July 1, 2009
President Obama recently gave a speech on the need for vast changes in the regulation of financial institutions. In his speech, he made the claim that he "knew that there were millions of Americans who signed contracts that they didn’t always understand offered by lenders who didn’t always tell the truth".
I visited the Mortgage Bankers Association of America at http://www.mortgagebankers.com to put that claim into perspective. According to their survey, we have averaged roughly 2.6 million mortgages per year in 2004-2007. Is President Obama trying to say that most mortgage contracts involved a dishonest mortgage broker and a financially illiterate consumer? Populism seems to have given rise to hyperbole within the Obama administration. More importantly, he seems to be adding another straw man to the long list of villains that he blames for our current economic woes.
Mr. Obama has a bad habit of creating villains to justify policies that centralize his power base in Washington. He is using this latest villain to justify one of the largest political power grabs in history. In that same speech, he proposed granting "resolution authority" to the Federal Reserve to regulate and oversee all banks. Under his scenario, if he turns over regulation of all banks to the Federal Reserve in Washington, this sort of inequality between banks and consumers would disappear. The Federal Reserve already has the power to regulate federally chartered banks that pose a systemic risk to the economy. During the savings & loan crisis of the 1980s, the Federal Reserve used the "Too Big to Fail" doctrine to usurp power from the FDIC to resolve banks that created a systemic risk.
I bring all of this up because Utah and California have the largest number of FDIC-regulated industrial banks in the United States. In 1987, Congress passed the Competitive Equality Banking Act that allowed creation of industrial banks that are subject to all of the same safety and soundness guidelines as federally chartered banks, except they are regulated by the FDIC. They are also exempt from Federal Reserve Board supervision as a bank holding company because they meet certain requirements. They must not have assets in excess of $100,000,000, they do not accept demand deposits, and they cannot incur overdrafts at the Federal Reserve Bank. This may seem subtle, but Utah’s financial institutions employ about 79,000 people, and provide loans to residents and businesses in the state of Utah that may not otherwise be granted under a federally chartered bank. This subtle change in regulations has a profound effect on Utah, and their financial industry. If the Federal Reserve assumes control of all banks, the local nature of banking will disappear forever. You banker will have to conform to a federal set of requirements that will certainly not benefit customers in small, financially sound states like Utah.
If the pundits are correct, President Obama is looking to make this power transfer very shortly before he appoints his friend Larry Summers as the new head of the Federal Reserve. This would put the Treasury, The Federal Reserve Bank, the Senate, and the House of Representatives in friendly hands.
I don’t want to fall into Mr. Obama’s habit of creating a villains list, but it is important to consider the following:
Recommended Stories For You
In 1997, Bank of America merged with NationsBank in what was then the largest bank merger in history. Citigroup merged with Travelers in 1998 to create a $140 billion company with $700 billion in assets. In 1998 Wachovia Corporation purchased CoreStates Financial and then two months later purchased the MoneyStore. They later merged with First Union Corporation to form Wachovia Bank. As a consequence of these mergers, these banks became three of the five largest banks in the United States.
There are three things that all of those mega-mergers have in common: (1) They were consummated while the lesson of the savings & loan crisis was fresh in our minds. That lesson was that mega-financial institutions could not be easily resolved and would require taxpayer bailouts if they failed. That meant that the banks and its shareholders got to keep the profits if the risks paid off, and the taxpayers got stuck with the bill if the risks failed. (2) They were three of the largest recipients of TARP funds. (3) They all took place during the Clinton administration under the oversight of Treasury Secretaries Robert Rubin and Larry Summers. In 1999 Robert Rubin became a board member of Citigroup and later chairman of the board until the company announced his resignation in January of 2009. That was shortly after having to provide them with $45B in taxpayer funds under TARP.
I live in Summit County where a large number of people (including myself) support President Obama and want him to succeed. I am, however, getting a bit tired of Mr. Obama repeating over and over that he "inherited" the economic problems caused by the banks (and Wall Street) from George W. Bush. It is important to point out that inheritances can often span generations, and some of those problems were obviously passed down to President Bush from President Clinton and his advisors. By deflecting blame to his elaborate list of villains, Mr. Obama is trying to reappoint members of the very staff that were partly responsible for this mess. It is time for new ideas and new people, and he should concentrate on meaningful legislation to fix the problem rather than endless power grabs by Democratic retreads.
Henry C. Glasheen is the chairman of the Summit County Republican Party