Inner City Press Federal Reserve Reporter Archive #4 (Sept. 27-Dec. 31, 1999)

Inner City Press' Federal Reserve Reporter

Sept. 27 - Dec. 31, 1999 (Archive #4)

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December 27, 1999

“In light of market uncertainties associated with the century date change...”. This was the key phrase from the FOMC’s Dec. 21 statement, leaving the bias at neutral. There is a virtual consensus that the FOMC will move to raise rates in early 2000 (the FOMC meetings are on Feb. 1, March 21, May 16 and June 27). The Fed greatest fear seems to be that 4% unemployment is simply not enough.

The politics of renomination: Clinton spokesman Joe Lockhart on Dec. 21 strongly implied that Clinton will reappoint Alan Greenspan as Fed chairman, if he wants four more years. Greenspan’s term expires in June, 2000. George W. has already urged Clinton to reappoint Greenspan, and John McCain in a debate earlier this month said “If Mr. Greenspan should happen to die -- God forbid -- I would... prop him up and put a pair of dark sunglasses on him and keep him as long as I could.” Ugg... Gore has issued similar gushings. Bradley has stated that there are “a lot of other people in the country who could also do a good job.” Sen. Byron Dorgan (D-ND) said Greenspan “was consistently wrong about how low unemployment could go, and he was consistently wrong about economic growth. I think my Uncle Joe could have done a good job during this period.”

Meanwhile, the Fed on December 23 circulated a draft of its proposed survey of banks on the profitability of Community Reinvestment Act lending. Under the Gramm-Leach-Bliley Act, signed into law by President Clinton on November 12, the Fed must finish and publish the results of its survey by March 15, 2000. The Fed will be asking banks to return the survey by February 29, 2000.

The Fed’s draft asks, among other things, whether banks instituted their “special CRA programs” to “minimize the likelihood of CRA protests in applications for mergers or acquisition,” or to “improve [their] public image.” The Fed also proposes to leave it up to the banks to estimate their return on equity from “CRA” and “non-CRA” lending.

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December 13, 1999

So what’s going to happen at the Dec. 21 FOMC meeting? Most have assumed that the Fed would not raise rates, ten days before the Y2K D-Day. But Governor Kelley is quoted in Barron’s that “People have said that Y2K takes the Fed completely out of the picture, but that’s too strong a statement.” Citigroup’s Solomon Smith Barney, in its weekly Comments on Credit report, predicts that the Fed will raise rates by 50 basis points in the first part of 2000. After Dec. 21, there’s no FOMC meeting until February...

The Fed’s open government practice continue to deteriorate. Even trying to discover the bases of the Fed’s public position becomes difficult. In early November, the GAO released a critical study of the Fed’s enforcement of fair lending laws, including a letter to the GAO from Alan Greenspan, stating that the Fed has considered but adopted a policy against examining bank holding company subsidiaries for fair lending compliance. In response to a Nov. 8 Freedom of Information Act request for documents reflecting the adoption of this Fed “policy,” the Fed responds a month later, on December 8, further extending its time to respond, to Dec. 22, “in order to consult with another agency or with two or more components of the Board having a substantial interest in the determination of the request.” It was bad enough that the Fed claimed to have a “policy” that it had never made public (or taken comments on). But to delay more than a month in even providing documentation of the policy is worse.

While the current Governors are understandably constrained for issuing endorsement in the upcoming Presidential election, it’s worth noting that previous Chairman Volcker on Dec. 7 issued a statement endorsing Bill Bradley (AP, 12/7). Now Citigroup’s Bob Rubin came out for Gore on the same day. George W. says Greenspan should be renominated as Chairman, while Clinton and Gore are silent, and Bradley cast one of the few votes against Greenspan’s initial installation as Chairman.

On Dec. 6, long after the close of the Federal Reserve’s comment period on its proposal to amend the Equal Credit Opportunity Act regulation to allow lenders to monitor their fair lending performance, Gramm and nine other Republicans on the Senate Banking Committee wrote to the Fed, opposing this change. While virtually all fair lending advocates and civil rights groups, and Attorney General Reno, are urging the Fed to adopt this change, Gramm and his gang write: “[A] creditor cannot discriminate against an applicant based on race, color, sex, religion and national origin if the creditor never collects such data.” It’s a ridiculous comment, at least as pertains to applications taken in person. Few dispute that discrimination has taken place in the U.S., during the time that creditors were prohibited from collecting this data to monitor their fairness.

