Bracing for a US banking overhaul

Ralph Nader is concerned that the "financial modernization" legislation moving through Congress will lead to "the most massive" consolidation of financial power in the 20th century.

The bill, S-900, is hundreds of pages long. And few people, even among the experts, know or understand it fully. One thing it does do is repeal the Glass-Steagall Act of 1933 that compartmentalized commercial banks, securities firms, and insurance companies from each other.

S-900 could pass this week.

"We will look back at this and wonder how the country was so asleep," declares Mr. Nader, a veteran consumer advocate. "It's just a nightmare."

The bill's advocates are cheering the recent removal of obstacles to passage.

The Federal Reserve and the Treasury reached a compromise on regulatory turf - a dispute that earlier had made a presidential veto likely.

Senate Banking Committee Chairman Phil Gramm (R) of Texas made a deal with the Clinton administration weakening the Community Reinvestment Act of 1977. That act obliges banks "to meet the credit needs of the local communities in which they are chartered" - in other words, to serve the ghettos.

A Senate-House conference also agreed on provisions dealing with the privacy of consumers. Elements of a financial conglomerate will be allowed to share information on individuals, ranging from health to financial status.

To Nader, a key problem is the undermining of what famed economist John Kenneth Galbraith called "countervailing power." Banks, securities firms, and insurance companies competed with each other for legislative support and consumer favor. That struggle tamed their respective power.

Now these industries will merge into "a handful" of trillion-dollar-plus conglomerates, and probably hundreds of small "boutiques" offering specific financial products, predicts Nader.

The conglomerates, Nader warns, will be "too big to fail." If one goes belly up, Uncle Sam may need to come to their rescue, costing taxpayers billions.

Already, Citigroup has some $800 billion in assets.

Since politics has become highly dependent on large campaign contributions, big money likely will have big political power.

"Nobody will be able to discipline a Citigroup," cautions Edward Kane, a finance professor at Boston College. The conglomerates could have "tremendous political clout." It may even be hard for the many regulatory agencies to know what these complex giants are doing.

Jake Lewis, a colleague of Nader's at the Center for the Study of Responsive Law in Washington, charges further that the "one-stop shopping centers" set up by the conglomerates "will lure and coerce consumers into buying all their financial products from a single source." People won't shop around for the lowest price and best choice from a variety of competing financial firms.

But to proponents, S-900 - the end result of many years of legislative battle - deserves passage despite faults.

For one thing, it makes de jure what has become de facto. Regulators and courts have gradually interpreted law to permit combinations between commercial banking and the securities business. S-900 will tidy up the process. It will especially hasten the merger of the insurance business into these conglomerates.

Anthony Santomero, a finance expert, sees S-900 as "a good step" in the nation's financial restructuring. "The United States is the only major country that has its financial institutions pigeonholed into narrow boundaries," says the Wharton School, University of Philadelphia, professor.

Consumers, he says, will be protected by a host of smaller firms offering competitive financial products, such as home and car loans, Internet banking, credit cards, CDs, brokerage services, and mutual funds. "It will be very interesting to see how it evolves," he says.

One question is whether federal regulatory agencies - at least six of them - can prevent abuses of power.

Mr. Lewis calls it "a convoluted Rube Goldberg structure" that may obscure accountability of federal regulators.

Professor Kane suggests part of regulators' compensation be set aside and paid only if there is financial stability for several years after they leave office. At present, many regulators bail out of Washington for big bucks in the industry they have regulated. The withheld pay would provide an incentive for them to be tough regulators.

(c) Copyright 1999. The Christian Science Publishing Society