Inner City Press' Federal Reserve Reporter Archive 2000 #4 (September 25 - December 26, 2000)

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December 26, 2000

      The FOMC on December 19 signaled it will probably move to interest rate cuts in early 2001. The move, and statement, were widely expected. What was more interesting was the "jaw-boning" from the president-elect's camp. After mugging for the camera's at his breakfast with Fed Chairman Greenspan, the president-elect had his team publicly lobby for rate cuts, and predict a recession. The outgoing administration quickly responded, claiming it is leaving the economy in "robust" shape. The Fed chairman set up a meet with California's governor, at the governor's request, to discuss... power costs.

      The Fed's main regulatory actions last week came on December 21, when the Fed, along with the other bank regulatory agencies, issues its final Community Reinvestment Act "sunshine" regulations, and, more quietly, a "final" rule concerning how companies become, and remain, financial holding companies. This second action was outrageous, including, as it did, a Christmas present for the largest Fed-regulated institution, Citigroup.

         Included in the Gramm-Leach-Bliley Act, as its one supposedly "pro-CRA" provision, were two ways in which a less than satisfactory CRA rating could have ramifications on a holding company. A company applying for financial holding company status couldn't have a subsidiary bank with a less than satisfactory CRA rating, unless the rating involved a bank acquired in the past twelve months (in which case a corrective plan would have to be filed). Separately, and with different statutory language, once a company is a financial holding company, if it has a subsidiary bank with a less than satisfactory CRA rating, it loses its GLB powers under 12 U.S.C. Section 1843(k) and (n). This provision, quoted below, does not have an exception for a bank bought in the previous 12 months, nor for a regulator waiving the prohibition in light of a CRA improvement plan.

      But the Fed, in its December 21 final rule, imports this loophole from one (pre-FHC) section, where it appears, to another (post-FHC-designation) section, where it does not appear, presumably (and presumptively) by Congress' choice. Now, despite the statute, the Fed will not impose any ramifications on FHCs that come to own banks with less than satisfactory CRA ratings.

       And who, you ask, might this benefit? To date, only one company: Citigroup. As reported at length elsewhere on this web site, Citigroup has acquired Associates First Capital, the much-sued subprime lender, and its bank, Associates National Bank, which has a rare Needs to Improve CRA rating. ICP raised this issue to the Fed in comments from September 25, 2000 to November 30, 2000, when it filed a formal petition for the Fed to notify Citigroup that, having just become the parent of a bank with a Needs to Improve CRA rating, it could no longer exercise powers under 12 U.S.C. Section 1843(k) and (n). ICP's comments, and petition, quoted the language of the statute, and of the Fed's "interim" rule, promulgated in January 2000. In that order:

     12 U.S.C. 1843(l)(2) provides that:

CRA requirement. Notwithstanding subsection (k) or (n) of this section, section 5136A(a) of the Revised Statutes of the United States [12 USCS 24a(a)], or section 46(a) of the Federal Deposit Insurance Act [12 USCS 1831w(a)], the appropriate Federal banking agency shall prohibit a financial holding company or any insured depository institution from--

(A) commencing any new activity under subsection (k) or (n) of this section, section 5136A(a) of the Revised Statutes of the United States [12 USCS 24a(a)], or section 46(a) of the Federal Deposit Insurance Act [12 USCS 1831w(a)]; or

(B) directly or indirectly acquiring control of a company engaged in any activity under subsection (k) or (n) of this section, section 5136A(a) of the Revised Statutes of the United States [12 USCS 24a(a)], or section 46(a) of the Federal Deposit Insurance Act [12 USCS 1831w(a)] (other than an investment made pursuant to subparagraph (H) or (I) of subsection (k)(4), or section 122 of the Gramm-Leach-Bliley Act [note to this section], or under section 46(a) of the Federal Deposit Insurance Act [12 USCS 1831w(a)] by reason of such section 122, by an affiliate already engaged in activities under any such provision);

if any insured depository institution subsidiary of such financial holding company, or the insured depository institution or any of its insured depository institution affiliates, has received in its most recent examination under the Community Reinvestment Act of 1977 [12 USCS 2901 et seq.], a rating of less than 'satisfactory record of meeting community credit needs'".

      As you can see from the (dense) statutory language, there's NO exemption here for banks acquired in the last 12 months, of banks which got the less than satisfactory CRA rating while owned by a company that the FHC subsequently bought. If an FHC owns a bank that received a less than satisfactory CRA rating at its last exam, it is precluded for exercising powers under subsections (k) and (n). That's what the law, passed by Congress, says. And that's what the Fed's interim rule of January 2000 said, providing, at CFR 225.84(a)(2):

(2) Notification. A financial holding company received notice for purposes of this paragraph at the time that the appropriate Federal banking agency for any insured depository institution controlled by the company or the Board provides notice to the institution or company that the institution has received a rating of "need to improve record of meeting community credit needs" or "substantial noncompliance in meeting community credit needs" in the institution's most recent examination under the Community Reinvestment Act.   --Emphasis added.

      As soon as Citigroup became the parent of Associates National Bank, with its Needs to Improve CRA rating, ICP asked the Fed to provide notice under the above-quoted section. For three weeks, the Fed did not respond. Then, on December 22, ICP received a letter from the Fed, citing to the revised and final GLB rule, released December 21 in Washington. The Fed's Associate Secretary's letter recites that

"[b]y letter dated November 30, 2000,you petitioned the Board to prohibit Citigroup.. from engaging in additional financial activities after the acquisition by Citigroup of Associates First Capital Corporation... A third party has no standing under the BHC Act, the GLB Act, or the Board's regulations to contest whether a company continues to qualify as a FHC or whether a FHC may engage in financial activities. Accordingly, the Board is returning your petition.

