In Barack Obama's economic speech today, he laid part of the blame for our current economic situation at the feet of the de-regulation movement in the 1990s.
[W]e have deregulated the financial services sector, and we face another crisis. A regulatory structure set up for banks in the 1930s needed to change because the nature of business has changed. But by the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.
The Glass-Steagall Act was repealed by a bill championed by Bill Clinton called the Gramm-Leach-Bliley Act. On the floor of the Senate, Paul Wellstone outlined why this deregulatory act was bad, and the consequences that would follow. The text of his [very long] prophetic speech on the floor follows.
Mr. President, before I start, since my remarks will be critical and hard hitting, and, I believe, will marshal considerable evidence for my point of view about this financial modernization act--and I rise to speak in strong opposition to S. 900--I congratulate Senator GRAMM for his political skill. I do not mean this in a cynical way. Cynicism is not my style; it is not the way I approach public service. He has been very skillful in his work, and as a Senator, I pay my respects to his considerable ability.
I rise in strong opposition to S. 900, the Financial Services Modernization Act of 1999. S. 900 would aggravate a trend towards economic concentration that endangers not only our economy, but also our democracy.
S. 900 would make it easier for banks, securities firms, and insurance companies to merge into gigantic new conglomerates that would dominate the U.S. financial industry and the U.S. economy.
Mr. President, this is the wrong kind of modernization at the wrong time. Modernization of the existing confusing patchwork of laws, regulations, and regulatory authorities would be a good thing, but that's not what this legislation is about. S. 900 is really about accelerating the trend towards massive consolidation of the financial sector.
This is the wrong kind of modernization because it fails to put in place adequate regulatory safeguards for these new financial giants the failure of which could jeopardize the entire economy. It's the wrong kind of modernization because taxpayers could be stuck with the bill if these conglomerates become ``too big to fail.''
This is the wrong kind of modernization because it fails to protect consumers. It allows banks, insurance companies and brokerage houses to share personal information about consumers' credit history, investments, health treatments, and buying habits. It weakens requirements for banks to invest in their own communities. It will result in higher fees for many customers and price gouging of the unwary. And it will squeeze credit for small businesses and rural America.
Most importantly, this is the wrong kind of modernization because it encourages the concentration of more and more economic power in the hands of fewer and fewer people. This concentration will wall off enormous areas of economic decision-making from any kind of democratic input or accountability.
I don't think there's any doubt that S. 900 will set in motion a tidal wave of big-money mergers. That's the whole point of the bill, really. The Washington Post quotes industry officials as saying that ``the point of reform is to make it as easy as possible for financial services companies to merge with one another and share customer names, addresses, and account data.''
S. 900 will prompt other banks to start courting insurance and securities firms, and it will put increasing pressure on banks of every size to find new partners. According to the Post, ``Analysts say it's likely to set off a spate of mergers over the next few years . . . and will cause consolidation of much of the industry into a handful of financial conglomerates.''
Fed Chairman Alan Greenspan has acknowledged that this kind of consolidation poses dangers for the stability of our financial system. In a speech on October 11, 1999, Mr. Greenspan said, ``We face the reality that the megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail.''
Last week Jeffrey Garten, an investment banker who served as Under Secretary of Commerce in the Clinton administration, issued a similar warning on the opinion page of the New York Times. ``Megabanks like Citigroup or the new Bank of America have become too big to fail. Were they to falter, they could take the entire global financial system down with them.''
The question we have to ask, then, is whether there's any danger that these financial goliaths could actually falter. Well, if we listen to Alan Greenspan, maybe there is. In an October 14 speech, the Fed Chairman warned that financial institutions may be underestimating the risk of a ``sharp reversal of confidence'' in the stock market. Mr. Greenspan was talking about not just a ``correction'' or a ``bubble'' in the market, but a much deeper loss of confidence like the one that occurred last year after Russia defaulted on part of its debt. The result could be ``panic reactions'' that cause financial markets to ``seize up.''