Gramm’s letter quotes from the Federal Reserve Board’s oft-repeated statement that “HMDA data does [sic] ‘not account for the possibility that an institution’s outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract...’”. But that’s only a problem if the institutions are reporting denial rates. For small business loans, the CRA regulation only provides for reporting loans made (and not applications taken, and therefore not denial rates). Gramm and his gang say they “believe that such data collection actually provides a disincentive for institutions to conduct such outreach efforts.” Again, that would only even arguably be true if banks were reporting denial rates, which they do not, for small business loans.

Note: the Fed most recently used the language that Gramm quotes in the Fed’s Dec. 6 approval of HSBC - Republic: therein, the Fed states that “HSBC’s mortgage originations in LMI and minority census tracts and to African-American and Hispanic applications, as a percentage of its total mortgage lending, are lower relative to the aggregate and relative to the demographics of the markets in which HSBC operates.” Order, n.35. The Fed then wheels out the language saying that this does not indicate discrimination, because HMDA data do “not account for the possibility that an institution’s outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract...”. But both HSBC’s actual loans made to, and the applications it receives from, protected classes are below industry aggregates -- credit histories and denial rates have nothing to do with it.

The Republicans’ letter emphasizes that the Federal Reserve Bank of Atlanta has opined that only consumers “who believe they will benefit are likely to product such data” -- that is, to fill in the forms. For mortgage lending data, institutions are required to record this data, including from surname or visual observation. In any event, what carries more weight: a comment from one of the Fed’s Reserve Banks (a non-governmental entity that is in fact owned by the commercial banks which hold its stock), or the position of the Department of Justice and the other bank regulatory agencies, all of whom support this amendment?

It will be interesting to see if the Fed, which now routine rejects comments from community groups if they are received even one day after the close of a comment period, will in fact consider Gramm’s letter, which was submitted long after the close of the comment period.

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November 29, 1999

The Fed has raised rates three times this year, yet the Dow stays above 10,000, and now hovers around 11,000. On November 26, the Commerce Department reported that in October, personal spending increased by 0.6%, and personal income by 1.3% -- both double the numbers expected. Eyes turn toward the December 21 meeting, where these Commerce Department numbers will be balanced against the much hyped possibility for disruption ten days after that FOMC meeting.

Meanwhile, NYS Labor Department figures show that in October, the unemployment rate in Bronx County stood at 8.5%, higher than NYC’s overall rate of 6.8%. Conditions in place like Bronx County, however, may not be what the Fed Governors are most concerned with.

The FT Asia Intelligence Wire of November 22 ran a piece by HSBC Markets’ Senior Treasury Marketing Manager for South India, Rahul Badhwar: “The Fed Did Move, The Market Did Snooze.” This HSBC-er says that “[o]ne event to look forward to is the December 21 meeting of the Fed Open Market Committee. However, the adoption of a neutral bias at last Tuesday’s FOMC means it is unlikely anything dramatic will come out of the December 21 meeting except perhaps a whole lot of Christmas cheer.”

HSBC itself is hoping for some pre-Christmas cheer from the Fed, in the form of approval for its application to acquire Republic New York Corporation. The Fed continues to refuse to provide the public with any of HSBC’s submissions concerning the Cresvale notes scandal at Republic. Earlier documents that were withheld by the Fed have supposed been “reviewed de novo” by Fed Vice Chairman Roger Ferguson. His November 23 Freedom of Information Act appeal denial says: “On review in connection with your appeal, I have confirmed that the information withheld from you under exemption 7(A) was compiled for law enforcement purposes, and that is disclosure could reasonably be expected to interfere with enforcement proceedings.” Question: what enforcement proceedings is Mr. Ferguson referring to? The Fed has done nothing, to date, about the Cresvale notes scandal (nor about the Bank of New York Russian money laundering scandal). Mr. Ferguson also writes that “I have also confirmed that this information was required to be submitted to the Board in accordance with Regulation Y, and that its disclosure would likely impair the Board’s ability to obtain necessary information in the future...”. Question: if the information is REQUIRED to be submitted, it’s hard to see how disclosure to the public would allow future applicants to skirt this supposed required submission. The new Vice Chairman’s open government policies are emerging, through the boilerplate, and it’s not pretty.

