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BANK REFORM UNDER PRESIDENT CLINTON.
Term Paper ID:26903
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Essay Subject:
Analyzes the political process, lobbying, compromise, conflicting goals & outcome of banking regulation reform in 1990s.... More...
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6 Pages / 1350 Words
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Paper Abstract:
Analyzes the political process, lobbying, compromise, conflicting goals & outcome of banking regulation reform in 1990s.
Paper Introduction:
The world of business has changed dramatically in recent years, yet one sector—banking—remained shackled by age-old regulations. That is what the framers of the Glass-Steagall Act intended. The law, passed in 1933, placed strict limits on banks to prevent a repeat of the Great Depression. In recent years, however, Glass-Steagall has come under attack, with banks, politicians, and even regulators calling on Congress to reform federal regulation of financial institutions. This paper will examine the politics of bank reform, and how a concerted and expensive lobbying effort finally paid off in 1999.
The Glass-Steagall Act, which Congress passed in 1933, sought to cure the excesses that spurred the Great Depression. The legislation also sought to restore the nation’s faith in banks. During the 1920s, banks served as underwriters on secur
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House of Representatives, Committee on Banking and Financial Services,www.house.gov/banking/21199gre.htm. Finally, Clinton brushed aside the concerns of consumer advocacygroups and supported a Democratic bank reform bill in 1999 ("Rubin backsbank bill, 1999, p. McNamee, M. D3). national economic policy, 1917-1985.New York: Praeger. Rubin proposed that banks be permitted to conduct securities andinsurance operations via subsidiaries, which would have left the banksunder the supervision of the Treasury Department (McNamee, March 1, 1999,p. B7). Greenspan, A. The Republican Party assumed a majorityin Congress after the 1994 elections and set about enacting their "ContractWith America." The boring issue of bank reform did not enjoy prioritystatus while the Republicans engaged in an all-out political war withPresident Clinton over the government shutdown. Slowly but surely, bank lobbyists managed to craft the issue as one ofleveling the playing field. None of the old rules seemed to apply in a searing economy basedon technology. A1. A8). Greenspan pushed a plan that called for banks to be remain separate(via holding companies) from the parts of their businesses that underwritesecurities and sell insurance. McNamee, M. Buoyedby the ever-expanding economy, a consensus had emerged that a repeat of the192 s could be avoided because of strict oversight by federal regulators.Despite supporting the notion of bank reform, Clinton refused to endorseany of the three competing measures introduced in 1998. 113). Toprevent banks from becoming overextended and illiquid, Glass-Steagalldivorced investment banking from commercial banking, and gave the FederalReserve the authority to regulate banks. At that time, the Republican leadership gave up its grandiose plans andset about conducting the business of government. economy not only weathered thoseshocks, it thrived amidst the upheaval. References Brinkley, J. Lobbyists redoubled their efforts, especially those from themerged Travelers and Citicorp, who needed a reform bill passed before theirfive-year waiver from the Federal Reserve expired ("Firms betting on changeof federal laws," 1997, p. A1). House of Representatives, Committee on Banking andFinancial Services, www.house.gov/banking/21199mie.htm. "Testimony of EdmondMierzwinski." U.S. American confidence only increased after the economic crises of1997 (Asia) and Russia (1998). The question no longer became "when" or "if," but"which," especially after Greenspan announced his support for bank reform("Greenspan backs two-stage reform of U.S. B7). D12. C3. LosAngeles Times, p. Scheer, R. Acaution sign put up by Alan Greenspan, the well-respected Chairman of theFederal Reserve Board, helped put a damper on the effort ("Greenspan backstwo-stage reform of U.S. banking laws," 1999, p. (1999, November 16). Commercial banks, insurance companies, and securities firms, which hadbeen pushing for Glass-Steagall's repeal since the 197 s, intensified thateffort. 