Something doesn't add up here. If Alan Greenspan is right that we need to be on guard against a ``sharp reversal of confidence'' that could cause financial markets to ``seize up''; and if the Fed Chairman is right that financial consolidation creates the potential for unusually large ``systemic risks'' should these conglomerates fail; and if Jeffrey Garten is right that their failure could bring the entire global financial system tumbling down; then it doesn't seem to make a whole lot of sense to increase those systemic risks by fostering even more concentration. Yet that is precisely what S. 900 does.
The problem with S. 900 is that its regulatory reach does not match the size of the new conglomerates. S. 900 does set up firewalls to protect banks from failures of their insurance and securities affiliates. But even Alan Greenspan has admitted that these firewalls would be weak. Earlier this year, economists Robert Auerbach and James Galbraith warned that ``the firewalls may be little more than placing potted plants between the desks of huge holding companies.''
And as the Chairwoman of the FDIC has testified, ``In times of stress, firewalls tend to weaken.'' Regulators will have little desire to stop violations of these firewalls if they think a holding company is ``too big to fail.'' In his New York Times article, former Under Secretary of Commerce Jeffrey Garten concluded, ``The seesaw of private and public power is seriously unbalanced.''
We seem determined to unlearn the lessons from our past mistakes. Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis. Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that stabilizer without putting any comparable safeguard in its place.
In a stinging attack on S. 900, conservative columnist William Safire wrote earlier this week:
Global financiers are given the green light for ever-greater concentration of power. Few remember the reason for those firewalls: to curtail the spread of the sort of panic from one financial segment to another that helped lead to the Great Depression. But today's lust for global giantism has swept aside the voices of prudence.
And what about the lessons of the Savings and Loan Crisis? The Garn-St Germain Act of 1982 allowed thrifts to expand their services beyond basic home loans. Only seven years later taxpayers were tapped for a multibillion dollar bailout.
I'm afraid we're running the same kind of risks with S. 900. These financial conglomerates may well be tempted to run greater risks, knowing that taxpayers will come to their rescue if things go bad. In a letter to me earlier this week, Professor Bob Auerbach of the LBJ School wrote, ``Taxpayers should be notified that [S. 900] substantially increases their risk on the $2.8 trillion in federally insured deposits for which they are liable.''
And what about the lessons of the Asian crisis? Just recently, the financial press was crowing about the inadequacies of Asian banking systems. Now we're considering a bill that would make our banking system more like theirs. The much-maligned cozy relationships between Asian banks, brokers, insurance companies and commercial firms are precisely the kind of ``crony capitalism'' that S. 900 would promote.
If we want to locate the causes of the Asian crisis, I think we have to look at the reckless liberalization of capital markets that led to unbalanced development and made these economies so vulnerable to investor panic in the first place. The IMF and other multilateral financial institutions failed to understand how dangerous and destabilizing financial deregulation can be without first putting appropriate safeguards in place.
World Bank Chief Economist Joseph Stiglitz wrote last year about the Asian crisis: ``The rapid growth and large influx of foreign investment created economic strain. In addition, heavy foreign investment combined with weak financial regulation to allow lenders in many Southeast Asian countries to rapidly expand credit, often to risky borrowers, making the financial system more vulnerable. Inadequate oversight, not over-regulation, caused these problems. Consequently, our emphasis should not be on deregulation, but on finding the right regulatory regime to reestablish stability and confidence.'' We claim to have learned our lessons from the crisis in Asia, but I'm not so sure we have.
So why on Earth are we doing this? And why now? For whose benefit is this legislation being passed? Financial services firms argue that consolidation is necessary for their survival. They claim they need to be as large and diversified as foreign firms in order to compete in the global marketplace. But the U.S. financial industry is already dominant across the globe, and in recent years has been quite profitable. I see no crisis of competitiveness.
Financial firms also argue that consolidation will produce efficiencies that can be passed on to consumers. But there is little evidence that big mergers translate into more efficiency or better service. In fact, studies by the Federal Reserve indicate just the opposite: there's no convincing evidence that mergers produce greater economic efficiencies. On the contrary, they often lead to higher banking fees and charges for small businesses, farmers, and other customers.
A recent Fed study showed that bigger banks tend to charge higher fees for ATM machines and other services. Bigger banks offer fewer loans for small businesses, and other Fed studies have shown that the concentration of banking squeezes out community banking.