The Fed finally provided ICP with a partial response to a months-old FOIA request for documents about the Fed’s lobbying about financial deregulation legislation. The response is decidedly interim, consisting of little more than a half-redacted summary of the OCC’s OTS’, SEC’s and FDIC’s positions on H.R. 10, written for the Board by Winthrop Hambley. Also in the partial response was a copy of DOJ’s 1994 memo to then-Comptroller Eugene Ludwig, holding that the regulators have no CRA enforcement powers beyond denying mergers. An inference: the Fed was chiming in to Congress that the divestiture of subsidiaries if CRA grade falls below Satisfactory provision in H.R. 10 was illegal. The provision was dropped, in the “compromise” bill the Administration agreed to on October 22, and that the President signed earlier this month.

The other documents have been heavily redacted by the Fed. A typical redaction: “In endorsing the LaFalce bill, Treasury also explicitly backed its provisions on CRA. These provisions are identical to those [full line deleted] late last year.” It’s hard to see any legitimacy to such a redaction; ICP will be appealing once it finally obtains the balance of the Fed’s response.

November 22, 1999

The Fed raises rates, and the stock market continues to climb. The two-word zap -- “irrational exuberance” -- did little to slow it; the announcing of the Fed’s “bias” at the end of FOMC meetings has little effect either. Greenspan has asked Vice Chair Ferguson to speed up with study of alternatives to the bias announcements, which is currently due next spring. Meanwhile, the Senate Banking Committee declined to act on the House bill to extend the Humphrey-Hawkins requirements for twice-yearly Fed testimony on the economy. One of the few windows -- no matter how staged or heavily-curtained -- into the Fed is closing. A strange Congress indeed: give the Fed more powers, but refuse to re-enact even the few oversight mechanisms that currently exist.

On November 15, the day before the FOMC meeting, Greenspan told the American Council of Life Insurance that while the Fed will at times defer to functional (that is, state) regulators, it and it alone is the “umbrella regulator” of the new behemoths. The Fed’s current portfolio under its umbrella is having a rocky end-of-year: money laundering (Bank of New York, Citigroup, etc.); mis-reporting (Chase); capture by rogue traders (Republic New York Corporation and Republic New York Securities Corp.).

Interestingly, the Fed has still not acted on Chase’s application to acquire Hambrecht & Quist. Chase has had to extends its offer from the investment bank (Reuters 11/19) -- the offer can’t closes until Chase receives regulatory approval. Not to worry, though: under the just-signed Gramm-Leach bill, holding companies won’t even have to apply to the Fed for prior approval of acquisitions like this, going forward. (Even prior to effective date, note that even companies under active investigation just lurch forward with acquisitions -- case in point: Bank of New York’s November 16 announcement it will buy Institutional Securities Trading). Prediction: it’ll be a free-for-all, and shadowy Fed interventions like the Long Term Capital Management bail out will become more frequent.

Strangely unprofessional is the Fed’s proposed methodology for the study of “CRA loan” default rates that Senators Gramm and Bennett squeezed into the financial deregulation bill. The Fed proposes to conduct a poll of some 500 banks, expecting a 20% response rate, asking the banks open-endly what their default rates are for either borrowers with incomes 80% of or below median income, or for undefined “special loan programs.” Such a methodology would allow banks to characterize many of their defaulting loans as “CRA loans,” and to include high interest rate subprime loans for which the banks don’t even seek CRA credit. Fed and Treasury Department staff are meeting on November 22. While the GAO’s recent study critical of the Fed (see last week’s Report, below) was virtually unreported by the press, watch in Spring 2000 for the Fed’s unscientific study of “CRA default rates” to be given a lot of play.

The Fed’s inattention (and resistance) to CRA is nothing new: the Houston Chronicle (11/12) reports that the Fed “hasn’t issued a negative rating for the Texas banks its supervises since 1993.” The Clinton administration’s one CRA “win” -- that only banks awarded CRA ratings of “Satisfactory” or higher can buy insurance companies and exercise new powers -- appears more meaningless by the day.

A final Fed / lack of transparency note: the Fed ignored an April 12, 1999 Freedom of Information Act request for documents reflecting its communications concerning financial modernization legislation for seven months, until November 17, after the bill was signed. The Fed’s November 17 letter now promises another “interim response,” with over 200 pages withheld

November 15, 1999

The new Federal Reserve Board “shadow” governor, Citigroup’s Sandy Weill, proclaimed on November 14 that it is unlikely the FOMC will vote to raise interest rates on November 16.

