Gramm (R-TX). A detailed report is below. But, late last week, the administration confirmed that it is nominating Chase Manhattan’s ex-CRA officer to the Federal Reserve, and is appointing current Governor Roger Ferguson to replace Alice Rivlin as Vice Chairman. A little background:

   While the wire services mostly portrayed Chase’s Carol Parry as a “champion of community lending,” they ignored that Chase and Chemical, under Ms. Parry’s watch, have been subject to extensive criticism by community groups for weak and/or disparate lending to poor and minority communities. Ms. Parry’s response, when pushed, was that it wasn’t the CRA that encouraged her bank to open a branch in a poor neighborhood, it was “just business.” There are firms that specialize in beating back unionization drives; their official are loosely called “labor lawyers.” But it’s unlikely the press would report the appointment of one of these to the NLRB as being a victory for working people, or for the labor movement. Similarly, there are lawyers who specialize in defending employment discrimination claims. They may be expert, but they are hardly champions of equal employment. The applicable phrase (now a cliché): Don’t believe the hype.

   Mr. Ferguson is harder to read: in his two years on the Board, he does not appear to have dissented from a single Federal Reserve Board (read, Alan Greenspan) decision. Governor Meyer has dissented; Alice Rivlin dissented; even Sue Phillips dissented. Perhaps Mr. Ferguson cast other than a concurring vote, on the FOMC -- it’s impossible to know, since the Fed has denied access to the FOMC transcripts, unless the requester pays $48,000 (see below). But the Fed’s merger votes, reported in the Federal Reserve Bulletin, are a fair sample. As ex-Vice Chairman Alan Blinder recently said, “Eighty percent of the life of a Fed governor is regulatory issues.” On these issues, Mr. Ferguson has not cast a single dissent. “Insiders say he has built a close working relationship with Greenspan.” L.A. Times, August 7. The chief economist of Schroder & Company said that Mr. Ferguson’s monetary policy views “are little known in the investment community... around the Fed he is viewed more as a management consultant and administrative guy.” And we thought those were functions of the STAFF of the Federal Reserve System, and that Governors made policy decisions. But it appears that the Governors have degenerated into acting as Greenspan’s staff...

      Speaking of the Fed’s staff, there is no question they work hard.  On August 6, ICP received from the Fed 500 pages reflecting its communications about CRA with the Senate Banking Committee, from April to June 1999. The majority of the document date from early May, right when the Senate’s anti-CRA version of financial modernization legislation was being debated on the Senate floor. Gramm’s staffers called the Fed up to three times a day for information that would help to attack CRA; the Fed’s internal e-mail reflect an “all-hands-on-deck, let’s-help-Gramm” atmosphere at the Fed. Also noteworthy is the number of Fed staffers called onto this project: the Freedom of Information unit (thereby delaying the Fed’s responses to requests from the press and public), and the Fed’s CRA analysts (thereby reducing the scrutiny given the protested merger applications during this time period).

Even the Fed’s Secretary (who rules on community groups’ request for extensions of comment periods, and expedited FOIA requests) and the Fed’s Associate General Counsel (who oversees preparation of draft Board orders on mergers) were pulled into the loop of responding to Gramm’s requests. It would seem that the Fed should build a “fire wall” between its staff who rule on the public’s CRA-related requests, and those responding to Sen. Gramm’s requests for information to use in attacking CRA. Otherwise, it would appear possible that a pall is cast over the Fed senior staff’s day-to-day CRA-related decisions. “What would Senator Gramm think of this?” -- is the question left hanging over each of these decisions. Meanwhile, the Democrats (and moderate Republicans) are requesting little to no information from the Fed. The squeaky wheel get the grease. Sen. Gramm and his staff have created a greater burden, and more backlog, at the Fed than any number of community group comments ever could. And the Fed staff now operate in the atmosphere created by Senator Gramm...

   As shown below, the Fed has been preparing lists of protested applications, highlighting all applications on which protests were withdrawn after they were filed...

