Greenspan Should Close His OWN Loopholes,
Before Calling for a Moratorium on Others’

                              by Matthew Lee -- Click here for ICP CRA Reporter

      The turf battles on financial modernization have reached the point of absurdity. Federal Reserve Chairman Alan Greenspan, speaking by video-conference to the Independent Bankers Association of America conference in Hawaii in March 1998, stated that, if no financial modernization legislation is passed, he favors a moratorium on the Office of Thrift Supervision’s granting of unitary thrift holding company status to “companies that cannot now own banks” -- companies such as The Travelers Group, State Farm, American General Corporation, GE Capital, and others.

    “With all due respect” (one supposedly HAS to say that, concerning the Fed Chairman), the Federal Reserve Board has been overseeing its own loophole for years: the so-called Competitive Equality in Banking Act (CEBA) banks. While some companies have taken the OTS route to a loophole, many others have obliged themselves of the Fed’s CEBA loophole, including Morgan Stanley Dean Witter, Merrill Lynch, Prudential, American Express and the Franklin mutual fund group. Despite detailed requests to rescind, or at least examine, these companies’ continuing eligibility for the CEBA loophole, the Fed has invariably upheld the loophole. Thus, Chairman Greenspan’s harping on another agency’s refusal to close its own statutory loophole is curious, to say the least.

    Our non-profit community and consumers’ group has attempted to guard both the unitary thrift holding company and the CEBA loopholes in recent years. Both the OTS and the Federal Reserve can point to Congress as the creator (or perpetrator) of the loopholes they oversee. However, the two agencies’ approaches to the issues, including Community Reinvestment Act implications, raised by the loopholes they oversee has been strikingly different.

     The OTS has taken the position that, while it must under statute consider companies’ application to create or acquire thrifts, it will require some real benefit to the communities served before activating or continuing the loophole. For example, the OTS encouraged a $430 million lending commitment to low and moderate income borrowers in connection with Travelers application to a thrift charter. In connection with its application for a thrift, State Farm has made a preliminary $195 million CRA commitment. The OTS recently suspended The Associates application for a thrift charter, because Associates is reported by this newspaper to be under investigation by the Department of Justice for fair lending and other consumer compliance violations. (This is to be contrasted, for example, to the Federal Reserve’s decision to approve Barnett’s applications in 1994, even while the Department of Justice confirmed it was investigating Barnett).

    Beyond its refusal to defer to the Department of Justice on fair lending, the Federal Reserve has hardly scrutinized applications involving CEBA banks, and has never required or encouraged any CRA or consumer compliance commitment in connection with CEBA applications. For example, Dean Witter (now a part of Morgan Stanley Dean Witter) has for years owned a CEBA bank called Greenwood Trust. This CEBA bank received a rare “Needs to Improve” CRA rating from the FDIC in 1995; there were NO implications at the Federal Reserve, however. Our organization asked the Federal Reserve to address this issue when Morgan Stanley was acquiring Dean Witter. After months, we received a terse letter from the Fed’s Secretary, saying that the CEBA loophole stood, and that the Fed would not even require an application from Morgan Stanley to acquire Dean Witter and its “non-bank bank” subsidiary, Greenwood Trust.

    The essence of the “non-bank bank”/CEBA loophole is that companies can own certain depository institutions without themselves being deemed bank holding companies subject to Federal Reserve regulation. The loophole was opened in the mid-eighties, based on the Fed’s definition of a “bank” as an institution that accepts demand deposits and makes commercial loans. Over 100 companies established subsidiaries that did only one of these two; the loophole was supposedly closed with the passage of the Competitive Equality in Banking Act of 1987, which grandfathered in the institutions created between 1984 and 1987. Significantly, institutions were supposed to lose their grandathered status if they acquired other depository institutions.

  But the Fed has allowed such companies as Dean Witter and Merrill Lynch to purchase other depository institutions and still retain grandfathered status. Dean Witter’s and Merrill’s purchases have supposedly been of institutions “in danger of default” -- but both Dean Witter and Merrill Lynch literally waited in line to be informed of the next near-failing institution, and to purchase small portions of their assets in order to drive through the loophole. The Federal Reserve has upheld this abuse and expansion of the CEBA loophole each time, without any formal comment periods, and rejecting what comments it did receive.

The CEBA loophole overseen by the Federal Reserve is in some way similar to the unitary thrift holding company loophole, which allows companies which could not own banks to own a single thrift. However, the OTS at least asserts jurisdiction over the thrift subsidiaries of Travelers and the like, while the FRB refuses to even require applications from, much less scrutinize, CEBA-bank owners like Dean Witter (now Morgan Stanley).

   For these reasons, Fed Chairman Greenspan’s support for a moratorium on OTS grants of unitary thrift charters is less principled, and less positive for low and moderate income communities, than it seems. While perhaps naive, I cannot help noting the apparent impropriety of the director of an administrative agency public weighing in on pending legislation, much less calling for a moratorium on the statutory powers of another regulatory agency. It is ironic to note that Chairman Greenspan has not spoken out so as forcefully, or called for a moratorium, against the Comptroller’s grants of new powers to national banks. While the Fed is also engaged in a turf war with the OCC, that agency is perceived as more powerful and more permanent than the OTS. Therefore the Fed’s advocacy for its positions vis-a-vis the OCC is more subtle, or more stealthy. The OTS is perceived as a weak agency, about to be eliminated. Thus Chairman Greenspan can by video-conference to a bankers’ conference call for curtailment of the OTS’s statutory powers, while the Fed oversees, with less concern for communities, a loophole at least as arbitrary as the OTS’s.

    It is no secret that the regulatory turf wars between the agencies are driven by institutional interests as much as public policy. Sometimes it becomes so obvious, however, that it must be highlighted, and its implications explored.

     Those members of Congress (and lobbyists) working on the ever-shifting financial modernization bill are sure to take note of Chairman Greenspan’s call for a moratorium against the OTS and unitary thrifts. Before being hypnotized by this omniscient voice, however, they should consider the CEBA loophole the Fed has overseen and allowed to expand over the years. Along with the competition-based arguments of the industries (and their campaign contributions), the two loopholes’ (and agencies’) consideration and enforcement of the Community Reinvestment Act, in connection with their loophole, should also be considered.

    For the present time, community groups and low income communities can get a fairer hearing, and a better result, from the OTS’ loophole than the Fed’s. If any loophole should be closed, it is the Fed’s CEBA loophole -- let’s hear Chairman Greenspan speak on THAT one. As the Bible says, examine the speck in your OWN eye before criticizing others’....

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