The titular Fed governors triggered the final repeal of the Glass Steagall Act in April 1998, by meeting privately with Weill and Citibank’s John Reed, and promising to bend the laws for them, and approve the first insurance - banking merger, of Travelers and Citibank. The Fed then refused to give the public any documents about these meetings with Weill and Reed, claiming that the notes were the “personal property” of Fed staffers. The Fed approved the merger, with a wink: Citigroup would have to sell of its insurance underwriting operations, unless Glass Steagall was repealed in the next two to five years.

Late on October 21, 1999, when it looked like Glass Steagall might survive another assault on it by the industries’ combined lobbying dollars, the Fed’s general counsel stepped into the breach, and suggested the final compromise. Clinton signed the law on November 12. No need to sell the rest of Travelers Property Casualty -- in fact, Citigroup will probably now buy the portion of it it doesn’t already own.

But perhaps, as some claim, the Fed was looking out for consumers, and for the public interest, in its incessant lobbying to change the law. Ex-titular Governor Alan Blinder, in a November 9 speech in New York, said that “there is very little, if any evidence of cost savings” attributable to expanding into new lines of business, and that he’s “skeptical” that any cost-savings would be passed to consumers. Ah, but his days are through. This is the Sandy Weill era at the Fed, and it’s not likely to change any time soon. Clinton renominated Greenspan; Republican frontrunner George W. Bush has opined, “I think Alan Greenspan has done a good job, and I think the president ought to reappoint him.” (N.Y. Post, 11/8/99). Anyway, the Vice Chairman’s a fish in the same kettle. The WSJ of November 8 quoted Roger Ferguson as saying the Fed has no intention of raising margin requirements, which currently stand at 50 percent. It may be irrational exuberance, but those in power sure like it.

Gov. Gramlich on November 9, in a speech at St. John’s University, said that recent revisions to the GDP figures “lend greater credence to the fact that there may have been a productivity upturn” in the U.S.. The day before, in Washington, Gramlich voted to approve J.P Morgan & Co. to acquire 17 percent of the TP Group, Grand Cayman, Cayman Islands. Sure, running an off-shore stock exchange may theoretically be closely related to banking -- but so were Citibank’s operations for Salinas, and its other activities discussed in the money-laundering hearings on November 9.... Check ICP's Bank Beat (click here to go there) for more.

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October 18, 1999

The master(s) of 20th and C Streets reach out to Congress, reach out to Wall Street, set policy, rates and even write the laws. On October 14, Fed Chairman Greenspan said he was “very pleased” he’d reached a “mutually satisfactory agreement” with Treasury Secretary Summers on financial modernization legislation. Then the Fed forwarded specific legislative language to Capitol Hill, where it was embraced. Senate Banking Committee Chairman Phil Gramm (R-TX) said “Anything that Alan Greenspan can agree to, I can live with.” Houston Chronicle, Oct. 13. Apparently, the rest of us don’t have that choice -- we just HAVE to live with it.

When elected legislators so openly defer to technocrats who’ve made their livings selling predictions to Wall Street, democracy suffers. The critique is echoed from unexpected quarters: Wall Street Week’s Louis Rukeyser told Reuters this week, “For myself, I favor a more modest and open Fed, with less of an inclination to dominate the financial news.”

In terms of Fed news this week (beyond the obvious -- Dow down 266 points on Oct. 15, following Greenspan’s Oct. 14 speech), Dallas Fed president Robert McTeer on Oct. 13 broke this news; “I’m happy with the term ‘new era.’” Isn’t that the name of an athletic shoe? On Oct. 12, the Kansas City Fed hyped its new Center for the Study of Rural America -- this after the Board has approved numerous mergers by banks with declining small farm lending (most recently, Firstar). Unreported by the media is the Fed’s (non-) policing of the banking / commerce firewall -- on Oct. 12, Citigroup revealed in an SEC filing that it owns 14.1 percent of the stock of Rex Stores Corp (RSC.N). Sounds like banking and commerce to us....

On interest rates, speculation continues to mount that the Fed will be raising rates in November. On Oct. 15, Clinton’s National Economic Council Director Gene Sperling was asked about the just-released Consumer Price Index numbers. Sperling responded that “the administration, as others, will be closely monitoring the inflation numbers... I think you have to take each piece of information one at a time...”. Pundits say the Fed / Greenspan are looking at burlap, polyester, cotton, steel, oil and lead -- the components of the Industrial Materials Price Index developed by Geoff Moore, Greenspan’s economics professor at NYU in Greenspan’s Ayn Rand days. At a Q and A after his February 1994 Humphrey Hawkins testimony, Greenspan said that “anything Geoff Moore does I follow very closely, because he taught me Statistics 101 in college.” Democracy 101 (i.e., that administrative agencies don’t write legislation, Congress does) was apparently not in the curriculum, or was drowned out by Ayn Rand. Atlas Shrugged, anyone?