In the long debate over passage of this legislation, there has been a lot of talk about the conflicting interests of bankers, insurance companies, and brokers. There has been a lot of talk about the jurisdictional battles between the Federal Reserve and the Office of the Comptroller of the Currency, the OCC. But there has been precious little discussion in this debate of the public interest.
What about the interests of ordinary consumers? An earlier version of this legislation contained a provision to ensure that people with lower incomes have access to basic banking services. The problem is that banking services are increasingly beyond the reach of millions of Americans. According to U.S. PIRG, the average cost of a checking account is $217 per year, a major obstacle for opening up a bank account for lower-income families. These families have to rely, instead, on usurious check cashing operations and money order services. Nevertheless, this ``basic banking'' provision was stripped out of the bill.
I don't see very much protection for consumers in S. 900, either. Banks that have always offered safe, federally insured deposits will have every incentive to lure their customers into riskier investments. Last year, for example, NationsBank paid $7 million to settle charges that it misled bank customers into investing in risky bonds through a securities affiliate that it set up with Morgan Stanley Dean Witter. S. 900 makes nominal attempts to address these problems, but in the end I am afraid this legislation is an invitation to fraud and abuse.
One of the most objectionable aspects of S. 900 is the absence of protection for consumer privacy. The conference report will allow the various affiliates of a financial conglomerate to share sensitive confidential information about their customers.
William Safire writes:
As for financial privacy, [S. 900] makes your bank account everyone's business. Without your consent, the private information you write on your mortgage application, with your tax return attached, goes to your insurance company, which already has your health information, and its snoops can also see your investment behavior and what you have been buying with your credit card. Under [S. 900], giant financial conglomerates, using other surveillance to protect against fraud, will know more about your money, your habits, your assets, your disease, and your genetic makeup than your spouse does, and probably more than you do.
I will tell you something. It is a little disconcerting to read columns such as this about the real potential for abuse and serious invasion of citizens' privacy. We need to have much, much more discussion about the implications of this bill for citizens' privacy in Minnesota and all across the country.
I am going to repeat the last part of this quote:
Under S. 900, giant financial conglomerates, using other surveillance to protect against fraud, will know more about your money, your habits, your assets, your diseases, and your genetic makeup than your spouse does, and probably more than you do.
Law Professor Joel Reidenberg of Fordham University concludes:
This is an astounding loss of privacy for the American citizens.
I want to shout from the floor of the Senate that this is an astounding loss of privacy for American citizens.
The impact of S. 900 on the Community Reinvestment Act, CRA, is another cause for real concern. When the Senate considered S. 900 earlier this year, I argued that if we were serious about modernizing the financial sector of our country, we should be serious about modernizing CRA along with it. There have been few
financial tools available to families and communities that have been as effective and have had as great an impact--positive impact--as CRA. An estimated $1 trillion has been reinvested in our towns and cities, thanks to this CRA legislation.
Under the S. 900 conference report, communities, consumers, and public interest organizations will see their opportunities for public comment limited. They will not have a chance to comment on mergers when banks that have received a satisfactory CRA rating are applying to become financial holding companies. To me, this looks more like a rollback than it does modernization.
Finally, under the S. 900 conference report, smaller banks that receive a satisfactory CRA rating will be reviewed every 4 years instead of every 2. Smaller banks that receive an excellent CRA rating will be reviewed every 5 years. Since an estimated 97 percent of all small banks currently receive a satisfactory or better CRA rating, S. 900 will essentially remove the majority of banks from the regular CRA review process. There are a number of reasons why banks must be reviewed by regulators, but it is only with regard to CRA that we are cutting back on the requirements for review.
In reality, S. 900 reflects the same priority of interests as financial consolidation itself. It offers a little something for everybody in the financial services industry. It is a Santa's wish list for the big banks. It gives enough to securities firms and the insurance industry to keep them on board. But it basically has nothing to offer for low-income families, nothing for rural and minority communities, and very little for consumers.