"Please note, however, that section 225.84 of Regulation Y sets forth the circumstances under which a FHC that controls an insured depository institution with an unsatisfactory CRA rating will be prohibited from expanding its financial activities under the GLB Act. AS reflected in this section, the Board has interpreted the GLB Act to require the Board to prohibit a FHC from expanding its financial activities only when one of the FHC's insured depository institutions has received a poor CRA rating while the institution is under the FHC's control. This interpretation gives full meaning to the words of the GLB Act. It also facilitates an important public purpose of allowing FHCs that have insured subsidiary depository institutions with satisfactory ratings to acquire and enhance the CRA performance of insured depository institutions with unsatisfactory ratings.

Sincerely yours, Robert deV. Frierson, Associate Secretary of the Board"

      Thou dost protest too much. The Fed's letter has to say that "the Board has interpreted the GLB Act...giv[ing] full meaning to the words of the GLB Act... facilitat[ing] an important public purpose" -- because the Fed's "interpretation" IS NOT WHAT THE GLB ACT SAYS. The Fed has CHANGED the law, in a way that benefit only one institution: Citigroup, the only FHC to have acquired a bank with a less than satisfactory rating. The Fed's January 2000 interim rule and preamble did not put forward this "interpretation" -- because Citigroup didn't need it then. Without having put this legal-switch out for comment, the Fed's December 21 preamble to its now "final" rule says, at page 14, that

"[t]he Board also has considered the applicability of the CRA provisions to the situation in which a FHC acquires an insured depository institution with a poor CRA rating. The terms of the GLB Act require that the Board apply the prohibitions if 'any insured depository institution subsidiary of such FHC... has received in its most recent examination under the CRA a rating of less than "satisfactory record of meeting community credit needs."' The Board believes that this language is best read to apply only when an insured depository institution received a less-than-satisfactory CRA rating while it is under the control of the BHC. [Footnote 6: Moreover, although the GLB Act requires the Board to impose prohibitions on the activities and acquisitions of a FHC if an insured depository institution of the FHC has received a less-than-satisfactory rating at its most recent CRA examination, the statute does not enumerate a specific procedure or time frame in which the Board must implement this requirement]...This notice will occur, if at all, at the first CRA examination after the poorly rated insured depository institution is acquired by the FHC. If the institution does not achieve at least a satisfactory CRA rating at its first CRA examination following the acquisition, the prohibition would apply to the FHC. This interpretation is consistent with the provision of the GLB Act that allows the Board when evaluating a FHC election to exclude the poor rating of any institution acquired by the company within the preceding 12 months. The Board will monitor the FHC's progress in addressing the CRA performance of any recently acquired insured depository institution and reserves the right also to provide notice that the CRA prohibitions apply if the FHC is not taking appropriate action to improve the insured depository institution's CRA performance."

       The Fed is simply changing the law, dressing it up in verbosity about "interpretation" and "reserving the right." Where the Fed says that the new loophole it creates is consistent with another section of the GLB Act, it ignores that Congress could have, but didn't incorporate this "12 months to fix" loophole into the post-FHC-election CRA provision. It's just not there, and the Board, constitutionally, has no right to read it in. But who's going to (effectively) protest? The Board's Dec. 21 letter to ICP says that "third parties have no standing." How about the Democrats that claimed so much credit for the inclusion of this provision in the GLB Act? Or are they conflicted, since the company the Fed has invented this loophole for is.. Citigroup, major donor? We shall see...

         It's worth parsing the gnarled language of the Fed's Dec. 21 preamble:

"[t]he Board also has considered the applicability of the CRA provisions to the situation in which a FHC acquires an insured depository institution with a poor CRA rating" -- but the Fed didn't raise this issue, for "consideration," in its interim rule of January 2000, or in the accompanying preamble. It only became an issue when Citigroup, the Fed's largest (and apparently favorite) FHC, suddenly had a problem.

"The Board believes that this language is best read" -- this is the Fed's way of acknowledging, as quietly as possible, that it is "reading," that is, changing, the terms of the statutory language -- "Footnote 6: Moreover, although the GLB Act requires the Board to impose prohibitions on the activities and acquisitions of a FHC if an insured depository institution of the FHC has received a less-than-satisfactory rating at its most recent CRA examination, the statute does not enumerate a specific procedure or time frame in which the Board must implement this requirement" -- breath-taking! The Fed, here, is cynically claiming the benefit of a word-for-word reading of the same statute that, above, it felt so comfortable "reading" and interpreting: since the law does say WHEN the Fed has to give notice, it never has to. This Fed statement should trigger outrage among Congressional Democrats. But will it? See above. "

"This notice will occur, if at all, at the first CRA examination after the poorly rated insured depository institution is acquired by the FHC." Note: the statute says NOTHING ABOUT THIS. The Fed is simply making up a time table.

"If the institution does not achieve at least a satisfactory CRA rating at its first CRA examination following the acquisition, the prohibition would apply to the FHC. This interpretation is consistent with the provision of the GLB Act that allows the Board when evaluating a FHC election to exclude the poor rating of any institution acquired by the company within the preceding 12 months" -- as noted, the Fed is referring to another section of the GLB, where this 12 month loophole exists. It doesn't exist, post-FHC-election.