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

* * *

October 11, 1999

So the Fed on October 5 left interest rates alone, but announced that it “adopted a directive that was biased toward a possible firming of policy going forward.” Pundits immediately hit the Fed’s “bias” statement as “confusing” -- that’s the word used by ex-Governor Sue Phillips on Reuters television shortly after the announcement. The Fed’s now set up a “Working Group on the Directive and Disclosure Policy,” lead by new Vice Chairman Roger Ferguson.

There seem to be some loose lips on the FOMC. On Oct. 5, libertarian economist Allan Melzer, chair of the so-called Shadow Open Markets Committee, told CNBC that “there are a lot of people on the Fed now who think that it was a mistake to start announcing the bias.” While all these for-profit Fed watchers love to name-drop to imply “access,” events this week brought up another connection between the Federal Open Markets Committee and its “Shadow.” Another “Shadow” member, George Benston, issued a warmed-over report for the Cato Institute, calling for the repeal of the Community Reinvestment Act. Cato’s spokesman, Ed Hudgins, said Cato deliberately released the report during the conference committee: “We’re hoping that this paper will for the CRA’s supporters to put up or shut up,” he said. But the study is little more than a rehash of Benston’s own previous writings. Five of the six first footnotes cite to -- Benston himself. Benston was anti-CRA even before the law passed in 1977. In fact, it was based on Benston’s “the myth of redlining” writings in the 1970s that Senator William Proxmire blocked Benston’s rumored nomination, heavily supported by S&L kingpin Charles Keating, to the Federal Home Loan Bank Board in 1986.

Another historical footnote: Fed Chairman Alan Greenspan (then a private citizen) and Benston collaborated in 1984 on a Keating-funded “study” pitching the great advantages of letting savings and loan associations make “direct investments.” As noted, that one cost the taxpayers hundreds of billions of dollars...

Fast forward to 1999: Sen. Trent Lott says he won’t bring a bill to the Senate floor that Fed chairman Greenspan does not support. (Greenspan, of course, claims that neither he nor the Fed are “political, see below).

Here’s some non-profit punditry: the Fed probably WILL raise rates at its November meeting, as the bond market(eers) are demanding. Raising at the December meeting is unlikely, due to the specter of Y2K. The Fed dropped rates 75 basis points last year after the LTCM bailout; only two of those three ticks have been reinstituted this year. Expect another rate hike in early 2000, before the presidential campaign really hits up.

In mid-August, the five Fed Governors (along with other government officials) filed their 1998 financial disclosures. News flash -- they’re all millionaires. The two academics, Govs. Gramlich and Meyer, both listed their largest asset as College Retirement Equities Fund Accounts. The longest report was that of Gov. Ed Kelley: 35 pages, listing everything from stocks to municipal bonds to a partnership invested in undeveloped acres in Harris County, Texas. Kelley’s wife’s invested in Fannie Mae; Gramlich’s invested in Freddie Mac. Oppenheimer (make that, “CIBC Oppenheimer”) shows up for Govs. Ferguson, Meyer, and Greenspan. It’s Chairman Greenspan who seems most scupulously to avoid investment in interest-rate sensitive stocks. The American Banker of Sept. 29 quoted the Fed’s spokesman that Greenspan has “chosen to go beyond statutory requirements.”

But the Fed doesn’t comply with, much less “go beyond,” the statutory requirements of the Freedom of Information Act. Inner City Press has received an October 5 Fed letter, stating that “On September 7, 1999, the Board of Governors received your request pursuant to the Freedom of Information Act concerning HSBC to acquire Republic New York Corporation. We are extending the period of our response until October 20, 1999... in order to consult with another agency or with two or more components of the Board having a substantial interest in the determination of the request.” So while the Fed should have responded in ten days, it’ll now be more than forty.

Also, in terms of the Fed staff’s “insulation” of the Governors from the sturm and drang of such issues as discrimination in lending, the Fed’s Associate Secretary, in an October 7 letter, states that he had declined to present to the Board information showing that participants in a bank merger the Fed approved on August 30 (First American/Deposit Guaranty and AmSouth) on September 29 settled discrimination in lending charged by the Department of Justice. Rubber stamp with no rear view mirror.

