Vol. 1999-2
The Long Road to Financial Modernization
Legislation: Will the Trip be Worth It?
I had not expected to deal quite so soon with proposed financial modernization legislation in this year's series of reports. But events do seem to be moving more rapidly than anticipated, at least for the moment. New proposed legislation is already before the banking committees in the House and Senate. Moreover, there have been a few interesting new sub-plots in the saga of Congressional attempts to fashion a "reform" package that will satisfy all parties. Sufficient reason, I concluded, to offer a brief, interim report.
From the viewpoint of proponents of modernization legislation, success came agonizingly close last year. That it did so was due in considerable part to the skill and perseverance of the Washington representatives of institutions and associations that were backing passage. Add to this the cumulative effect of years of failed efforts and unfulfilled promises by legislators, and the intensity applied to achieving passage of H.R.10 becomes even more understandable. And, of course, behind all this were some extremely large and influential institutions pushing for the legislation, ranging from major banking and financial organizations that were attempting to combine banking with other financial operations to the Federal Reserve, which was the federal agency beneficiary of the legislation.
Legislation was approved in May last year by the House of Representatives (although only by a single vote) and was reported out by the Senate Banking Committee on September 18. It got no further. The legislative log-jam in the closing days of the 105th Congress proved impossible to break. Had the measure gone to the full Senate and been approved, it likely would have proceeded immediately to the President because the House had arranged to accept the Senate version, thereby avoiding the need for a House-Senate conference. However, the measure would have adversely impacted national banks and diminished the regulatory authority of the Comptroller of the Currency, while at the same time increasing significantly the authority of the Federal Reserve, a result that the Administration was not willing to accept. For this reason, primarily, a presidential veto was promised, but never became necessary.
Interestingly, if one were to depend solely on the major journals -- say the New York Times or The Wall Street Journal -- for information on the legislative effort now underway, this report would be brief indeed. For example, the House Banking Committee's hearings on the resumption of the battle over financial modernization featured a star-studded cast, including the Secretary of the Treasury, the Chairman of the Federal Reserve Board, the Comptroller of the Currency, the Chairman of the FDIC, and top officers from such major banking organizations as J.P. Morgan and Bank One, along with the usual cast of interested associations, generally represented by their elected presidents as in the case of the ABA and the IBAA. As one of my friends, apparently a devotee of the film "Casablanca," said at the time, Banking Committee Chairman Jim Leach had rounded up "all the usual suspects." Yet it was hard to see that much, if any, attention was given to this by the national press. And, thus far, the Senate hearings, with much the same cast of characters, are also being ignored.
The reason for the absence of media attention (the trade press excepted of course) was not that the players were unknown or the subject thought to be unimportant. Rather, it was because almost everyone is pretty tired of the whole thing. Continued wrangling over the legislation in hearings, speeches, articles, and debates has been with us for so long now that the situation is somewhat similar to the public’s attitude during the President's impeachment trial, which is to say that most persons were interested only in when the process might come to an end rather than who might emerge victorious.
In fact, efforts to modernize banking law have been with us so long that no one seems to know just when it all started, or even what the purpose is, aside from some vague idea of updating the law. As Phil Meyer pointed out in Vol. 1998-8 of these reports, in his piece titled "Origins of Financial Modernization," probably it all began with the appointment of Jim Saxon as Comptroller of the Currency in the Kennedy Adminis-tration. The Economist, usually a precise and authoritative journal on matters of this kind, reported that on February 10, "Congress launched its twelfth bid to kill the Glass-Steagall Act," which means, if true, that the current campaign has been going on for a little longer than 20 years. This is not inconsistent with the start date suggested recently by Senator Gramm, who observed in a press conference that the last ten congresses had failed to get legislation enacted. (I should remind readers again that the legislation now being considered by the Congress does not now, and never did, contemplate repeal of the Glass-Steagall Act, but only the elimination of its affiliate provisions, a problem that has been largely solved by federal agency action and the courts).
So Congress is engaged once again in an effort to demonstrate that it can deal, comprehensively and effectively, with a rapidly changing banking and financial services industry. The record of the past 40 years or so pretty well demonstrates that it will not be able to do so. For the most part, it can only clear the competitive battleground of some barbed wire entanglements and land mines that Congress itself had put into place earlier, often unnecessarily. The banking and other financial services industries were then compelled to navigate (or bulldoze) their way through these congressional impediments, aided immensely by the courts and the bank regulatory agencies. To a much greater extent than many realize, financial modernization by Congress simply means cleaning up what remains of its past mistakes.
To be sure, it is always helpful for Congress to remove these impediments, thereby making it a bit easier for financial institutions to provide financial services efficiently and at lower cost. Unfortunately, however, Congress rarely stops there. Instead, with an apparently incurable penchant for comprehensive legislation, which means having to satisfy every conceivable pressure group (including federal regulatory bureaucracies), it inevitably winds up by introducing new, and often worse, impediments to the smooth functioning of the financial services industry.
It is this kind of thing that makes it fascinating to follow closely the current financial modernization effort. As for modernization itself, we know that the parade has already gone by and that Congress is largely attempting to catch up to what financial markets, the industry, the courts, and the agencies have managed to accomplish. To be sure, there are still a few knotty items to which Congress could usefully address itself, but the real fascination lies in trying to identify the new problems Congress will have created when it finally gets around to "modernizing" banking and financial law. It is impossible to know what the result will be, or even to be certain that, on balance, the modernization accomplished will be greater than the new distortions and regulatory burdens added. Indeed we cannot be certain that there will be legislation at all. However, it does appear that there is a reasonable chance that something will emerge eventually.
The objective here is modest: to offer an interim report, more or less to serve as an orientation piece. There are three Sections. The first takes up the story from the end of the last Congress. Section II focuses on the recent hearings on modernization legislation. Finally, in Section III, I try to complete the near-essay that serves as the introduction to the present report by offering a few thoughts on what might happen, and on what, ideally, one wishes could happen.