The blow-by-blow, in the spirit of “the journalism of attentiveness”:

      On April 12, 1999, Beverly Smith of the Fed’s Community and Consumer Affairs department (DCCA) wrote to ten other Fed staffers, regarding the “latest request from [Sen. Gramm’s staffer] Dina Ellis dated 4/8/99.” Dina Ellis’ letter “request[ed] the same set of documents from us as before, but this time for the last 6 months of 1997, that were protested on CRA grounds.” The Fed put together a “protest list,” and made copies of “the relevant CRA protest letters.”

Later on April 12, 1999, Fed staffer Helen Troy assigned document collection for various 1997 protested applications to other staffers. Ms. Troy asked staffer Peggy Naulty, about Huntington/First Michigan: “It looks like you only relied on Huntington’s 10/17/96 PE (which I cannot get on the OCC’s website). You mentioned that First Michigan’s 13 subs were “Sat.” or better. Does this mean that you did the ratings screen and did not actually use the First Michigan PE’s?” [Note: “PE” stands for “Performance Evaluation,” otherwise known as a CRA exam. The implication is that the Fed did not even read the actual examination reports for Huntington, but only relied on the “Satisfactory” ratings. 98% of banks are awarded Satisfactory or Outstanding ratings. If the Fed has taken to relying on the mere ratings themselves, the Fed has impermissibly implemented the type of safe harbor that the regulators considered, and rejected, in the new CRA regulation].

Ms. Troy assigned the Chase Manhattan, Los Angeles application to staffer Charles Fleet, who then pointed out that “The Chase LA case was not mine. Peggy [Naulty] was the lead, and you [Helen Troy] co-signed the memo. I don’t have any PE’s in my files for the case (I helped out with the branch analysis.” To which Ms. Troy responded: “Oops -- I had you in my mind as the Chase guru -- you’re right, it was Peggy and me.” This was followed by an e-mail from Peggy Naulty to Beverly Smith, Charles Fleet and Helen Troy, stating “I did find a copy of the Chase 10/95 PE, in one of Charles’ old files...”.

On April 14, 1999, Fed staff Pat Robinson wrote to the Federal Reserve Bank of Atlanta, stating: “The Senate Banking Committee has requested documents related to CRA protests in cases before the Board in 1998. For whatever reason, Board Records does not have a key document in the Regions Financial Corporation / First Commercial Corp. case -- the protest letter from Mr. Zippert, Greene County Democrat. Could you please... fax me a copy? Thanks!”

Then, Ms. Robinson wrote to another Reserve Bank, stating that “for whatever reason, Board Records does not have a key document in the Susquehanna Bancshares / [Cardinal Bancorp] case (decided 11/23/98) -- the original protest letter from New Jersey Citizen Action (I believe the letter was dated 8/12/98). Could you please... fax me a copy? Thanks!” Ms. Robinson also wrote to the Boston Reserve Bank, asking for “one protestant letter -- Judy Grupenhoff, proprietor of InterNetworks (rec’d 1/13/98).”

Then, Ms. Robinson wrote to the FRB of Richmond, stating that “for whatever reason, Board Records does not have some key documents in the Suntrust / Crestar case -- the Protestant letters (ironically, Records has the favorable comments)!!! Could you please... fax me a copy? Thanks!”

The Richmond Reserve Bank forwarded this request to the Atlanta Reserve Bank, which supervised Suntrust. Wayne Smith, Lisa DeFrances and Julie Mizell coordinated the response, digging up all of the protest letters from “the Restricted package.” [Note: it appears that the Federal Reserve Board in Washington, on that major merger, only considered the favorable comments, while leaving the comments opposing the merger down at the Atlanta Reserve Bank].