October 4, 1999

Leading into Tuesday’s FOMC meeting, various pundits opine that the Fed is torn between doing a rate hike to support the dollar, or not doing one, so that the stock market doesn’t continue to decline. Friday’s National Association of Purchasing Management’s report of increased production and component cost in September, and the Commerce Department’s report on August consumer spending (up to $6.253-trillion, a 0.9% annual rate) led analysts to retract their “no-rise” prediction, and to acknowledge unknowing.

Meanwhile, Chairman Greenspan on Thursday engaged in a “Net chat” from Minnesota, and Governor Meyer on Friday told a Chicago Fed conference that the Fed is concentrating on 30 U.S. banks -- one third of them subsidiaries of foreign banks -- the so-called “large, complex banking organizations, LCBOs.” Some focus: Bank of New York was money laundering, and Fleet and BankBoston as well; Republic was mis-valuing portfolios for Martin Anderson, LTCM was blowing up. NY Fed President McDonough announced with glee that LTCM will probably not continue business, at least not under the same name. Hey -- different name, same game.

On September 29, the Senate confirmed Governor Ferguson as vice chairman. New vice chair, same game -- until we see different. On September 27, Jiji Press quoted sources confirming that ex-Fed Chair Volcker will joint LTCB (note: that’s a different name than LTCM, above) as senior advisor, once U.S. investment group Ripplewood Holdings LLC is given the bank by the Japanese government. Old names, same game (okay, enough of that theme...).

The Fed has approved to itself an operating budget of $387.6 million for 2000-2001, up 4.9%. The apparent unconcern about inflation is compounded by the Fed’s statement that the increase does not take into account the extra costs that would be associated with the possible passage of the S. 900 financial “modernization” legislation -- Fed staff told reporters on September 7 that these costs could be “substantial,” something the Republican majority on the conference committee has not mentioned, despite their stated focus on government spending.

At the Fed’s upcoming (Oct. 21) Consumer Advisory Council meeting, on the agenda is “subprime lending.” One wonders what sort of generic “backgrounder” is planned, while the Fed continues to refuse to take action on its largest banks buying mortgage-backed securities issues by the worst of the subprime / predatory lenders (such as Delta Funding, whose securities Republic National Bank has continued buying, even after Delta was charged with discrimination by the NYS Attorney General).

On “straight-forward” fair lending, the Fed on August 30 approved the AmSouth - First American/Deposit Guaranty merger, saying there were no fair lending problems. Then, on September 29, the Department of Justice announced that it had filed and settled a fair lending suit with Deposit Guaranty and First American. Earlier in the week, the GAO issued a report calling on the Fed to be more “transparent” in its decision-making on merger applications, and Chairman Greenspan had said he agrees. But where’s the transparency?

The height of opaqueness is the Fed’s processing of HSBC’s application to acquire Republic. The proposal’s in shambles, due to Republic’s involvement with Martin Armstrong, who has just been indicted for a $1 billion fraud on Japanese investors. Republic’s securities unit did 90% of its futures business with Armstrong, and reportedly issued letter to Armstrong to help him misrepresent the values of accounts. The whole thing calls into question not only Republic’s oversight of its securities unit, but also the Fed’s supervision of this large bank holding company and its Section 20 subsidiary. To date, however, the Fed has not released to the public ANY submission by HSBC or Republic on this issue. If the past is any guide, this entire important issue could be relegated to a footnote is whatever Order the Fed ends up issuing. Meanwhile, Bridge News reports that the Fed may take longer than expected to act on the application by Bank of New York to acquire Royal Bank of Scotland’s RBS Trust unit, due to inquiries into Bank of New York’s involvement in Russian money laundering. (Note that last week, Moscow Narodny Bank finally withdrew its application to the Fed to open a representative office in New York). But the Fed approved Fleet - BankBoston (both of which are reportedly involved in the Russian money laundering scandal), and did not “reconsider” the approval prior to the October 1 closing of that deal. In fact, the Fed has yet to rule on commenters’ timely requests for reconsideration on that deal. The Fed sets a time (fifteen days) for requesting reconsideration, but does not abide by the timelines to rule on the requests.

Neither does the Fed abide by the timelines of the Freedom of Information Act. On August 10, Inner City Press sent nearly identical FOIA requests to all four federal bank regulatory agencies, about the Community Reinvestment Act. All three other agencies have already responded, with boxes of documents. The Fed has still not responded. Maybe they’re tied up with monetary policy...

