[Congressional Record Volume 145, Number 63 (Tuesday, May 4, 1999)]
[Senate]
[Pages S4616-S4630]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              FINANCIAL SERVICES MODERNIZATION ACT OF 1999

  The PRESIDING OFFICER (Mr. Bunning). The motion to proceed to S. 900 
is agreed to and the clerk will report.
  The legislative assistant read as follows:

       A bill (S. 900) to enhance competition in the financial 
     services industry by providing a prudential framework for the 
     affiliation of banks, securities firms, insurance companies, 
     and other financial service providers, and for other 
     purposes.

  The Senate proceeded to consider the bill.
  The PRESIDING OFFICER. The Senator from Texas is recognized.
  Mr. GRAMM. Does the Senator from New Mexico wish to say something 
before we start?
  Mr. President, I ask unanimous consent to yield to Senator Domenici 
and to reclaim my time when he is finished.
  The PRESIDING OFFICER. Without objection, it is so ordered.

[[Page S4617]]

  The Senator from New Mexico is recognized.
  (The remarks of Mr. Domenici pertaining to the introduction of S. 951 
are printed in today's Record under ``Statements on Introduced Bills 
and Joint Resolutions.'')
  Mr. GRAMM addressed the Chair.
  The PRESIDING OFFICER. The Senator from Texas is recognized.
  Mr. GRAMM. Mr. President, let me try to outline the procedure that we 
have agreed to by unanimous consent as we begin the debate on financial 
services modernization. We have agreed to have opening statements. I 
guess we will assume that the rest of the morning will be used up in 
those opening statements. I will make an opening statement, the ranking 
member of the committee, Senator Sarbanes, will make an opening 
statement, and then all those who would like to make an opening 
statement are encouraged to come to the floor and do those statements 
this morning.
  Under the unanimous consent agreement, Senator Sarbanes would then 
offer a comprehensive substitute for the committee mark. That would be 
debated for the remainder of the morning--if there is any morning left 
when it is introduced--and this afternoon. When debate on that is 
completed, a vote would be set. It is my assumption, since we have 
colleagues from two States who have had a terrible natural disaster and 
have gone home this morning to assist in making the evaluations that 
will help us respond to that through our Federal emergency programs, my 
assumption is that we will set aside the vote until some time tomorrow 
when they can come back.
  Under the unanimous consent agreement, at the end of the Sarbanes 
amendment, I, or my designee, would be recognized to offer two 
amendments. Those amendments will be offered and debated. And then, 
depending on where we are in terms of our colleagues coming back from 
their States that have had the natural disasters, we would begin the 
voting process.
  The final part of the unanimous consent agreement would be a fourth 
amendment that Senator Sarbanes, or his designee, would offer, and that 
would be an amendment that would strike the CRA provisions of the 
committee bill and insert the provisions related to CRA, which are in 
the Sarbanes substitute. That would get us four amendments into the 
process, and we would then begin the normal debate process where the 
floor would be open to those who seek recognition.
  I know that it is the hope of our leadership that we would finish the 
bill this week. I don't see any reason that we can't do that. Let me 
say, as we begin this debate, I am willing to stay here late at night, 
through the night, if we need to in order to have a full debate on 
these issues. I think we all recognize that under the Senate rules 
everybody gets to have their say. Everybody gets an opportunity to 
offer amendments. I am hopeful that we can complete this process by 
Thursday. We have a long trail to follow to complete the bill.
  As many people in the Senate are aware, the House has a divided 
jurisdiction. The House committee has acted on the bill, the Banking 
Committee; but the Commerce Committee, which has joint jurisdiction, is 
now in the process, on a bipartisan basis, of writing a bill that is 
very different. So I am hopeful that by this Thursday we can complete 
this bill and start moving toward conference and toward all the work 
that still lies before us.
  I would be happy to yield to Senator Sarbanes.
  Mr. SARBANES. Mr. President, I just want to underscore a couple of 
the things that the able chairman of the committee just stated. This is 
a partial agreement that was worked out and was an effort to get the 
Senate into its consideration of the bill in an orderly and prompt 
manner. I think it will accomplish that.
  A number of colleagues asked me during the last vote about making 
opening statements. I indicated that the chairman would be making an 
opening statement, and I would make one, and then the floor would be 
open for opening statements. We hope we can complete those, I assume, 
this morning before we take a break for the conference luncheons, and 
then we would be able to move on to the substitute amendment in the 
afternoon.
  So we hope Members will try to keep this schedule in mind and come 
over sometime during the morning here. I know a number have left to go 
to committee meetings, but they said they wanted to come back in order 
to make an opening statement. We want to try to accommodate our 
colleagues in that regard.