"The Board will monitor the FHC's progress in addressing the CRA performance of any recently acquired insured depository institution and reserves the right also to provide notice that the CRA prohibitions apply if the FHC is not taking appropriate action to improve the insured depository institution's CRA performance" -- wait a minute -- the Fed just said it would give the acquiring FHC until the next exam. Now it says it will be monitoring the FHC, even before the next exam. Again, the Fed's simply invented this procedure, which will take place entirely outside of public scrutiny, even the scrutiny available, in the pre-FHC-election procedure, of the FHC having to file and have accepted a CRA improvement plan.

     By the Fed's logic, even if a bank than an FHC acquired then received a Needs to Improve CRA rating, six months after the acquisition, the Fed could claim that the exam was BASED ON performance before the FHC acquired it. The only thing that's clear from all this is that the Fed will bend the rules for Citigroup, as it did when it permitted the Travelers-Citicorp merger in 1998, before the GLB Act had even been enacted.

      ICP has raised this to the Fed, in a December 26 letter.   We will report responses on this site...

      And now, the Fed's CRA Sunshine regulation. While even many in the banking industry have said they oppose this provision, and its new "inter-agency" regulation, the agencies were required to finalize a rule. A major issue raised to the agencies was that by limiting reporting to those groups which comment to a Federal bank regulatory agency, an impermissible burden is being placed on petitioning the government for redress of grievances, an activity expressly protected (from interference, or undue burden) by the First Amendment to the U.S. Constitution. The final rule nevertheless maintains this focus -- it even carves out an exception for situations in which the regulators themselves choose a group to solicit comment from. In that scenario, a group is NOT "petitioning the government for redress;" therefore, the agencies impose no reporting requirement. The impermissible targeting of "petitioning" (that is, advocacy) groups could not be more clear in the regulation. It is also demonstrated by the agencies' statement (in the FRB's preamble at 28) that law firms will not be covered, because they'd be considered "representatives of insured depository institutions." The agency, apparently, didn't think of (or care about) the situation in which a law firm (a Legal Services or other public interest law entity) represents not a bank, but a community group. The final rule will also intrude upon attorney-client privilege; or, the agencies are trying to create a situation in which, in a legal proceeding, one side (banks) has legal representation, and the other (community groups and the public) does not...

    On particular (pending) transactions, the Fed has yet to ask meaningful questions to Fleet, in connection with its application to acquire Summit Bancorp. While U.S. Bancorp and Firstar have YET to file a response to ICP's December 4 comments (despite their spokespeople's promise to do so, to newspapers from Milwaukee to Nashville), the Federal Reserve has continued to ask the banks questions. On December 18 (too late for last week's report), the Fed asked, among other things, "Does Firstar or USB have any policies or procedures whereby subprime lending affiliates refer applicants who appear to be qualified for traditional or 'prime' home mortgage or consumer loans to Firstaar of USB prime lending subsidiaries?" The banks' December 21 response is short, but not sweet: "Firstar has indicated that it does not have any such policies or procedures." Fair lending problems, anyone?

    The Fed also asked: "With respect to Firstar's and USB's business relationships with subprime lenders as warehouse lender or trustee in securitizations of subprime loan pools, discuss any specific due diligence measures and related actions taken by Firstar, USB and their relevant affiliates in connection with such relationships." The banks' response, as to warehouse lending is evasive, stating that "the more prudent practice is to follow their credit policies and procedures uniformly in making these loans and not to deviate from them in making loans to subprime lenders." Translation? No standards at all... The response, as to work as trustee / registrar / paying agent on subprime loan pools, is even worse: the banks "do not perform due diligence with respect to the origination practices of the lenders...". The banks cite to the Fed's 1999 Deutsche Bank - Bankers Trust order, in which, they claim, the Fed "has declined to impose any such due diligence obligations." Meanwhile, the Fed has given the banks' ten days (from Dec. 21) to further justify another of their requests for confidential treatment.

     Finally, for this week, Fed Governor Gramlich has issued yet another boiler-plate FOIA appeal denial, this one dated December 21, regarding Chase - Morgan. Essentially, Gov. Gramlich denies that the Fed has in its possession any documents reflecting oral communications with Chase or Morgan, in connection with their pending merger. This is simply not credible: the Fed has recently held pre-application meetings with much smaller (and less complex) applicants, such as Firstar and U.S. Bancorp. Given such things as Chase's and Morgan's combined loan exposure to Xerox, ICP is not sure how to react to the Fed's claim it had no communications, beyond the application and related letters, with Chase and Morgan. The possibilities seem to be: out-to-lunch, or, stone-walling...

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November 27, 2000

      In the lull between FOMC meeting, Fed chairman Greenspan gave a speech on Nov. 20 on one of his ongoing themes: there is no need for bank regulation, the market solves all. Greenspan said: "in recent years rapidly changing technology has begun to render obsolete much of the examination regime established in earlier decades... Indeed, these developments reinforce the truth of a key lesson from our banking history -- that private counterparty supervision remains the first line of regulatory defense."

