As we started the the 110th Congress, issues revolving around mixing banking and commerce and how that historic separation should be maintained. As we end the 110th these separations took on new meaning.
The most significant piece of legislation for the 110th and perhaps for this decade is Emergency Economic Stabilization Act of 2008. This was not an easy vote to make, but I voted "no" on this bill which now has become law. The bail out bill was portrayed as a badly needed government fix which would solve our economic problems.
Since I came to Congress, I have consistently voted for smaller more efficient government and not to increase the debt we pass onto the next generation. On September 30th, the federal debt went over $10 trillion, a fact that received no real attention in the news or in Congress. This one bill, now law, alone has the potential to raise our debt by $1 trillion. Converting private debts into public debts that make the federal government weaker will not solve the problems on Wall Street or Main Street. Further, this bill fails the basic requirement of correcting the federal government policies that have contributed to fueling the housing bubble that burst, the credit freeze or the resulting economic downturn.
I supported better alternatives that unfortunately, were not debated nor allowed a vote. In order to maintain confidence in our banking system, I offered the Main Street Protection Act, H.R. 7228, to protect 100% of the accounts in FDIC covered banks. We could spread the premiums over a long period to reduce the burden on the banks. My bill also protects the principle in money market accounts.
I also cosponsored a comprehensive alternative bill, HR 7223, that would provided other alternatives such as:
New MBS Insurance with Risk-Based Premiums: Direct the Treasury Department to assess a risk-based premium to finance new government insurance on all outstanding Mortgage Backed Securities (MBS), that is bundled mortgages. Participation in the program would be mandatory for all holders of MBS in order to guard against adverse selection where only the holders of troubled assets participate. This would establish a minimum value for MBS whose value is now uncertain for institutions that own them. This is a key factor undermining confidence among banks to lend to each other. The premium would expire when the Treasury Secretary determines the fund has sufficient resources to meet any projected losses.
Net Operating Losses: Allow companies to carry-back losses arising in tax years ending in 2007, 2008, or 2009 back 5 years, generating a tax refund and immediate capital. Despite the presence of willing buyers, many firms with MBS are not willing to sell at such a huge loss. Such a carry-back provides a cushion for any such loss, making firms more willing sellers.
Repatriation Infusion: Allow a repatriation window for profits earned by U.S. firms overseas. Such repatriation amounts would be taxed at 0% if invested in distressed debt (as defined by Treasury) for at least one year.
Bank Losses on Government Sponsored Enterprise (GSE) Stock: Allow banks to treat losses on shares of preferred stock in Fannie Mae and Freddie Mac as ordinary losses, not as capital losses.
Two-Year Suspension of Capital Gains: Immediately suspend the capital gains rate from 15% for individuals and 35% for corporations. By encouraging corporations to sell unwanted assets, this provision would unleash funds and materials with which to create jobs and grow the economy. After the two-year suspension, capital gains rates would return to present levels but assets would be indexed permanently for any inflationary gains.
Limit Federal Backing for High Risk Loans: Mandate that GSEs no longer securitize any unsound mortgage that is: (1) not fully documented to meet minimum requirements for work, assets, and income; (2) written to comply with any law or regulation that would otherwise violate a firm's lending rules.
Schedule the GSEs for Privatization: Transition Fannie and Freddie over a reasonable time period to truly private companies without special government privileges and open them up to real market competition. This reform would 1) establish commonsense limits for their capital requirements and portfolio holdings relative their size, 2) focus their mission on affordable housing only, not profit making, 3) require them to pay an appropriate risk-based amount for the government guarantee they enjoy, 4) subject them to state and local taxes and accurate SEC filings like every other private for-profit corporation, and 5) ultimately provide for the phase out their GSE charters once their conservatorship has ended.
Suspend "Mark to Market" Accounting: Direct the SEC to suspend the mark-to-market regulatory rules until the agency can issue new guidelines that will allow firms to mark these assets to their true economic value. This would free up to $2 trillion in capital for investment. The current rules contribute to a downward spiral as firms have to evaluate their assets not on the basis of their long-term investment value but rather on short-term fear-driven market prices.