September 27, 1999

On September 20, the Fed put out a press release announcing its appointment of Chairman and Deputy Chairmen of its Reserve Banks for 2000. The Fed claims that its appointments to the Reserve Bank boards of directors represent consumers, the public, a full range of views. Fed Chairman Greenspan has acknowledged that the New York Fed is slanted toward the financial services industry, given the NY Fed’s role in executing the Fed’s monetary policy strategies. That’s an understatement--

Appointed as Chairman of the Federal Reserve Bank of New York is Peter G. Peterson of The Blackstone Group. Blackstone is a privately-held investment and advisory colossus, including “hedge fund investment.” Financial Times, June 11, 1999, at Page 2. American Insurance Group (AIG) acquired seven percent of Blackstone in 1998, for $150 million. Together, Blackstone and AIG are “advising Asian companies on restructuring and M&A strategy.” Business Wire, June 11, 1999. Blackstone owns waste management and oil refining companies, and its “hedge fund business manages more than $1 billion for high net worth individuals.” Financial Times, supra. It’s good to know that “the public,” and consumers, are represented on the board of the New York Fed.

Just south, on the Philadelphia Fed, the COO of UM Holdings, Ltd., has been re-named Chairman. UM Holdings is another, smaller investment company -- it recently put Eastwind Airlines of Greensboro, North Carolina up for sale, and last year owned over half of the stock of Cybex International, “a leading strength and cardiovascular equipment company.”

Down at the Richmond Fed, the Deputy Chairman is a partner of the Covington & Burling law firm, who is also co-CEO of Lockhart Caribbean Corporation, which bought insurance companies in the British and U.S. Virgin Islands in August, 1998, and a “senior board member” of Penn Mutual Life Insurance Company. Even the few windows for public and consumer input into the Federal Reserve System are dominated by corporate interests...

Meanwhile, the Reserve Bank presidents gave talks all over the country on September 21: Minneapolis Fed president Stern spoke in Billings, Montana; St. Louis Fed president Poole spoke before the “Money Marketeers” of New York University in Manhattan; San Francisco Fed president Parry spoke to a conference in San Jose, California, and NY Fed president McDonough spoke at a press conference in New York about banks’ preparations for Y2K. Meanwhile, on Saturday, September 18, Fed chairman Alan Greenspan was hob-nobbing at investor Teddy Forstmann’s bash in Aspen, Colorado, along with, among others, Oprah Winfrey. NY Daily News, Sept 23, 1999.

Two days later, back in D.C., Greenspan joined three other Governors in unanimously approving an application by Canadian Imperial Bank of Commerce to form what the Fed described as a “bank that would deliver banking products to its customers solely through a variety of electronic delivery channels.” While some have characterized CIBC’s proposal as being for an “Internet bank,” mid-way through the CIBC Fed proceeding, CIBC committed that “customers would be able to open accounts, apply for loans, or make deposits at the Bank only through one of the Bank’s pavilions,” which are currently slated for Winn Dixie supermarkets in Orlando and Tampa, Florida. Strangely, these “pavilions” will consider of a computer terminal with dedicated access to a CIBC Internet web site. But customers will be precluded, according to the Fed, from access this web site from home or work, and applying for loans. How and if the Fed will police this counter-intuitive business model remains to be seen... Why base a bank around a web site, if you’re not going to allow people to apply for loans over the web site? The Office of Thrift Supervision recently fined a savings bank for deviating from the business plan it had submitted to the OTS to get its charter. We’ll see whether the Fed takes the commitments it obtains and memorializes in approval orders as seriously... And/or whether the Fed requires public notice when and if CIBC decides to change its strangely limited business model...

But there seems to be very little follow-up on Fed approval orders. Weeks ago, the Fed approved Fleet’s application to acquire BankBoston. The deal has not yet closed. Now, it is revealed that Fleet held accounts for Benex, the company at the heart (for now) of the Russian money laundering scandal, and that BankBoston wired money to Benex’ accounts. Benex official Peter Berlin and his wife, Bank of New York employee Lucy Edwards, both had accounts with a Fleet branch in upstate New York. USA Today of September 23 quoted federal investigators, in condition of anonymity, that some of the transfers at Fleet were as high as $200 million, and that BankBoston (and J.P. Morgan) have started their own internal investigations. One might assume that the Fed would now stay and reconsider its approval, pending the outcome of the investigations. But one would probably be wrong -- the Fed of late is not even purporting to use its full regulatory powers to get to the bottom of the increasing number of scandals swirling around its top twenty bank holding companies. The Fed is currently considering allowing J.P. Morgan to acquire another shadow company based in the Cayman Islands. According to a recent survey by Central Banking Publications, Ltd., the Cayman Islands Monetary Authority, charged with regulating over 650 trust companies, banks and insurance companies, employs 44 staff and 15 banking supervisors...