31. Los Angeles Times, p.D3. "Testimony of Alan Greenspan."U.S. Fairness dictated that banks be allowed tocompete in the same way as other businesses. That time came in the late 199 s, after a roaringbull market and unsurpassed confidence in institutions such as the FederalReserve Board eliminated Congressional reservations about bank reform.Moreover, lobbyists garnered support by framing the issue as one offairness, which allowed members of Congress to support the bill withoutseeming to prefer Goliath to David. Twenty-five years and millions of dollars later, bank reform finallyhad everybody important on board, yet it still would not find smoothsailing in Washington. "The starting contest that's stallingbank reform." BusinessWeek, p. That is whatthe framers of the Glass-Steagall Act intended. Heargued that the repeal of Glass-Steagall would lead to the formation ofcorporate combinations "which will dominate the delivery of financialproducts and fuel the already alarming trend toward mega mergers and theconcentration of economic power" (Nader, 1999). At this point, Congress only had to apply the coup de grâce toGlass-Steagall, because "[f]or years, market innovations, judicial rulingsand regulatory decisions [had] eroded the legal walls that bar[red] banks,securities firms and insurance companies from elbowing into each other'sbusinesses" (Brownstein, 1997, p. That lackof liquidity helped turn a recession into the Great Depression (Campagna,1987, pp. banking laws," 1999, p. 31). (1999, March 1). Clinton signed the bill on November 12, 1999, and immediately cameunder attack from consumer advocates. The initial effort fell short andHouse leaders pulled the bill from the floor in the spring of 1997. If Clinton could hold the billhostage to minority-lending concerns, then why not hold it hostage toprivacy concerns as well? The world of business has changed dramatically in recent years, yetone sector-banking-remained shackled by age-old regulations. Greenspan and Rubinenjoyed enormous respect, both on Capitol Hill and Wall Street, becausethey are credited with orchestrating economic policy during the booming199 s. Nader, R. Banks extended themselves into so many areas that they could notweather the economic downturn. "Rubin backs bank bill." (1999, February 1 ). Critics later asserted that Clinton had givenaway too much. Yetthey stood little chance once Rubin and Greenspan weighed in. Criticscharged that Clinton had squandered his only opportunity to insureAmericans' privacy rights and instead had forfeited those rights (Scheer,1999, p. Fast forward to the 199 s, where a bull market had pushed the stockmarket to unthinkable highs and confidence in the economy has never beengreater. Brownstein, R. Oppel, R.A. 1. Bank and insurance lobbyists simply waiteduntil the conditions were right in Washington (they felt they had no choicebut to keep trying). So lucrative that they spent $3 million lobbying Congress, themost expensive lobbying campaign ever (Scheer, 1999, p. Bankreform had to wait another year ("Business rallies behind banking reformbill," 1999, p. Only consumer advocacy groups arrayed against bank reform, at leastfor the long haul. This paper will examine the politicsof bank reform, and how a concerted and expensive lobbying effort finallypaid off in 1999. (1999, October 23). economy bounced back after the 1987 stock-market crash, and the way in which the Fed and the Treasury Departmentmanaged the economy, allayed fears that we will ever see a repeat of the193 s. For businesses, however, repeal of Glass-Steagall became only a matterof time. A lucrative world beckoned if they could tear down the walls ofGlass-Steagall and build financial services firms offering one-stopshopping. Meanwhile, a spat erupted between Greenspan and Rubin, thegovernment's two most powerful economic policymakers. "Business rallies behind banking reform bill." (1999, February 11).Los Angeles Times, p. The banksbelieved that they had to secure this legislation or they "were going todisappear" (Brinkley, 1999, p. C4).Greenspan testified before Congress that the current system harmed U.S.competitiveness in the international marketplace and led to severeinefficiencies that harmed consumers and corporations alike (Greenspan,1999). The billdemonstrates that special interests with enough money and enough patienceusually prevail in Washington. (1999, October 23). The legislation alsosought to restore the nation's faith in banks. (1999, October 23). "Clinton has a golden opportunityto push his urban-investment agenda." Los Angeles Times, p. 43. The President apparently decided that the historicopportunity to reform the nation's banking laws could not be risked overthe issue of lending in poor communities (Oppel, 1999, p. (1987). "Banking reform or bust: Senator Grammups the