The Fed’s Congressional Liaison Office then chimed in: “My records show that the January 25 and February 18 letters have already been answered... Anyway, no problem in sending the material up by messenger.” Pat Robinson relied: “To date, the Jan. 25 and Feb. 18 letters have been only partially answered -- e.g., the Board approval letters and the CRA ratings and examination reports of the relevant institutions have been provided. We’ve been compiling documents to answer the rest of their request -- the comment letters and documents related to the protests and how the protests were resolved.” Beverly Smith added: “This particular set of boxes relate to the 1/25 and 2/18 Dina Ellis letters. Once all of the 1998 documents go, then these letter can be closed out. Her letters dated 3/2 and 3/10 go to specific cases in 1994-1997 and her most recent one (4/2) requests the same information for the cases filed in the last 6 months of 1997.” Ms. Smith added to FRB Associate General Counsel Scott Alvarez: “Re case files to Gramm -- I don’t think FUNC/Corestates has gone yet.” Mr. Alvarez responded: “Thanks for the info! Scott”.

On May 3, 1999, Pat Robinson wrote to the Fed’s FOIA office that “[t]he Senate Banking Committee is complaining that it’s taking too long for us to send the requested documents to him.... We have about 22 other cases still to process. Therefore, can Shirley get some help in pulling the documents. We need to finish all the cases as quickly as possible.”

[NOTE: By this time, Gramm’s staff’s five requests have taken full days’ staff time from more than a dozen Fed staffers, having involved the Fed’s Associate General Counsel, and have resulted in delays for the press’ and public’s Freedom of Information Act requests. The Fed has not made any complaint to Sen. Gramm -- he is supporting a version of financial modernization legislation which would favor the Fed over the Treasury Department. And so the production continues...].

    Senate Banking Committee Democratic staffer Patience Singleton also chimed in with a request: “to discuss the FDIC’s small bank examination procedures.” Beverly Smith wrote: “Patience Singleton (Sen. Gramm’s staff) left me a voicemail... Win, I’ll leave it up to you if you think we need to get these in writing since the phone calls keep coming in.” The Fed staffers misperceived Ms. Singleton as being on Sen. Gramm’s staff -- when she’s on the Democratic staff. Soon thereafter, Fed staffer Peggy Naulty opined: “We should not discuss other agencies’ procedures.” ICP note: Particularly not with a Democratic staffer -- it’s Gramm that the Fed is placating / courting.

      In terms of difference between the FDIC and the Fed on CRA, another e-mail from Beverly Smith recites that a comment against Compass Bancshares that the Fed decided not to treat as a protest (“we considered it a complaint since it involved a specific loan... rather than a more general comment about the bank’s lending practices”) -- the FDIC DID treat as a protest. Senator Gramm, clearly, would be happier with the Fed’s narrower reading of CRA...

    Interestingly, on May 25, Patience Singleton faxed the Fed a draft proposal by Senator Santorum which “would permit banks to receive full CRA credit for purchasing securitized CRA loans and securities.” Question: why are the Senate Democrats doing work for Republican Senator Rick Santorum of Pennsylvania?

     The next call was from Joe Cwiklinski, who IS a Gramm staffer. Cwiklinski called asking “what the case breakdown was for various years by type of application.” Helen Troy asked Fed Congressional Liaison Win Hambley, “Does someone need to ask Mr. C to put his request in writing? If so, who should make the call?” [Note: the Fed staffers appear to be concerned about offending even Gramm’s third tier staff -- meanwhile, the press’ and public’s FOIA requests are being ignored, and the Fed staffers are refusing discussions with Democratic staffers].

The following day, Ms. Troy sent another e-mail: “Mr. C... asked if I would very generally characterize the protests as pertaining to mergers and I told him that most of the applications on which we receive protests are Section 3’s (BHC Act), which are mergers and acquisitions... He said he was satisfied with this information. Now -- do I need to send a letter to Mr. C confirming our conversation and containing this information (lest I be misquoted)?”

[NOTE: Gramm wants to claim that community groups only raise issues on time-sensitive mergers, allegedly as a way to “extort;” therefore, Gramm’s staffer is trying to get the Fed to “confirm” that most protests come in on merger applications].