Stabilize the Dollar: Repeal the laws which divert the Federal Reserve's attention from long-term price stability to short-term economic growth. In an effort to fuel the economy, this additional mandate has encouraged the Fed to keep rates artificially low, fueling economic boom and busts, and now a strong up-tick in inflation and the decline of the dollar (as investors free dollars for hard assets). This reform would require the Fed to establish a numerical definition for price stability and maintain a policy that promotes it over the long-term.
Strict Enforcement of Laws Designed to Protect Investors: Task the SEC with reviewing the annual audit reports of entities the federal government has brought under conservatorship or now owns, and determine if those annual audit reports from years 2005 to present accurately reflected the financial health of those businesses.
We also need bank transparency that would allow banks to have confidence in each others balance sheets so credit can flow once again. These structural reforms were not included in the bill that was approved.
This law puts us on a dangerous course. It's wrong to privatize profits while socializing losses. It's wrong to make taxpayers liable for the consequences of decisions by irresponsible borrowers, lenders and investors. It is a very poor deal for taxpayers and future generations for the government to be the buyer of last resort of troubled assets for above market prices in the hopes they will be sold later for a profit.
We are in an economic downturn. There are tough times ahead. But, we will get through these troubled times a stronger people. I believe that the people of the Sixth District demand that Congress focus on the problems that got us to this point and develop solutions which will strengthen our economy in the long run and not look for short term gimmicks or fixes.
H.R. 698, `Industrial Bank Holding Company Act of 2007'
On May 21, 2007, The Industrial Bank Holding Company Act was passed by the House. Congressman Bartlett both co-sponsored and voted for this piece of legislation.
PURPOSE AND SUMMARY
H.R. 698, `Industrial Bank Holding Company Act of 2007,' is intended to restore the traditional separation between banking and commerce by prohibiting commercial ownership of industrial banks and empowering the Federal Deposit Insurance Corporation (FDIC) as the federal supervisor of industrial bank holding companies.
H.R. 698 generally prohibits commercial companies from owning industrial banks. A company will be considered `commercial' if it derived 15 percent or more of its gross revenue, on a consolidated basis, from non-financial activities. Those commercial companies that already own industrial banks, however, will be exempt from this prohibition under one of two grandfather provisions.
H.R. 698 also establishes the FDIC as the consolidated supervisor of industrial bank holding companies, which are companies that control industrial banks and are not already subject to consolidated supervision by another federal regulator. In addition, the legislation provides the FDIC with certain regulatory tools, comparable to those possessed by the Federal Reserve, to be able to effectively supervise industrial bank holding companies. H.R. 698 gives the FDIC the authority to, among others, examine industrial bank holding companies and subsidiaries, regulate the acquisition of industrial banks, set capital adequacy standards on industrial bank holding companies, and apply a similar enforcement regime to industrial bank holding companies that the Federal Reserve applies to bank holding companies.
BACKGROUND AND NEED FOR LEGISLATION
Under current law, a commercial company cannot own a bank; however, a commercial company can own an industrial bank. Industrial banks are state-chartered banks that have direct access to federal deposit insurance and the Federal Reserve's discount window and payments system, and have most of the deposit-taking, lending, and other powers of banks. Industrial banks, however, operate under a special exception to the federal Bank Holding Company Act that allows companies, including commercial companies or foreign banks, to own and operate industrial banks outside the framework of federal supervision and activity restrictions that otherwise apply to bank holding companies.
Federal law places few, limited restrictions on the types of activities that an industrial bank may conduct. Industrial banks operating under the Bank Holding Company Act exception can offer a range of federally insured retail deposit accounts; commercial, mortgage, credit card, and other loans; and other banking services. Industrial banks with greater than $100 million in assets may operate under the exception so long as they do not accept demand deposits, but many such industrial banks offer `negotiable order of withdrawal' accounts that are the functional equivalent of demand deposits. Federal law also allows industrial banks to branch across state lines to the same extent as other types of insured banks.