       Which brings us back to our second, and final, review of Bob Woodward's gossipy send-up of Greenspan, "Maestro." Last week's review stopped at page 100. In the final 129 pages of the book, you'll find: a breathless (and unsourced) description of Greenspan's computer system (page 101-102); Robert Rubin supporting Alan Blinder's nomination to the Fed, because "he was a Democrat who didn't use the class-warfare rhetoric Rubin detested (page 126); ex-Fed governor Wayne Angell, by then at Bear Stearns, briefing Bob Dole on the Mexican peso devaluation crisis (page 143 -- with no mention of Angell's charging $100 a minute for consulting work, nor of the Fed's lack of "revolving door" policies); Rubin calling John Reed of Citigroup to "solve" the South Korea currency crisis (page 191 -- no mention that Rubin subsequently went to work for Citigroup); and an account of the Fed-brokered bail-out of Long Term Capital Management, which conveniently leaves Greenspan with plausible deniability for this seeming violation of his libertarian, free-market principles (pages 199-212). The book's epilogue beginning with a quote from Greenspan's December 5, 1996 "irrational exuberance" speech: "The Fed must be as transparent as any agency of government. It cannot be acceptable in a democratic society that a group of unelected individuals are vested with important responsibilities, without being open to full public scrutiny and accountability." Woodward makes no comment on this principle, which the Fed routinely violated (although perhaps not with a compliant self-described "celebrity journalist" like Woodward).

       For example, the Fed has YET to release documents reflecting its communications with Chase Manhattan and J.P. Morgan, as other agencies like the New York Banking Department have done (see last week's report). The Fed has met three times with Citigroup, concerning its proposal to acquire controversial subprime lender Associates First Capital -- but has withheld all of the substance of these communications. We heartily agree with Greenspan's statements, quoted above, that the Fed "must be... transparent... [and] open to full public scrutiny and accountability " The problem is, it's not.

      Now, on regulatory matters, it's worth noting that while the Fed has finally asked Chase some questions about its involvement in subprime lending, and other matters, the Fed did not, as the NYBD has, ask Chase for a list of subprime lenders it has worked with in the past two years. The Fed has asked only about Chase's "policies and procedures" -- in keeping with Greenspan's disinterest in actual bank regulation, in favor of merely monitoring banks' self-described "policies and procedures."   Then a Long Term Capital Management-like collapse takes place, and Fed underlings are set up as the unsavory purveyors of bail-outs, and the "Maestro" keeps his hands clean...

     Another purported venue for Fed openness is the boards of directors of the Reserve Banks, which are supposed to have "public interest" representation. Well, the two new appointees to the board of the Chicago Fed are William Osborn, chairman and chief executive of Northern Trust Corp. (elected by the member banks themselves), and James Farrell, chairman and chief executive of Illinois Tool Works Inc. (appointed by the Board in Washington). A factory CEO -- surely, he'll convey the views of the wider public...

November 20, 2000

     The Federal Open Market Committee on Nov. 15 left the fed funds rate at 6.5%, and issued a statement ostensibly keeping its rate-tightening bias. The wording, however, left most analysts expecting the Fed to remove the bias (well, at least this bias) at its next meeting, on Dec. 19, 2000.

    The maintenance of the status quo, which had been widely expected, leaves us this week with two main items: a review of the first half of Bob Woodward's new book about the Fed, "Maestro," and a you-were-there, second-person account of a recent visit to the Federal Reserve Board, to meet with the Fed's "consumer" governor, Ed ("some of you can call me 'Ned'") Gramlich.

    Bob Woodward, one of the two "fathers" of modern, "gotcha" Washington journalism, has turned soft with this book, "Maestro: Greenspan's Fed and the American Boom." Woodward's trademark is the use of unnamed, anonymous sources. He claims to get stories that few others could; he brags that "people like to talk to celebrities," and notes his own celebrity. When it was announced he was "taking on" the Fed, one expected some new and interesting, if unverifiable, information.

      But the just-released book, with a cover price of $25, is disappointing. Not only because it contains very little new information (Greenspan was a follower of Ayn Rand? Greenspan played the tenor saxophone? Tell us something new) -- the book is also, surprisingly, just another sycophantic send-up of Greenspan, almost a form of apologia, treading lightly on such topics as Greenspan's 1985 defense of Charles Keating's Lincoln S&L, and the Fed's disingenuous denials, through the 1980s, that it was taping the FOMC meetings.

       At page 30, Woodward throws his first "dig" -- and it's weak one, noting that Greenspan mispronounced the name of then-Philadelphia Fed president Edward Boehne. "It is pronounced 'Baney,' rhyming with 'Janey,' and Greenspan had embarrassingly called him 'Boney,'" Woodward writes. Oooh, how embarrassing. What great sources! In fact, most of Woodward's account is taken directly from the minutes of the FOMC meetings, released after a five year delay.

      Woodward begins his "Notes" section with the statement that "[s]ince the story is about politics, money and Washington, nearly all of the sources declined to allow me to identify them by name or position." Funny -- many authors write about politics, money or Washington without relying so fully on unnamed sources. For the prologue, Woodward discloses that "the second source was interviewed on June 2, 2000;" for subsequent chapters, Woodward is more vague: "The first source was interviewed four times; the second source was interviewed five times and the third source was interviewed seven times" (this is for Chapter Two).

       For veering so much from the principles of journalism, you'd expect Woodward to have some scoops. But there are few, very few. At page 35: "In an unusually graphic comparison, [Greenspan] said coming to Washington to advise a president in a free-market economy that might suddenly shift to one with wage and price controls was like a gynecologist being asked to practice proctology." Scatological Greenspan! Getting psychological for a moment: deregulation = gynecologist = womb = good; wage and price controls = proctology = bowels = feces = bad. Where is Gail Sheehy?!?