On May 3, Fed staffer Pat Robinson wrote, under the topic “Next Response to Senator Gramm,” that “we plan on continually ‘feeding’ the Committee additional documents once or twice a week until all its requests are satisfied. FOIA is getting additional persons to help pull documents and I’m getting additional review help, so we should be able to keep providing the Committee with documents on a more regularly scheduled basis.” A full paragraph has been redacted from this e-mail, as it was provided to ICP. ICP is appealing...

On May 4, Beverly Smith wrote to a dozen Fed staffers, regarding other CRA-related requests for documents, from the General Accounting Office and the Congressional Budget Office. “We need to count cases in 1998 where both the applicant and the target are over $1.0 billion. Then we need to estimate how many of those it would be “necessary” to have public meetings.” [Note: This is a proposal in the House’s version of financial modernization legislation].

On May 5, Helen Troy added: “By our count, there were 67 Board applications in total in 1998. Of these, the applicant’s assets were $1 billion or greater in 53 instances, of which 31 were subject to CRA. In 19 instances, the assets of both the applicant and target exceeded $1 billion.” Then, the Fed has redacted the rest of the e-mail. ICP is appealing.

On May 6, Beverly Smith circulated “a draft letter from Win’s signature on some CRA stats that Joe Cwiklinski (Sen. Gramm’s staff) had requested. He called me about 3 times yesterday for them and I gave him some in draft late yesterday due to the urgency... I know that folks are tied up with the legislation, but could you make sure someone sees this message and let’s me know if there is anything more I can do to assist?”

[ICP note: May 6 is when S. 900 was being debated on the Senate floor. Gramm and his staff wanted any statistic possible from the Fed, to attack CRA. The Fed (whose other staffers were also “tied up with the legislation”) wanted to “assist” in any way possible...].

On May 7 (after the S. 900 vote), Helen Troy wrote to Beverly Smith: “I just spoke with Joe C. to tell him that we can’t readily break out the protest statistics by type. He was about to call us anyway. He received Win Hambly’s letter, but the statistics apparently didn’t including the rural / non-rural break out and he wants to know whether those are coming...”.

Also on May 7, Pat Robertson asked the Federal Reserve Bank of San Francisco for more documents (protest letters on the Santa Barbara Bancorporation / Citizen State Bank case, 1997), adding that “I apologize for the disruption that our requests undoubtedly are causing!”

NOTE: Yes, Gramm and his staffers are “causing disruptions” in the Fed’s FOIA and DCCA units, resulting in less detailed consideration of pending public comments on mergers, and slower response to FOIA requests from the press and public. But the Fed is not complaining to Gramm, because Gramm’s legislation favors the Fed over Treasury. That’s the most benign explanation...

A May 10 e-mail makes clear that the FRB in Washington did not even have copies of the protests that were submitted in the Star Banc / Great Financial Corp. case of 1997. Another May 10 e-mail shows that FRB Associate Secretary Bob Frierson’s been pulled into the response team, raising the “body count” of senior Fed staffers who can no longer react to any other requests, including requests from the public. A May 11 e-mail makes clear that the FRB in Washington did not even have copies of the protests that were submitted in the NationsBank / Barnett case of 1997.

In a May 12 e-mail, Pat Robinson writes that “the First Bank System / U.S. Bancorp case is included among the cases for which the Senate Banking Committee has requested documents related to CRA protests. For some reason, Board Records does not have the comment letters listed below... Gary Sandusky, Center for Community Change (5/13/97), Ben Langston, Department of Housing Services, Hillsboro OR (4/30/97,” etc..

On May 17, Beverly Smith e-mailed 12 Fed staffers about “the incoming letter I just received moments ago in which Dina [Ellis] has requested info. related to CRA protests for July 1996 through July 1997. She wants ‘only’ the following... the written protest(s) or comment(s) submitted concerning the application, [and] any written agreement[s] between either the bank and the ‘protester’ or the bank and any non-profit group. She wants the info by 5/26/99.”

