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Stephen Pizzo & Mary Fricker's 1992 Written Testimony To Congress
Stephen Pizzo & Mary Fricker's 1992 Written Testimony To Congress
WRITTEN TESTIMONY OF
-- Now, almost exactly a decade later the nation's big banks are
Clamoring for their own deregulation because, they too claim, they
can't make a profit making commercial and consumer loans. They say
they need to diversify, to get into ventures that offer the promise
of higher returns. Competition from investment banks, financial
conglomerates and international banks, they say, is killing them.
(Note: Manr independent community banks are opposing this
deregulation. )
Steagall Act, which was passed in 1933 because many of the bank
failures fOllowing the market crash in 1929 were caused by risky
transactions conducted between banks and their securities
affiliates. The Glass-Steagall Act removed banks from Wall Street
and, to entice a gun shy public back to banks, it created federal
deposit insurance. (Bankers today want only one of these Glass
Steagall provisions r.etained .These WOUld-be speCUlators still want
deposit insurance. Free enterprise and level playing fields is one
thing, but removing their federally-backed insurance safety net is
qui te another.)
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Sound familiar? The same argument was used a decade ago when
savings and loans wanted to get into the construction and
development business. Developers needed loans - thrifts made loans.
Bingo. Natural synergy. RegUlations prohibiting such joint ventures
were abolished, and sure enough private capital poured into the
thrift industry as developers bought thrifts and thrifts acquired
their own construction companies.
"My God! This is what I've been waiting for all my life!" gasped
the owner of (now defunct) San Marino Savings and Loan.
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Louisiana, told us, "Some of the same people who took down savings
and loans, are out in the 'securities business and banking now,
already in place. And they're just waiting for Congress to abolish
the Glass-steagall Act. If that happens I'm afraid they'll take the
banks just like they did the savings and loans."
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Firewalls
And this time Greenspan might just be right. Firewalls proved quite
unreliable during the S&L debacle. In the 1980s, when a thrift's
risky investments started going sour, regulatory firewalls were
easily breached. For example, thrift executives were forbidden by
regulations from making loans to themselves, their families,
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Our expensive S&L lessons should have taught Congress that if banks
are allowed back into the securities business something like this
would almost certainly occur the next time Wall Street crashes:
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COntinental.
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How examiners might detect lending within that maze has not been
explained. The~e's not a bank examiner in this country who could
control such a corporate banking octopus. If S&L regulators
couldn't stop the looting at savings and loans - which are by
comparison a fairly straight forward corporate structure - what
hope is there that bank regulators will be able to monitor a two
tiered hOlding company structure with multiple affiliates and
subsidiaries?
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427
At the same time the current legislation pays only lip service to
a strong regulatory structure. It does not outline how the
regulatory structure will be beefed up, or where the money will
come from to attract the thousands of additional first-rate
examiners that will be needed. If specific provisions for funding
this examination force are not included in any bank deregulation
legiSlation, the legiSlation should be dropped like a hot potato.
If Congress tries to enact it later, the same bankers who are now
purring like kittens, to get what they want, will become tigers who
will attack any plan that increases their deposit insurance
premiums or asks them to contribute to the regulatory kitty.
Interstate Branching
The net result of interstate branching will be fewer banks and the
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428
Banks' demands for dramatic changes come at a time when banks are
weaker than they have been since the Great Depression. Almost 1,000
banks have failed in the last four years, more than failed in the
first 50 years after Glass-Steagall was passed. Restrictive
regulations did not cause these problems, as the big banks would
have Congress believe. Instead, in the last five years American
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High flyers like these make it a point to know where the money is
and to get at it before regulators know its ,gone. And they stand
today straining at the starting gate, with their eyes on Congress
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and the banks. A man who arranges mezzanine financing for leveraged
buyouts told us not long ago, "I think I'll go buy a bank. They
only cost $3 million." When an LBO player thinks a stodgy old bank
is suddenly attractive, should congress begin to worry?
Some banks are sick and they need congressional medicine. But not
the narcotics they are begging for. What they need is:
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But the bottom line is really this: Most banks are healthy. They
know what they're doing. Leave them alone. Don't be spooked into
a big 'operation when some delicate surgery will do.
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"After five short years, we may now need to be reminded what Wall
Street was like before Uncle Sam stationed a policeman at its
corner, lest, in time to come, some attempt be made to abolish that
post. II
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"But how was this possible? For surely, the layman will protest,
the law does not permit a bank to engage in such activities. A
bank, especially a national bank, is, or is supposed to be,
sacrosanct, its power strictlY limited by Act of Congress, and its
activities carefully and regularly examined by skilled examiners.
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436
"How were these millions made? ... Mr. Wiggin was able to make an
income many times in excess of his ($175,000) salary, in large part
by using his unique opportunities as the trusted and all-powerful
head of a great bank, for his personal advantage.
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437
"Mr. \'1i.ggin' s private operations in Chase Bank stock for his own
benefit, moreover, wer.e intimately intertwined and'synchronized
with extensive and intricate manipUlations of the same stock
undertaken by the bank's own affiliates. The full story of these
involved relationships is an incredible one."
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