       More seriously, Woodward's book, at page 47, has Greenspan nodding, siding with then- vice chairman Manuel Johnson, over the objections of chief bank supervision staffer William Taylor,  that Continental Illinois should be allowed to use insured deposits to bail out its First Options subsidiary in 1987. At 52, Greenspan briefs Jim Baker about an as-yet unannounced interest rate hike: "'I'm sorry, Jim,' Greenspan said." At 68, Greenspan "consult[s] with his longtime friend Secretary of Defense Dick Cheney." At 73, then New York Fed president Corrigan plays matchmaker between Citicorp and Saudi prince Alwaleed bin Talal. At 88: "Greenspan hoped that Bush would win reelection in 1992." At 89, another economist "suggested sarcastically that there were parallels with Norman Bates, the mother-obsessed character in Alfred Hitchcock's Psycho." Woodward does not follow this up, nor source it, beyond saying that "most of the information in this chapter comes from the author's interviews with six knowledgeable sources." And on that note, this reviewer closed the book. Because, fortuitously enough, the security guards at the Federal Reserve's headquarters on 20th and C Streets had been instructed to allow admission...

      ...You walk into a small vestibule. To the side is a closet, incongruously labeled "Room 1240," with copies of Fed press releases lining the walls. There is a airport-like metal detector, but it's turned sideways, and not in use today. A security guard slowly types in your name, and prints you out an identification card. This must be returned before you leave, you're told: there will be no after-market in Federal Reserve memorabilia.

       The foyer is cream-colored; to the side is a room with a video game, "You are the chairman." Today, it doesn't work. On either side of the marble staircase up to the second floor are closed wooden doors, with the names of the Reserve Banks over them. On the Constitution Avenue side of the second floor is a long hallway. The first door to the left is a small conference room, not the FOMC room, with its long polished wood table. Here, the table only seats six. The walls are lined with portraits of Fed Chairman: Arthur Burns, Paul Volcker. There are paper napkins with the Federal Reserve seal on them (ah, memorabilia!).

       In comes Governor Gramlich, with two staffers. The staffers take seats along with wall, and Gramlich sits at the table, leaning back in his chair, appearing slightly bored. Gramlich is been appointed the Board's specialist on community lending. His current focus (accounting for most of his 200 media-mentions in 2000) is on predatory lending. He's asked whether the Fed will begin conducting fair lending examinations of bank holding company subsidiary subprime lenders. He jots on his pad. He's reminded that more and more banks are mixing their subprime mortgage data in with their larger mortgage companies and banks. He smiles: "I didn't know that, until I got your letter," he says. Instant rapport. Disarming. He leans back again.

       He's asked about the Fed's inaction on particular deals. There is silence. He is asked about the Fed withholding documents from the public. Here, there is strained silence: Gramlich has also been appointed the Board's denier of Freedom of Information Act appeals. He's asked about discrimination in small business lending. Now he leans forward, to note how difficult it is to judge whether a business is minority-owned or not. He leans back again. He's shown his expertise. This is enough.

       He makes a joke, that a pending regulation will be released before a certain election is decided, then says, "Don't quote me on that." He's asked about the increasing dominance of the Fed's Consumer Advisory Council by banks. He disagrees, saying that the CAC is "very useful" to the Fed, perhaps more useful than the Federal Advisory Council, or the Thrift Advisory Council. He says that the Fed is tightening its budget, and proposes to reduce the CAC from 30 to 24 members, or to reduce its meetings from three to two times a year. The incongruity of the Fed claiming budget constraints is pointed out to him. He notes that he didn’t say "constraint," just "tightening." He jots this down.

      The meeting is ending. Gramlich says he's jotted down "seven points," to inquire into. He's asked what the points are, but declines to say. An eighth point is proffered, but is rejected. He's told of recent statements by his father, at a conference on community lending held in Rochester. Here, he perks up. "What did he say?" he's asked. "That Associates First Capital Corporation is a predatory lender." Surprise. It's a family project, Gramlich says, to get his parents on e-mail. Maybe this will be the trigger. Maybe.

       You are back out on C Street, ten blocks from the Metro. They've taken your identification card, but you still have the Federal Reserve Board napkin. If nothing else...

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November 13, 2000

       Fed watchers expect no interest rate hike, or decline, at the Federal Open Markets Committee meeting of November 15. Citigroup's Salomon Smith Barney unit on November 10 opined that the Nov. 15 meeting "will be the last at which... an inflation bias is retained, if in fact it is retained... To the extent that political events have lessened chances of significant fiscal relaxation, Fed officials may have one more small degree of freedom to relax policy themselves if current financial conditions persist and the slowing in demand intensifies early next year."

       So Citigroup watches the Fed -- but the Fed, apparently, doesn't watch Citigroup. As reported elsewhere on this Web site, the New York Banking Department on November 10 held a day-long public meeting on Citigroup's proposal to buy the controversial subprime lender Associates First Capital Corporation. Among the issues that arose was Associates National Bank's rare Needs to Improve rating under the Community Reinvestment Act, a rating that should require the Fed to prohibit Citigroup from exercising new powers under the Gramm-Leach-Bliley Act. ICP has raised this issue to the Fed, several times, since the deal was announced on September 6, 2000. Citigroup has even filed two applications with the Fed, in connection with the deal.

     ICP has finally received a response from the Fed. In a two paragraph letter dated November 7, the FRB's Associate Secretary writes: "This refers to your letters dated September 25 and October 16, 2000... The only portion of this acquisition that involves the Federal Reserve System notice process is Citigroup's indirect acquisition of two foreign subsidiaries of Associates... Regulation K does not provide for a public comment process... Copies of your comments have been forwarded to Citigroup, the [FDIC, OCC, NYBD] and the South Dakota Division of Banking." The Fed has simply refused to respond to the issue of Associates National Bank's less than satisfactory CRA rating, a case of first impression under the Gramm-Leach-Bliley Act. The Fed, which wanted to be, and now is, the "umbrella regulator," appears to be a holder of Citigroup's red umbrella (logo). There was a "Viewpoint" piece in the American Banker of November 10 (that appeared first in Inner City Press), in precisely this point: the Fed's inappropriate passivity. And it was written before receipt of the Fed November 7 terse non-response...

