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NOW: ABC NEWS THIS WEEK, 25 Jan 2009.
SPEAKER OF THE HOUSE:
Well, whatever you want to call it… If we are strengthening [the banks], then the American people should get some of the upside of that strengthening. Some people call that nationalization.
[Who] would … have ever thought we would see the day when we’d be using that terminology? Nationalization of the banks.
THEN: HOUSE COMMITTEE ON BANKING & FINANCIAL SERVICES, 29 Apr 1998.
The hearing will come to order.
The committee is meeting today to hear testimony from 23 witnesses on recently announced mergers of large financial institutions.
It is an understatement to say that this is a period of dramatic change in the banking industry in the United States.
Since 1980, according to Federal Reserve statistics, there have been about 7,000 mergers of financial institutions in the country that have occurred, and the number of individual banks has dropped from a peak of 14,400 in 1980 to 9,064 today…
Each of the recent merger announcements needs to be looked at on an individual basis as well as on an industry-wide basis.
The Citicorp-Travelers merger involves the integration of a money center commercial bank with a major insurance and securities firm.
- The NationsBank-BankAmerica merger involves the creation of a national coast-to-coast retail bank based upon a union of two dominant regional banks.
- The Banc One-First Chicago NBD merger involves a major consolidation within a particular region.
- The Washington Mutual merger with Great Western and Home Savings involves the creation of the largest S&L in the country…
- And, finally, the Household-Beneficial merger involves a consolidation of two of the largest consumer finance companies in the country…
Thank you, Mr. Chairman…
We must … be cautious as we look to the 21st century. Banks and other financial institutions are crucial parts of our economic engine. Any future structure … must provide for a true safe-and-sound banking system with certainty and predictability…
Mr. Chairman, I am concerned about mega-anything, especially mega-entities with deposit insurance backed by the taxpayer and an implicit moral hazard phenomenon that is assumed.
However, our American dual banking system, today’s system, this banking system is one of the most open in the world. I hope we don’t have to report that as being a historical fact in the future…
Thank you very much, Mr. Chairman… I want to welcome all of our bank regulators to join us this morning.
Sometimes when I look at what has happened in the banking world in the last couple of months, I think that maybe the chairmen of these banks have just gotten a prescription for the Viagra pill. I think every time I turn around they are growing and growing, but I don’t know what is going to come of it.
…Over the last month we have seen five mega-mergers announced in the banking industry. If approved, these five banks will control over $2 trillion in assets.
Mega-merger mania is the new Beanie Baby of the American financial scene; everybody has got to have one, but at the end of the day they are not worth very much…
Mr. Chairman, before us today we have—pending regulatory approval:
- the largest bank, the largest thrift and the largest finance company in the country, as well as the largest financial services company in the world.
Judging from their stock prices, it looks as if the market has already blessed these unions, but it is appropriate that we take a very careful look at what the results of these mergers are going to be…
Because the Citigroup merger goes the farthest in this regard, it is the transaction that should give us the greatest concern.
By asking the Fed to squeeze a very sizable insurance underwriting operation through a loophole with the expectation that we will repeal Glass-Steagall sometime in the next five years, the Citigroup companies are essentially playing a very expensive game of chicken with Congress. It is important the Fed take a very close look at this.
The other deals are troubling for their sheer size.
- The new BankAmerica would control 8 percent of the banking assets in the country, uncomfortably close to the cap allowed by the interstate branching laws.
- Banc One may bump up against the deposit concentration limits in some of its local markets because of the overlap in service between the two banks.
- Washington Mutual would hold 17 percent of deposits in California but, more importantly, account for a sizable share of the deposits insured by the Savings Association Insurance Fund…
…So my question really is, do you think we should look at shifting it to the private investor so that the threat of a failure, if we have a regulator who is not as up to speed as they should be—we obviously had many regulators during the S&L process, yet they did not stop it. We did insure them. Should we take the risk and shift it to the private investor so that whether or not you have the regulator there or not, if you make a mistake, if you squander money, take all these outrageous risks, then you are going to have to pay for it, not the American taxpayer?
One of the problems is that everything is too big to fail. Everything is too big to fail, and you get these mega-mergers, and it is really too big to fail. One of these things goes down and the American taxpayers are going to have to be the ones that are going to have to bail it out because they are too big to fail.
So do you think we should shift more of this risk away from the American taxpayer and to the person who is initiating the risk and making them realize they will have to pay for it?…
… I would say that we have a lot to learn from the experience of the 1980′s, but I think principal among the things we have to learn is that you can’t deal effectively with an industry like the savings and loan industry when it is already insolvent.
That was the problem that Congress faced. The industry was insolvent by 1980, and we were all pretending that it wasn’t. We tried to deal with remedies that were intended to gamble on an insolvent industry pulling itself out of insolvency.
I think the congressional response in later years, putting emphasis on the maintenance of high levels of capital, putting emphasis on prompt corrective action and on better disclosure, is a marked change from what happened during the experience of the 1980′s.
When an industry or institution is insolvent, it is too late to try to bring remedies to bear, and regulation and supervision should be aimed at preventing insolvency and bringing market forces to bear, so that we are not dealing with institutions that have no net worth left.
That was the problem of the 1980′s.
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I used to work with numbers for a living. I am reminded that truth is stranger than fiction as I search for a new job or at least my next idea. Till next time.
Transcript, ABC News This Week, 25 Jan 2009.
Transcript, House Committee on Banking & Financial Services, 29 Apr 1998.
Despair.com – Government.