  On the vote schedule, I think we will have to work that out on the 
basis of the people who are away, so that we can accommodate everyone 
in terms of being able to vote, which I assume will be sometime 
tomorrow, as I understand it.
  Mr. GRAMM. Mr. President, I think that is right. Some time between 
noon and 4 o'clock is the word that I received.
  Mr. SARBANES. We will have to discuss that, because I think we may 
have a little problem with that. We may need to extend that a little 
bit.
  Mr. GRAMM. I don't see any reason why we can't accommodate each 
other. We want to have a full debate. Much of the essence of the 
differences that exist are embodied in the first and fourth amendments. 
I think having a full debate is what we should do. I think it is 
important that people understand the issues, and I can certainly say, 
from my point of view, I think the better people understand these 
issues, the better off we are.
  We are here to debate the most important banking bill in 60 years 
today. This bill would dramatically change the American financial 
system. It would knock down existing barriers that separate insurance 
and banking and separate securities and banking. It would create a new 
financial institution in America, which would still be a bank or a bank 
holding company, would still have the same structure, but it would be a 
very different institution, and it would be basically a supermarket for 
financial services.
  Let me say, in going into the process, that my goal is to put 
together a bill that will provide greater diversity and financial 
services at a lower price to American consumers. If this bill does not 
meet the test of providing benefit in terms of a greater diversity and 
availability of product, if it doesn't meet the test of providing a 
lower cost for those products, for the people who do the work and pay 
the taxes and pull the wagon in America, then it would be my view that 
we have failed in this bill. That, I think, is the test that we need to 
use in order to judge our success or lack thereof on this bill.
  In terms of barriers erected between insurance and banking and 
between securities and banking, most of these barriers erected in the 
1920s and 1930s, what has happened that has really brought us to this 
point in terms of legislating this dramatic change in the American 
financial system is that, over time, these barriers have stopped 
looking like barriers, and now they look like little slices of Swiss 
cheese. They have large and small holes in them, some created by 
innovative regulators, some created by the growth of practice and 
convention. But the net result is that after fighting each other for 50 
years to try to keep other industries out of their individual portion 
of the financial services industry, these three great economic forces 
in the American economy--the insurance industry, the banking industry, 
and the securities industry--have basically concluded that they would 
be better off in terms of an open field of competition and greater able 
to meet the needs of their consumers if we simply took down these 
barriers.

  Also students of this problem--no matter what their persuasion within 
limits at the beginning of the debate--have concluded that the 
instability that exists in allowing these walls that divide these three 
major financial industries to continue to stand, knowing that these 
walls have, because of the holes in them, produced this instability and 
produced an unstable structure in many cases--the basic conclusion has 
been reached by virtually everyone engaged in the debate that we would 
be better off to take down these barriers than to leave them standing 
as they are. The debate today is not about the changes that we make in 
the name of financial services modernization.
  That is why I believe and hope that in the end we can reach a 
consensus where at least 51 Members of the Senate--hopefully more--will 
vote for the final product of this deliberation.