         The Fed is also reviewing another case of first impression under the Gramm-Leach-Bliley Act, MetLife's application to get into banking by buying a one-branch bank in New Jersey, Grand Bank, N.A.. ICP submitted a timely comment on November 2 (reported on last week's Bank Beat, and subsequently in the American Banker, the National Underwriter, and A.M. Best's BestWire. As set forth below, the Fed is withholding even MetLife's CRA plan, and has (for now) refused to extend the comment period:

Dear Chairman Greenspan, Governors, Secretary Johnson:

     On behalf of Inner City Press/Community on the Move and its members and affiliates, including the Inner City Public Interest Law Center (collectively, "ICP"), this is a supplemental comment in opposition to, containing requests in connection with, the applications/notices of MetLife, Inc. to become a bank holding company by acquiring Grand Bank, N.A. and to become a financial holding company.

On October 5, 2000, ICP faxed to the Federal Reserve System (the "FRB") a request, explicitly under the Freedom of Information Act ("FOIA"), for this application "and for related records including those reflecting communications between the FRS and [MetLife]"... By November 2, no formal FOIA response has been received from the Board... MetLife's Cover Letter requested confidential treatment for "the MetLife Organizational Chart," the "Bank Stock Purchase Agreement," and the entirety of the "Business Plan for MetLife Bank, N.A.," including the "MetLife Bank CRA Plan," among many other things.

On the evening of November 1-2, ICP submitted a letter to the FRB, noting the above, providing certain preliminary comments on the Applications, and requesting an extension of the comment period.

On November 3, the very day the comment period was set to expire, ICP received by fax from the FRB a (late) FOIA determination letter on ICP's October 6 FOIA request, along with a grand total of six previously withheld pages. Nothing about MetLife's CRA plan(s) was attached, nor any of the other responsive information. Secretary Johnson's November 3, 2000 determination letter (the "Denial") stated in pertinent part that "[t]he confidential portion of the application, consisting of approximately three and one-quarter linear inches of documents will be withheld from you in its entirely." Emphasis added. We will return to the propriety of withholding such documents as MetLife's CRA plan, and the FRB Secretary's apparent denial of ICP's request for an extension of the comment period, infra. [ICP has yet to receive any letter to that effect; see infra.] But consider this:

On November 10, ICP received a copy of MetLife's counsel's letter of that date to the FRB (the "Resp."), purporting to respond to ICP's November 2 initial comment. As is relevant here, under the rubric of the "Application Process," the Resp. at 5 states that "MetLife has already provided more than 30 cartons of information in support of the application." Emphasis added.

There is a problem here. The Secretary's November 3 (late) FOIA Denial states that "[t]he confidential portion of the application, consisting of approximately three and one-quarter linear inches of documents will be withheld from you in its entirely" -- but MetLife's November 10 Resp. claims that "MetLife has already provided more than 30 cartons of information in support of the application." The wide discrepancy here is troubling. ICP is submitting a separate FOIA appeal, but is hereby raising this troubling discrepancy to the FRB staff and Governors. This comment should and must be considered timely...

Even before this wide discrepancy arose, it seemed obvious that the comment period would have to be extended, given MetLife's meritless request for confidential treatment for its CRA plan, and even its organizational chart (see supra). For your information, none of the other federal bank regulatory agencies have permitted an applicant to withhold its CRA plan... There is no legitimate basis for the FRB to be withholding applicants CRA plans, when the OTS and all of the other federal bank regulatory agencies routinely (and explicitly, see supra) release this information. The only (illegitimate) basis ICP can infer is that, now that the Gramm-Leach-Bliley Act allows insurance and securities firms to get into banking through the FRB, rather than only through the OTS / unitary thrift charter provision, the FRB wishes to make applications to it even "easier," and most exclusionary of the public, than other alternatives. Of course, that may not be the intention of the Secretary's November 3 FOIA denial letter - the goal may simply have been to purportedly respond to ICP's October 6 FOIA request, even if late, technically before the expiration of the comment period. But the withholding -- of the CRA plan, and of the difference between "30 cartons" and "three and a quarter linear inches" (see supra) -- is inappropriate, and should be reversed (and explained).

As recited above, ICP submitted its initial comment and request to extend the comment period on November 1-2, and received a mere six extra pages on November 3. On November 8, having heard nothing on its comment period extension request, ICP telephoned the Associate Secretary of the Board. Frankly, since ICP had that day learned that the FRB HAD extended the comment period, for another commenter, ICP was calling to confirm that this extension applied to it, as well. But the Associate Secretary stated that ICP's request had been denied, and that a letter to this effect was on its way to ICP. (ICP has yet to receive any such letter, despite conspicuously including its fax number on all correspondence). When asked if it was true that the FRB was extending the comment period for another commenter, the Associate Secretary confirmed this, referencing "some misunderstanding" between the commenter and the Federal Reserve Bank of New York.