This should not be surprising. I don't think it is a mere coincidence that finance, insurance, and real estate spend more than any other industries on congressional campaigns and lobbying on Capitol Hill. This is a reformer's dream issue. There is no one-to-one correlation, of course; their influence is felt at a systemic level. And I have congratulated some of my colleagues on their political skill. But I do not think it is a coincidence that the finance, insurance, and real estate interests spend more than any other industries on congressional campaigns and on lobbying Capitol Hill. Last year, they shelled out more than $200 million on lobbying activities, according to the Center for Responsive Politics, and they have made more than $150 million in campaign contributions since 1996.
As William Safire wrote on November 1:
Generous financial lobbies have persuaded our leaders that in enormous size there is strength.
Generous lobbies have been making the same case in other industries as well, with equal success. Similar consolidation is occurring in agriculture, the media, entertainment, health care, airlines, telecommunications, you name it. Teddy Roosevelt, where are you when we need you? Who is going to take on these monopolies?
Who is going to call for some serious antitrust action? When are we going to be on the side of people and consumers?
In fact, we are witnessing the biggest wave of mergers and economic concentration since the late 1800s.
There were 4,728 reportable mergers in 1998, compared to 3,087 in 1993, 1,521 in 1991, and a mere 804 in 1980.
As Joel Klein, head of the Justice Department's Antitrust Division, pointed out, the value of last year's mergers equals the combined value of all mergers from 1999 to 1996--put together.
What is in store for us if we allow this trend to continue? Pretty soon we are going to have three financial service firms in this country, four airlines, two media conglomerates, and five energy giants.
Huge financial conglomerates the size of Citigroup will truly be ``too big to fail.'' Government officials and Members of the Congress will be prone to confuse Citigroup's interests with the public interest, if they don't already.
What happens, for example, when one of these colossal conglomerates decides it might like to turn a profit by privatizing Social Security? Who is going to stand in their way? That is a trick question, of course, because we already face that dilemma today. But I contend that the economic concentration resulting from the passage of S. 900 would only make that problem worse.
The bigger these financial conglomerates get, the more influence they have over public policy choices. The bigger they get, the more money they will have to spend on political campaigns. The bigger they get, the more lobbyists they will be able to amass on Capitol Hill. And the bigger they get, the more weight they will carry in the media.
I am going to repeat that.
The bigger these financial conglomerates get, the more influence they are going to have over public policy choices. The bigger they get, the more money they will have to spend on political campaigns. The bigger they get, the more lobbyists they will have to amass on Capitol Hill. And the biggerthey get, the more weight they will carry with the media.
It is a vicious cycle. These financial conglomerates used their political clout to shape public policy that helped them grow so big in the first place. Now their overwhelming size makes it easier for them to dictate policies that will help them get even bigger. It is a vicious cycle.
Jeffrey Garten's remarkable October 26th column in the New York Times called attention to this problem. ``Many megacompanies may be beyond the law,'' Garten said.
Their deep pockets can buy teams of lawyers that can stymie prosecutors for years. And if they lose in court, they can afford to pay huge fines without damaging their operations.
Moreover, no one should be surprised that mega-companies navigate our scandalously porous campaign financing system to influence tax policy, environmental standards, Social Security financing, and other issues of national policy. Yes, companies have always lobbied, but these huge corporations often have more pull. Because there are fewer of them, their influence can be more focused and, in some cases, the country may be highly dependent on their survival.
For example, corporate giants can have enormous leverage when they focus on America's foreign and trade policy. Defense contractors like Lockheed Martin, itself a result of a merger of two big firms, were able to exert extraordinarily powerful force to influence legislation that approved enlarging NATO, a move that opened up new markets for American weapons sales to Poland and the Czech Republic.
Companies like Boeing, which not long ago acquired McDonnell Douglas, have expanded their already formidable influence on trade policy toward countries like China. Boeing is now the only American commercial aircraft manufacturer.
Corporations like Exxon-Mobil will negotiate with oil-producing countries almost as equals, conducting the most powerful private diplomacy since the 19th century, when the British East India Company wielded near-sovereign influence in Asia.
As long as the economy remains strong, the rise of corporate power with inadequate public oversight will not be high on the national agenda. But sooner or later--perhaps starting with the next serious economic downturn--the United States will have to confront one of the great challenges of our times: How does a sovereign nation govern itself effectively when politics are national and business is global?