The Fed has provided the public no information yet on Republic National Bank’s explanation(s) of its dealings with Martin Armstrong, Cresvale and Princeton Global Management, which have given rise to Japanese investigations and lawsuits. On Friday, September 24, the London Independent published an unsourced report that Republic own internal “probe” of its liabilities for Republic New York Securities Corporation has found that “the only employee with knowledge of Mr. Armstrong’s trading relationship with Republic was William Rogers.” On that basis, Republic’s shares rose five percent on Friday. Analysts and arbitrageurs expect Republic to issue a statement early in the week of September 27, either confirming that the shareholders’ vote will be held on October 12, at the same purchase price, or announcing a new (lower) purchase price. But wait --

The question is, how much credibility should a probe a company itself pays for be given, in this situation? By analogy, what if Bank of New York this week announces that its New York law firm has found that it has no liability in the developing Russian money laundering scandal -- would that mean that all investigators and Congressional committees would throw up their hands, and announce that BNY is clean? Hardly. How is this Republic situation different?

Even on what has been publicly reported to date, one can reasonably question why parent RNYC’s management did not inquire into RNYSC, whose futures division did 90% of its business with a single company / individual, Armstrong-Princeton-Cresvale. The Indepedent’s article states that “[t]he report also points out that Republic Securities is an ‘arm’s length’ company... The advice is that any legal liability for damages would be limited to the $76 million of equity still held by the securities arm.” This raises questions about the Independent’s article, and/or the report is purports to summarize. It would be absurd to characterize a U.S. bank holding company’s Section 20 sub as “an arm’s length company,” or to advise that liability for the Section 20 sub’s actions will necessarily be limited to the sub’s remaining equity. The Federal Reserve, in allowing bank holding companies to set up so-called Section 20 subsidiaries like RNYSC, clearly expected and expects the holding companies’ management to supervise these subsidiaries. If Republic itself is now trying to disavow its Section 20 sub, or characterize it as “an ‘arm’s length’ company,” the Fed’s Section 20 precedents, and the credibility of the Fed’s supervision, is called into question.

Strangely, the Fed has yet to release to the public any Republic or HSBC submission on this issue, which the Fed would have to rule on along with the merger. Not only will Republic have to get its shareholders new and up-to-date information ten days before a valid shareholders’ meeting -- the Fed, based on this late-breaking issue, should allow the public to review and comment on HSBC’s and/or Republic’s arguments on how this incident reflects on the “managerial and financial factors” which the Fed must consider, and that the public has a right to comment on. This is particularly true if, as The Independent has reported, Republic is now trying to disavow its Section 20 sub, or characterize it as “an ‘arm’s length’ company.”

Section 20 subsidiaries as the Savings & Loans of the year 2000?

Continuing revolving door watch: James E. Scott, a Fed staff member from 1983 to 1987 (and before that, from 1973 to 1977) has left Bankers Trust for the Venable law firm, which says “Now we can compete with the bigger firms in mergers and acquisition and bank holding company work.” Keep those revolving doors spinning!

Finally, on September 26 in Washington, D.C., Deutsche Bank CEO Rolf Breuer shared the stage with New York Fed president William McDonough, at a panel discussion of the Bank for International Settlements’ Capital Adequacy Accord proposals. Breuer essentially called for less government regulation, saying that “market discipline” is faster and better. The high-powered pairing brought back the question: what role with the Federal Reserve System -- the New York Fed in particular -- play in brokering Deutsche Bank’s takeover of Bankers Trust? Numerous sources state that New York Fed senior officials bragged in late 1998, in business as well as social settings, that they had “set up” the DB’s acquisition of the weakened Bankers Trust. New York Fed president McDonough is, of course, considered a prime candidate to become Fed Chairman, if Mr. Greenspan is not re-appointed. Part of the qualification for become Fed Chairman is to be able to put deal like this together, quietly-but-not-too-quietly. For the sake of open government, the question should have been asked, and still should be...

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