ICP certainly supports extending the comment period for other commenters -- in fact, because of the withholding, throughout the comment period, of MetLife's CRA plan, ICP contends that the comment period must (now) be extended for the public at large. But ICP cannot understand how or why its request for an extension of the comment period could legitimately, and under the FRB's prior precedents, be denied. At a minimum, the FRB delayed in responding to ICP's October 6 FOIA request until November 3, the very expiration of the comment period. The FRB's November 3 transmission to ICP (of a mere six pages) included an FRBNY Office Memorandum of September 6, part of the record, which clearly should have been provided to ICP, by the FRBNY in its initial response, and, even after that error, by the Board well prior to the expiration of the comment period. We've highlighted, above, the troubling discrepancy between the "three and a quarter linear inches" alluded to in the Secretary's November 3 FOIA denial, and the "more than 30 cartons" claim made in MetLife's November 10 submission.

The FRB's November 3 fax transmission of a mere six pages included a copy of an October 12 letter from the FRBNY to the Board, stating that it encloses "proposed questions for inclusion in the additional information request to MetLife." These "proposed questions" have been withheld from ICP; ICP has not been provided with a copy of the final "additional information request to MetLife," nor MetLife's response. The final questions are not confidential -- the FRB routinely directs applicants to send a copy of their responses to such questions, which recite the questions, to commenters. ICP anticipates the FRB stating that the additional information request went out after ICP's October 6 FOIA request (which the Board took a month to respond to) -- but, that would be a "post hoc" justification, given the inclusion of the FRBNY's October 12 (that is, post-October 6) letter in the FRB's November 3 fax transmission to ICP. Again, ICP infers that the Board staff simply wanted to close the comment period (on ICP), regardless of the record, regardless of the undisclosed "30 cartons," regardless of the fact that the Applicant would not be prejudiced by the requested extension (since, inter alia, the Board was granting another commenter an extension, and, apparently, MetLife had not even answered the Board's additional information request yet, see supra).

This type of process, on any application, but particular this precedent-setting first application (of its kind) under the Gramm-Leach-Bliley Act, is extremely troubling....

      [For the substantive portion of ICP's supplemental MetLife comment, see this week's ICP Bank Beat].

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

          ...Speaking of the Freedom of Information Act, we received a most intriguing FOIA response from the Fed at week's end. ICP has requested copy of any communications between Citigroup and the Fed concerning Citigroup's proposed acquisition of Associates First Capital, the scandal-plagued subprime lender. According to Fed Associate Secretary Frierson's September 28 letter to ICP, "the staff has searched appropriate Board records and made suitable inquiries, but has found no documents responsive to your request." It would seem, then, that the Fed will prohibit Citigroup for exercising the new powers granted by the Gramm-Leach-Bliley Act of 1999, if and when Citigroup acquires Associates and its bank with a Needs to Improve CRA rating, Associates National Bank. Unless of course, as during the Travelers - Citicorp proceeding in 1998, the Fed is failing to disclose the existence of handwritten notes at meetings with Citi's representatives. We'll be appealing, and will update this matter on this site.

         And speaking of updates, we have two this week, on CRA-protested applications pending before the Federal Reserve Board: one by Countrywide Home Loans, Inc., and another by Queens County Bancorp. (Both were analysis in ICP's CRA Report two weeks ago). Both institutions have sent the Fed responses to ICP's comments, each absurd and insufficient, in their own way. We'll begin with Queens County Savings Bank's ("QCSB's") response:

        ICP focused its September 15, 2000 comment to the Fed on (1) QCSB's Needs to Improve ratings, by both the FDIC and the NYSBD, under the CRA Investment Test; (2) CFS's "Low Satisfactory" CRA Investment Test rating in one assessment area, and "Needs to Improve" ratings under the Lending, Investment of Overall CRA tests in another assessment area; (3) QCSB's plan, announced to investment analysts, to close or sell 15 of CFS's branches; and (4) disparities identified in QCSB's lending record, by HMDA data and otherwise.

      QCSB's Response to the Fed, at 3 states that "[t]he investment test component of the CRA examination has come under increasing criticism from bankers, regulators, and the public." Apparently, QCSB is asking the Fed to disregard its rare Needs to Improve rating under the CRA Investment Test because the Chairman of the FDIC has suggested that the test be reconsidered in 2002. As a back-up argument, QCSB's Response, at 4, claims to have increased its self-described "qualified investments" by slightly less than $2 million. For an institution with over $2 billion in assets, here seeking to acquire an institution with approximately $3 billion in assets, it is far from clear that the eleventh hour investment of less than $2 million results in any material "upgrade" from a level that both the FDIC and NYSBD found inadequate.

      On September 25, 2000, QCSB filed with the Securities and Exchange Commission (the "SEC") a Form S-4 which states, at 43-44, that ICP "has submitted a letter to the Federal Reserve Board indicating its opposition to the notice submitted by Queens with respect to the merger on the grounds of Queens County Savings Bank's and CFS Bank's Connecticut branches' CRA compliance. Queens and Haven believe that such opposition is without merit, although we cannot assure you that such opposition will not delay or otherwise affect our obtaining regulatory approval of the merger. As a result of the most recent Federal Deposit Insurance Corporation and New York State Banking Department examinations, Queens County Savings Bank received an overall CRA compliance rating of 'Satisfactory,' and as result of its most recent OTS examination, CFS Bank received an overall CRA compliance rating of 'Satisfactory.'"