Only seven states charter entities identified as industrial banks by the FDIC: Utah, California, Colorado, Minnesota, Hawaii, Indiana and Nevada. Of these, Minnesota, California and Colorado no longer permit commercial companies to acquire or establish industrial banks, leaving Utah, Nevada and Hawaii as the only states permitting new charters for industrial banks owned by commercial firms. Hawaii has not chartered any industrial banks since at least 1992, and Indiana no longer charters any new industrial banks.
In recent years, the aggregate amount of assets and deposits held by all industrial banks has increased substantially. Between 1997 and 2006, the aggregate amount of assets increased from $25.1 billion to $212.8 billion, an increase of more than 750 percent, and the aggregate amount of deposits increased from $11.7 billion to $146.7 billion, an increase of more than 1,000 percent. The size and nature of individual industrial banks have changed as well in recent years. The largest industrial bank in 1987 had assets of approximately $410 million; the largest industrial bank in 2006 had more than $67 billion in assets and more than $54 billion in deposits, making it among the twenty largest insured banks in terms of deposits. Historically, industrial banks were locally owned and focused on small consumer loans. Today, many industrial banks are controlled by large, internationally active companies and used to support complex business plans and operations.
Without this legislation, further expansion of industrial banks may undermine the separation of banking and commerce. Several concerns are at issue. First, banks affiliated with commercial companies may be less willing to provide credit to the competitors of their commercial affiliates or may provide credit to their commercial affiliates at preferential rates or more favorable terms. Second, allowing the mixing of banking and commerce might, in effect, lead to an extension of the federal safety net to commercial affiliates and make insured banks susceptible to the risks facing their commercial affiliates. Third, allowing banks and commercial companies to affiliate with each other could lead to the concentration of economic power in a few very large conglomerates.
On June 8, 2006, ninety-eight Members of Congress wrote to the FDIC requesting a moratorium on new approvals for new commercially-owned industrial banks until Congress considers the matter. A six-month moratorium was imposed by the FDIC on July 28, 2006. Reps. Frank and Gillmor, joined by 115 other Members of Congress, wrote to the FDIC on December 7, 2006 and requested that the moratorium be extended. Congressman Bartlett was one of the 115 members of Congress. On January 31, 2007, the FDIC voted to extend the moratorium on approving applications for commercially-owned industrial banks for one year, through January 31, 2008.
H.R. 1537, THE CREDIT UNION REGULATORY IMPROVEMENT ACT OF 2007
Another significant piece of legislation facing the banking industry is HR. 1537, the Credit Union Regulatory Improvements Act of 2007. Congressman Bartlett is a co-sponsor of this legislation.
The following is a summary of this legislation:
· Credit Union Regulatory Improvements Act of 2007 - Amends the Federal Credit Union Act to reduce the minimum net worth ratio requirements of credit unions.
· Revises the minimum risk-based net ratio for such capitalizations.
· Transfers from the federal banking agencies to the Federal Deposit Insurance Corporation (FDIC) the authority to adjust the net worth levels of credit unions.
· Instructs the National Credit Union Administration Board (Board) to design the risk-based net worth requirement to take account of material risks to insured credit unions that are taken account of by comparable standards applicable to FDIC-insured institutions.
· Establishes a temporary waiver of the net worth restoration plan requirement for an undercapitalized credit union which attains its status due to a major natural or man-made disaster.
· Revamps requirements for limits and restrictions on member business loans.
· Authorizes credit unions to lease to any business enterprise separate and clearly distinct space in credit union office buildings in underserved areas.
· Authorizes the Board, in specified circumstances, to encompass within credit union membership any person or organization within an underserved local community, neighborhood, or rural district.
· Permits a credit union to invest in securities for its own account.
· Increases the investment and lending limit in credit union service organizations.
· Exempts certain voluntary mergers involving multiple common-bond credit unions from the numerical limit for eligibility within the field of membership category of a credit union.
· Directs the Board to prescribe criteria for continued membership of certain member groups in the case of certain credit union conversions to a community charter.
· Includes just cause as grounds for expulsion from membership.
· Authorizes term limits for board members of federal credit unions.
· Revises voting requirements for credit union conversions to mutual savings banks.
· Amends the Clayton Act to exempt from its pre-merger notification and waiting period requirements any mergers of one insured credit union activities with another which require agency approval under the Federal Credit Union Act.