All the Presidents' Bankers (64 page)

The issue of financial institutions deregulation legislation appeared on the staff meeting schedule regularly throughout 1983.
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By July 1983, Bush’s task force had drawn opposition from various industry groups, notably the smaller players in the financial spectrum, who were increasingly worried about losing their piece of the financial services industry pie.
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Notwithstanding, on July 8, 1983, Bush sent Reagan a draft of the bill that would provide commercial banks far more latitude.
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The Treasury Department also went to bat for the bankers. On July 18, 1983, Regan provided testimony before the Senate Banking Committee regarding the proposed Financial Institutions Deregulation Act (FIDA).
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It was the second of the administration’s two-part proposal for bank holding company deregulation, following the Garn–St. Germain Depository Institutions Act of 1982, which layered on Carter’s 1980 Depository Act, removing the interest rate ceiling that banks and S&Ls had to abide by for customer accounts. In addition, the act raised the limit of investment that S&Ls could make in nonresidential real estate from 20 percent to 40 percent of their
assets, and raised the consumer lending limit from 20 percent to 30 percent of assets.

The previous act had allowed S&Ls to offer new products like interest-bearing checking accounts and commercial loans, in addition to savings accounts. Deregulation of those lending standards was a major contributing factor to the brewing S&L crisis. The S&Ls’ new ability to invest in riskier ventures opened them up to sales of dubious-quality assets by rapacious banks anxious to sell them junk wrapped as valuable investments.

Regan further informed the committee that “developments in the financial service industry have all but eliminated most traditional distinctions between banking and nonbanking services” anyway.
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He argued that legislation should follow the practice. Besides, diversified nonbanking firms like Sears, Roebuck; Merrill Lynch; Shearson/American Express; and Prudential-Bache were rapidly approaching the point of being able to offer “one-stop financial shopping.”
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Commercial banks should be allowed to expand their role in order to compete.

In November 1983, after convening more than forty meetings with industry groups to get their reactions to the bill, Bush’s Working Group on Financial Institutions Reform submitted its report to the Council of Economic Advisers.
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The package included various industry reactions to FIDA. Not surprisingly, non–bank holding companies wanted bank holding companies to stay out of their turf, whereas commercial and investment banks wanted more deregulation. Insurance companies wanted a “prohibition on states authorizing banks to enter other businesses” and “opposed any insurance authority for banks.”
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Investment banks advocated broadening the deregulation proposals “to include full securities powers for banks and bank power for securities firms.” They also wanted to be permitted to expand across state lines so they could be subject to national rather than state laws—it was easier to lobby the federal government on deregulation than deal with each state individually. And they wanted the “expanded rights” that the commercial banks wanted, including easier paths to becoming bank holding companies and the right to create mutual funds within their firm, in order to keep customers from taking such business elsewhere.
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In short, they wanted full reversion to pre-Glass-Steagall times.

All the other financial service factions wanted to preserve their corner of the market and have more deregulation. For their part, thrifts, or S&Ls—which tended to be smaller, more localized institutions—believed FIDA put
them at a competitive disadvantage. Mortgage bankers supported FIDA as it applied to banks but thought the entire idea of the holding company approach “limits flexibility.”
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The housing industry objected to subsidiaries of bank holding companies and S&L holding companies participating in direct real estate investment, development, and brokerage, because it would infringe on their business. They also generally opposed FIDA because it would “tend to create fewer, larger financial institutions.”
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That was exactly what the commercial banks counted on.

Commercial banks, with their powerful and politically connected leaders, were angling for broader powers, including authority for corporate underwriting in their securities affiliates.
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Their demands would be honored to the extent the administration could get them through Congress.

Taking all this into account, on November 19, 1983, Bush’s task force crafted a list of bills that largely ignored noncommercial bank concerns. Title I, the Financial Institution Competitive Equity clause, for instance, deregulated a wide range of financial services that could be offered by depository institution holding companies.
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But it took time to wriggle these concepts through Congress. So on March 28, 1984, Regan had to testify again before the Senate Banking Committee regarding Senator Jake Garn’s Financial Services Competitive Equity Act, which was based on the group’s proposals. His logic remained that banks were already moving past their boundaries, so their initiative might as well be made legal. For instance, BankAmerica had moved into the insurance business by allowing Capital Holding Company, a Louisville-based firm, to sell insurance in its branches. Citicorp was operating S&Ls in California, Florida, and Illinois. And national banks were already permitted to offer investment advice.
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“You can continue to do nothing, and allow the marketplace, the states, and the federal regulators to mold the financial services industry as they see fit,” he told the committee, “or you can enact legislations, which will respond to the realities of today.”
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Wriston Retires

The New York Fed was fully supportive of expanding the powers of commercial bankers, too, such that they could acquire the depositors and business of other banks. In addition to authorizing commercial banks to purchase flailing thrifts, New York Fed president Anthony Solomon also promoted “a practical, federal plan for phasing in nationwide banking.”
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Citicorp particularly benefited from this expansionary stance and interstate banking loophole. On January 20, 1984, the Federal Reserve Board permitted it to purchase two flailing thrifts, First Federal Savings & Loan Association of Chicago and New Biscayne Savings & Loan Association of Miami.
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The acquisitions placed Citicorp, the biggest US commercial bank holding company, and now one of the nation’s biggest S&L association operators, a step closer to full-service interstate banking. Citicorp flexed its muscle by bending laws that still prohibited banks from taking deposits across state lines.