       QCSB does not mention the branch closing / selling issues (QCSB told investment analysis it will CLOSE or sell 15 branches, but has now told the FRB, in a non-binding fashion, that it really meant "sell") in its S-4. Nor does QCSB's (partial) disclosure in its S-4 note that QCSB received rare "Needs to Improve" ratings under the CRA Investment Test, from both of its regulators; nor does it disclose that CFS Bank received an overall "Needs to Improve" CRA rating for the State of Connecticut (and a "Low Satisfactory" under the Investment Test, in New York). QCSB affirms that both banks find the issues ICP has raised to be "without merit."

       QCSB's S-4 does not mention the CRA issues (including NTI sub-rating, and statewide rating in Connecticut) as among the factors that the boards of directors of either QCSB or Haven considered. We repeat the question we are asking in the Citigroup - Associates proceeding: how can it be, even given the one "pro-CRA" provision of the Gramm-Leach-Bliley Act, that adverse CRA ratings are not even "material"? We will be pursuing this...

      On the "branch disposition" issue, QCSB states that "the CFS Connecticut / New Jersey supermarket branch locations do not comport with QCSB's long-term strategic planning." Response at 4. But the American Banker of June 29, 2000, at 14, reported: "In a conference call with analysts Wednesday, Mr. Ficalora said that the post-merger company would sell or close Haven's 15 supermarket branches in New Jersey and Connecticut. Though he did not rule out an eventual expansion into the attractive New Jersey and Connecticut suburbs, he said these branches would simply take too long to become profitable without the support of a traditional branch network. 'We cannot continue those operations and provide for our shareholders the kind of returns they expect,' he said. 'We're not all that patient.'" Emphasis added.

      Mr. Ficalora's references was to "sell[ing] or clos[ing]." Mr. Ficalora's reasoning was not QCSB's "long-term strategic planning" -- he did not say that QCSB has no interest in being in those communities "long term," rather that QCSB is "not all that patient." Safety and soundness is one thing; closing or selling 15 of the target's branches due to a lack of "patien[ce]" is something else. The Response's vague and non-binding statement about not "currently plan[ning] to close these locations" is just that: vague and non-binding. The mere "provi[sion of] details" about the "disposition" of branches, after the fact, does not resolve or address this issue.

       So: on QCSB's application, the Fed is faced with an applicant with current "Needs to Improve" ratings on the CRA Investment Test from both of its primary regulators, seeking to acquire a bank which, in one of the states in which it does business, made, as of its most recent CRA exam, no community development loans, and no CRA qualified investments, resulting in a CRA rating for that state of "Needs to Improve." The required outcome here, on the current record (even as supplemented by QCSB's and Haven's September 26, 2000 submissions) is clear.

       And now Countrywide -- oh, Countrywide! On a central issues raised by ICP's timely September 12-13, 2000 comments to the Fed (and OCC) -- that protected classes who apply to the Countrywide conglomerate are disproportionately served (at presumably higher rates) by Countrywide's "subprime" Full Spectrum unit -- Countrywide's response is that since ICP purportedly "admitted" that it "does not know what the actual interest rates" of Full Spectrum are, its claims "should be questioned." Response at 3.

       Countrywide's application to the Fed, at Section II(C)(2)(e), states that "Full Spectrum offer a wide range of competitively priced, fix- and adjustable-rate loan products to borrowers who may have been turned down for traditional conforming credit-grade loans... The company... is undergoing steady expansion efforts." Emphasis added.

       That Full Spectrum is a higher than normal (prime) interest rate lender is not disputed. Full Spectrum is identified on HUD's 1998 and 1999 lists of subprime lenders. That ICP does not know that precise interest rate on each loan made by Full Spectrum is both understandable and irrelevant. The public does not have access to interest rate information on all of Full Spectrum's loans. Significantly, Countrywide's purported response includes no information about the rates charged by Full Spectrum. This information should be requested by the regulators. Nor does Countrywide's Response describe any fair lending safeguard procedure whereby it checks or assesses the correlation of protected class status and interest rate and/or fees. As such, Countrywide's submission evades the key fair lending / consumer compliance issues raised in ICP's comments, and in this proceeding.

      The same National Mortgage News article that Countrywide (cynically) cites in its defense confirms Countrywide's inattention to (or lack of understanding of) the need for fair lending safeguards, including review of race and rates, reporting that "[a] Countrywide official did not seem concerned with [ICP's] opposition. 'I'm not sure I understand what the concern is all about,' said the official." For the record, this "concern" is that, as demonstrated in ICP's previous submission, Countrywide's subprime lending unit, Full Spectrum, disproportionately targets protected classes with its higher than normal (prime) interest rate loans, and that, as evidenced by Countrywide's September 27 submission, Countrywide appears to have few fair lending safeguards in place.

       On the second issue raised by ICP's comments -- the proposed one-city CRA assessment area -- Countrywide is also evasive. Its purported response, which it was required to send to ICP, refers to "the confidential business plan." Resp. at 3. ICP has requested access to this document, on which Countrywide now bases its response to ICP's comment. ICP's formal FOIA request to the FRB has yet to be ruled upon. While, beyond referring to a document for which it is requesting confidential treatment, Countrywide's only response is that "Effinity Bank has not yet made any loans," the application to the Fed states that "the Bank's lending territory will be nationwide" (FRB App. at 36, emphasis added) and that "Effinity Bank anticipates that customers will contact the Bank primarily through the Internet or by mail or telephone" (Fed App. at 17). These statements militate against the proposed one-city CRA assessment area; the highlighted statement in the FRB application is quite different from the evasive approach adopted in the Resp.. On this issue as well, the applications should not be approved.

       Despite having evaded both issues raised, Countrywide begins its Response with a request that "the opposition... should not be considered by" the Fed.

     For or with more information, contact us.

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

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