When the answers start coming, they could be as radical and as prolonged as the backlash against unbridled corporate power that took place during the first 40 years of this century.
Indeed, we've been through this before. At the end of the 19th century, industrial concentration accelerated at an alarming pace. Various observers--including the columnist and author E.J. Dionne, former House Speaker Newt Gingrich, and the philosopher Michael Sandel--have noted the similarities between that era and our own.
In the Gilded Age of the late 1800s and the Progressive Era of the early 1900s, the danger of concentrated economic power was widely recognized and hotly debated.
And this speech on the floor of the Senate I give with a sense of history because I believe this will become a front-burner issue in America politics. Many Americans deeply believed that a free and democratic society could not prosper with such concentration of power and inequalities of wealth. As the great Supreme Court Justice Louis Brandeis said, ``We can have democracy in this country, or we can have wealth in the hands of a few. We can't have both.''
The idea that concentrations of wealth, of economic power--which is exactly what S. 900 is all about--and of political power are unhealthy for our democracy is a theme that runs throughout American history, from Thomas Jefferson to Andrew Jackson to the Progressive Era to the New Deal. Thomas Jefferson and Andrew Jackson warned not only against concentration of political power, but also against concentration of economic power.
We should not, Senators, let that debate die out. That is why I come to the floor of the Senate today. That debate is a vital part of our democratic--with a small ``d''--heritage. It is a heritage that teaches us that ordinary people should have more say about the economic decisions that affect their lives.
Weakening CRA isn't going to give them that. No amount of anti-government rhetoric is going to give them that. But enforcing some meaningful consumer protections certainly would. So would protecting the privacy of sensitive personal information. And so would putting a stop to mergers that crowd out community banking, squeeze credit for small businesses, and open the door to higher fees and more gouging of consumers.
A lot of banks don't like the CRA. A lot of financial service firms don't want to be bothered with regulations to protect individual privacy. They denounce them as ``big government'' and ``overregulation.'' But for most people, which is the greater danger in these situations--concentration of political power in the Government, or concentration of economic power? I don't think it is a close call.
When I go to the Town Talk Cafe in Willmar, MN, or any cafe in MN, and I talk and listen to people over a cup of coffee or two, I find people have what I describe as a healthy distrust of big government, a healthy distrust of overly centralized and overly bureaucratized public policy.
I love it when people say, get us some capital, let us make things happen at the neighborhood and community level. I love the idea of homegrown economies. I prefer that small business people living in the community be the ones who make the capital investment decisions that determine whether or not our communities are going to do well, rather than some multinational financial services conglomerate folks halfway across the world or halfway across the country making the capital investment decisions that determine whether our communities live or die. I want the decisionmaking to be in the communities. I appreciate that focus on local development, on more self-reliant, self-sufficient people and more self-reliant, self-sufficient communities.
The people in the Town Talk Cafe in Willmar, or any other cafe I have visited, also have a very healthy skepticism, distrust, and--I don't think this is too strong a term--dislike of the concentration that is taking place in the financial sector and other areas of the economy. They do not like the big insurance companies. They do not like these big telecommunication companies. They are still waiting, since the telecommunications bill passed in 1996 and all of the mergers and acquisitions since then, for cable rates to go down. They are still waiting for more diversity of viewpoints to be offered in the media. Farmers do not like the big meat packers. They don't like the big grain companies. People certainly don't like the big oil companies. With considerable justification, they certainly don't like the big banks. And with considerable justification they have reached the conclusion that too much of the legislation we pass in Congress works to the advantage of folks who have the capital, who have the wealth, who have the access, and who have the influence.
And they've reached the conclusion that, as rural citizens or low-income citizens or minority communities or family farmers or just regular plain ordinary citizens and consumers, they get the short end of the stick.
S. 900 is legislation that goes in the direction of giving more power to the privileged few and giving ordinary citizens less say in the economic decisions that affect their lives. S. 900 is bad for consumers, it is bad for low-income families, it is bad for rural communities, it creates potentially enormous risks for the economy, and it exposes taxpayers--please remember the S&L debacle--to tremendous liability.
I believe S. 900 is bad legislation that as a nation we will soon regret.
I yield the floor.
Nashville for the 21st Century