NOTE: This is now Gramm’s focus: the protests, the protesters, and banks’ agreements with the protesters “or any non-profit group.”

On May 20, Carolyn Welch of Fed staff sent an e-mail stating “we do not maintain in our files the documents that she requested in the last two bullet points of this letter: 1) written protests or comments submitted concerning the application, and (2) written agreements between the banks and protesters and non-profit organizations. My understanding is that this information is being compiled by Records and FOIA....”.

    And so, the Fed became trying to compile for Gramm “agreements between the banks and protesters or non-profit organizations”....

Later, Pat Robinson e-mailed Beverly Smith, “re: new fax from Dina Ellis requesting more!: This overlaps with the 94-97 case documents that she already requested and which we already have provided... What gives? Can we get her to allow us to respond to only those cases that she hasn’t already requested?... In any event, we should have another strategy meeting with Jennifer [Johnson], FOIA and Records because of the number of cases involved and the extremely short time frame.” The next morning, Ms. Smith e-mailed Ms. Robinson: “Scott [Alvarez] agrees that we should only respond to the cases that were not covered by the other requests.”

     Note that the FRB’s Secretary (who rules on community groups’ request for extensions of comment periods, and expedited FOIA requests) and the FRB’s Associate General Counsel (who oversees preparation of draft Board orders on mergers) are pulled into the loop of responding to Gramm’s requests. It would seem that the Fed should build a “fire wall” between its staff who rule on the public’s CRA-related requests, and those responding to Sen. Gramm’s requests for information to use in attacking CRA. Otherwise, it would appear possible that a pall is cast over the Fed senior staff’s day-to-day CRA-related decisions. “What would Senator Gramm think of this?” -- is the question left hanging over each of these decisions. Meanwhile, the Democrats (and moderate Republicans) are requesting little to no information from the Fed. The squeaky wheel get the grease. Sen. Gramm and his staff have created a greater burden, and more backlog, at the Fed than any number of community group comments ever could. And the Fed staff now operate in the atmosphere created by Senator Gramm...

     The Fed then prepared a list of protested applications, highlighting all applications on which protests were withdrawn after they were filed...

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

* * *

August 2, 1999

    In the spot light, erudite. In the shadows, pure politics.

   On July 28, Fed Chairman Alan Greenspan delivered what may be the Fed’s last Humphrey-Hawkins testimony required by law. Senate Banking Committee Chairman Phil Gramm (R-TX) began the session by stating, “I don’t see any great necessity in continuing the Humphrey-Hawkins hearings.” Twice a year, the Fed testifies on its view of the economy, and answers questions about its operations. To Gramm and his ilk, apparently, this is altogether too much accountability.

      Meanwhile, sources tell ICP that Gramm wrote to BB&T, a bank in North Carolina, demanding disclosure of all of that bank’s Community Reinvestment Act agreements with community groups. Because one agreement was confidential by its terms, BB&T wrote back and declined. Gramm wrote again, more insistently. And, with the group’s consent, BB&T provided the agreement. (And, on July 28, BB&T announced a deal to buy Premier Bancshares of Georgia, for $624 million. Needless to say, this application will be before the Federal Reserve -- probably being approved on a delegated basis by the Federal Reserve Bank of Richmond).

     Barron’s of August 2 has an analysis concluding that the Federal Reserve System is “bloated” and wasteful: “The Fed should eliminate many of its economists and researchers,” the article says, and the Fed should shut down several of its 12 regional Reserve Banks, which are no longer needed.

     The Fed’s Dallas Reserve Bank continues to crank out amateurish research supporting Gramm’s claims. See, most recently, this Reserve Bank’s Economic and Financial Review for the second quarter of 1999, “The CRA - Safety and Soundness Pinch,” by Jeffrey Gunther. Shooting fish in a barrel: this type of openly political research-on-demand is hardly needed; the Federal Reserve Bank of Dallas might productively be asked to justify its continued existence.

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

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