American Banker
observed that Citicorp’s takeovers had been pushing legal boundaries for years: “Citicorp . . . has used a weakening in the regulatory fabric to gain a foothold in California, Florida, and Illinois . . . [which] emerged in cases of failing S&Ls when regulators have taken merger bids from out-of-state institutions rather than let a thrift fail. The acquisition of Fidelity, now with $3.3 billion in assets and the new name of Citicorp Savings, was the first merger over state lines to be approved by federal regulators.”
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On September 1, 1984, John Reed succeeded Wriston as chairman and CEO of Citicorp.
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Initially, he kept a relatively low profile that matched his more subdued personality relative to the broad media Wriston had coveted to express his views.

Wriston’s seventeen-year reign had catapulted Citibank past Chase to become America’s largest commercial bank, with $130 billion in assets. When he retired, a few years after his old rival David Rockefeller retired from Chase, he similarly bequeathed a company saddled with unstable Latin American debt and other crises. The
Wall Street Journal
’s Charles Stabler described the situation by declaring that the risk-free world of banking in 1967 had transformed into a risky, aggressive, innovative, and exciting enterprise, adding that “the adaptation of banks to this revolution, and even the encouragement of it, is Walt Wriston’s doing.”
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Stabler neglected to mention the downside of that excitement.

Reagan praised Wriston and a group of other businessmen at a White House dinner on May 21, 1986. “We’ve raised $7 million this year. That’s almost enough to buy a small oil company,” said Reagan.
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Wriston continued his post-Citicorp influence through op-eds, speeches, and fundraising.

“Sweeping Revisions” for Bankers

Following a brief one-month review period, Reagan approved Bush’s task force recommendations for submission to Congress. (Reagan vetoed only
thirty-nine acts in his first four years in office, compared to Ford’s total of sixty-six in less than two years.) On February 2, 1984, Bush announced that “the task group’s regulatory proposals, together with the administration’s pending legislation concerning product deregulation [are] the most comprehensive revision of federal law affecting financial institutions in the last 50 years.”
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The focal point of Bush’s recommendations was the Group’s Blueprint for Reform. Bush considered the proposal a “sweeping revision of the federal regulatory system for commercial banks.” With an obligatory nod to the public, he promised the plan would put “the overall regulatory structure in a position to protect the integrity and stability of financial markets over the coming decades.”
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In July 1984, Butcher pressed Chase to acquire the Lincoln First Corporation. The acquisition marked a radical shift in federal regulatory sentiment. During the mid-1960s, Chase failed to gain the regulatory approval to become a holding company a fraction of the size of Lincoln First.
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Now size was no longer an obstacle.

Emboldened by the situation, Butcher beat the drum harder for full interstate banking. “We want to be an interstate bank,” he said during a press conference at the annual American Bankers Association convention on October 26, 1984. “We can put a branch in Bangkok, Thailand, which I can tell you is exactly half-way around the world, but not in New Jersey, which I can see over the river.”
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By 1985, Chase had facilities in twenty-three states and Washington, DC, and spanned seventy-one nations. It was assiduously buying international banks to access fresh networks of clients. Piggy-backing on Rockefeller’s legacy, twenty-two offices for private banking of high-net-worth individuals spanned the globe, concentrating in Latin America, the Middle East, and, increasingly, Asia.
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Reagan’s Reelection

During the summer of 1984, Volcker met with Reagan and his chief of staff, James Baker, in the East Wing of the White House to discuss interest rates in the lead-up to the 1984 presidential campaign.

“For Baker, it was more a routine discussion,” wrote Bob Woodward in his biography of Alan Greenspan,
Maestro.
“He didn’t want to be seen as pressuring Volcker. Of course the administration wanted lower rates. The White House always did.”
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So did the bankers. Lower rates would enable banks to
fund themselves more cheaply so as to plug holes from potential losses arising from third world debt defaults or payment delinquencies.

Volcker ultimately did lower rates.
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The Fed obtained greater influence over banking, too. On October 9, 1984, Bush’s task force sent its final report to Reagan. It contained fifty legislative recommendations. The report called for extending the power of the Federal Reserve by requesting the nearly nine thousand nonmember state banks supervised by the FDIC to fall under Federal Reserve supervisory jurisdiction. The Fed would maintain control over the fifty largest US bank holding companies.
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A month later, Reagan was reelected in a landslide. After his victory, on January 9, 1985, Reagan announced that Treasury Secretary Regan and Chief of Staff Baker would switch roles.
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The Independent Bankers Association of America, among others, believed that Baker understood “the value of strong regional banks,” whereas former Wall Street leader Regan “maintained close ties to the giant New York money center banks” and was thus perceived as being more sympathetic to their demands.
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Yet the distinction was meaningless in the scheme of deregulation and the commercial bank support it had in Washington. It was true that Regan had gone to bat for Wriston and the rest of the commercial bankers repeatedly, and that he was philosophically aligned with them. But Baker would turn out to be equally helpful to their power plays.

Baker, Bankers, and the Developing World

Baker unveiled the rough version of his plan for dealing with the third world debt crisis at a joint meeting of the World Bank and IMF in Seoul, South Korea, on October 6, 1985, and provided more details two days later. He called for a “new global compact among commercial bankers, debtor countries, and the international development institutions.”
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The plan urged private banks to increase their lending. It also called for $9 billion in IMF and World Bank loans in exchange for austerity measures.

Tom Clausen, president of the World Bank and the International Finance Corporation, also delivered a speech there. He stated, “Developing countries must undertake policy reforms, and they must receive adequate capital flows to support their reform efforts.”
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