ante." BusinessWeek, p. "Big gains by Gramm in dilutinglending act." The New York Times, p. Edmund Mierzwinski from thePublic Interest Research Group (PIRG) echoed Nader's sentiments, arguingthat the "one-stop" shopping pushed by banks would lead to higher fees,less privacy, and less choice for consumers (Mierzwinski, 1999). "Testimony of Ralph Nader." U.S.House of Representatives, Committee on Banking and Financial Services,www.house.gov/banking/21199nad.htm. Thus, Clinton seized the opportunity andlinked bank reform to legislation designed to increase lending to poorcommunities. A5. (1999, May 24). As Americans hoarded money, banks simplyran out of capital, prompting numerous "runs" and bank failures. During the 192 s, banksserved as underwriters on securities, and many lost millions in speculativeventures. Bank lobbyists were waiting for that day, and their patience was aboutto pay off. To restore confidence, Glass-Steagall established the Federal DepositInsurance Corporation, which guarantees deposits in insured banks. Ralph Nader, head of Public Citizen summarized hisgroup's opposition in testimony before Congress on February 11, 1999. The Glass-Steagall Act, which Congress passed in 1933, sought to curethe excesses that spurred the Great Depression. "Behind the banking bill, years ofintense lobbying." The New York Times, p. The Clinton Administration's economic team, led by Treasury SecretaryRobert Rubin, supported the repeal of Glass-Steagall in principle. Travelers (insurance) and Citicorp (banking) merged in 1997,expressing confidence that Congress would soon pass legislation permittingtheir union. The Senate, led by Republican Phil Gramm, vigorously resistedClinton's quid pro quo (McNamee, May 24, 1999, p. The House passed abank reform bill, but faced with opposition from Clinton and severalpowerful Senators, the Senate never considered the legislation. (1999, February 11). The Fed established newguidelines for capitalization, and slowly but surely, America rebuilt itsbanking system (Campagna, 1987, p. The way in which the U.S. Clinton saw the bank reform bill as a chance toadvance another part of his agenda. Compromisealso prevailed between Gramm and Clinton, who agreed to a provision thatpenalized banks with poor lending records in minority communities(Rosenblatt, 1999, p. But those rules still applied to banks, which watched theirprofitability suffer as they were denied entry into other sectors of theeconomy. C3). The reform bill gave financial institutions theright to exchange information about their customers, a huge victory for thebusiness lobbyists and a huge defeat for consumer lobbying groups. The Washington politicalscene did not return to normal until after Clinton won re-election in 1996. As a result, politics and a turf battle placed the 25-year push forbank reform in peril. The law, passed in 1933,placed strict limits on banks to prevent a repeat of the Great Depression.In recent years, however, Glass-Steagall has come under attack, with banks,politicians, and even regulators calling on Congress to reform federalregulation of financial institutions. (1999, February 11). Rosenblatt, R. "Firms betting on change of federal laws." (1998, April 7). Nader countered that banksserved a unique role as guarantors of America's financial security and assuch, the government must hold banks to different standards (Nader, 1999).But as the economy expanded and changed during the 199 s, the notion ofbanks as unique receded as our confidence in our ability to manage the neweconomy increased. Nonetheless, the issue still received little attention fromgovernment, at least before 1997. A5). Ultimately, the spirit of cooperation that dominatedthe Rubin-Greenspan relationship prevailed, and they worked out acompromise that left existing regulatory authority in place. Mierzwinski, E. (1997, January 27). B7. Campagna, A.S. C4). A1). U.S. Indeed, the bill represented a huge defeat for consumer groups. D12). A8. "Privacy issue bubbles beneath thephoto op." Los Angeles Times, p. 43). With optimism at an all-time high,the bank lobbyists' message received a much better reception in the hallsof Congress. Faced with a Republican-dominatedCongress, Clinton had few opportunities to push his policy initiatives.Here, he had leverage because Congress did not have the votes to overridehim if he vetoed bank reform. Those holding companies would be subject toFederal Reserve oversight, a plan supported by most of the playersinvolved. The U.S. 1 1-113). "Congress, White House forge bankreform deal." Los Angeles Times, p. (1999, February 11).
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