[[Page S4618]]

  What we are debating is not about what changes are to be made, but 
how to make those changes. That really involves basically two areas, 
and they will be the focal point of this debate.
  The first area is the question of where these new financial services 
should be provided. Should these new financial services be provided 
within the bank itself, within the legal structure of the bank, and 
what capital that is invested in these new parts of the financial 
services industry will count as the capital of the bank itself? Or 
should these new financial services be provided by affiliates of 
holding companies outside the bank?
  This is a fundamentally important question. It is a question where we 
have great differences of opinion. It is a question that the Chairman 
of the Federal Reserve Board, Alan Greenspan, believes is so important 
that he has said in testimony before the House Commerce Committee that 
if we had a bill that allowed banks to provide these expanded services 
within the bank itself, that bill would be so dangerous in terms of 
providing an unlevel playing surface--in terms of encouraging 
artificially the concentration of securities products being sold and 
serviced inside the bank--and the safety and soundness dangers with the 
Federal Deposit Insurance Corporation would be so great, that he and 
every member of the Board of Governors of the Federal Reserve Board 
have taken a position that it would be better to pass no financial 
services modernization than to undertake to allow banks to provide 
these new services within the bank itself.
  The White House and the Treasury have taken exactly the opposite 
position--they favor a bill where banks can provide these services 
within the legal structure of the bank.
  It is my understanding--I have not seen it, but it is my 
understanding--that we have another veto threat from the President. The 
number of items the President is threatening to veto has grown, and now 
we have gone from four items in his first letter to six items, some of 
which, it is my understanding, would also apply to the Sarbanes 
substitute and to the House bill, further raising some question about 
the administration's degree of seriousness about this bill.
  That is our first issue. Should banks provide the new expanded 
financial services within the structure of the bank itself, or should 
they be forced to take capital out of the bank and invest it through 
their holding company in these separate and independent entities that, 
while affiliated with the bank holding company, will be independent of 
the bank?

  That is probably the most important issue that we will vote on. I 
will say more about it later in my opening statement. You will hear a 
lot more about it as we get further into the debate.
  Inevitably in a big bill like this, subsidiary issues take on great 
importance. One issue that has taken on very great importance in this 
bill is community reinvestment. I will talk more about this later when 
we turn to these two areas of dispute.
  But let me say the real question here boils down to this simple 
question: Should we have a massive expansion in CRA and CRA enforcement 
and with it a massive expansion in regulatory burden, or should we 
reform the existing program to try to eliminate the growing abuse that 
is occurring in that program and the growing regulatory burden that 
exists in that program?
  That will be the second major issue that we will deal with as part of 
this bill.
  Before I turn to a discussion about what the underlying committee 
bill does, I just want to say a few words of thanks to people that have 
been important in putting this bill together.
  I first want to thank Senator Bryan and Senator Johnson for their 
help in committee in making many elements of this bill a bipartisan 
bill.
  I joined with Senator Bryan to adopt a provision related to how banks 
would sell insurance.
  I thank Senator Johnson from South Dakota, who joined with Senator 
Shelby in supporting an amendment to exempt very small rural banks from 
the regulatory burden of CRA.
  I think the action by these two Senators really set a standard that 
we ought to work to meet in the rest of this bill.
  I thank my Republican colleagues who sat through many long seminars 
on financial services modernization, for lack of a better term. I thank 
them for doing this with a minimum of complaint. I think the net result 
is that by and large the Republican members of the Banking Committee 
understand this issue better than we did when this issue was discussed 
last year. I think the net result is that we have a better bill.
  I would like to thank all of my staff on the majority side of the 
committee. But I especially want to thank our staff director, Wayne 
Abernathy, our chief counsel, Linda Lord, and our financial economist, 
Steve McMillin, for all the work they have done on this bill and the 
work that they have done to make the bill better.
  Finally, let me just express a regret. I regret that I have not done 
a better job in working with Senator Sarbanes. We have had a difficult 
time in working together to forge a bipartisan bill. Some of this is 
inevitable, I think. Some of it is not. I just want to say that my 
inability to work with Senator Sarbanes on this bill is something that 
I regret. I have the highest regard for his intellect and his sincerity 
on these issues. And while he and I do not agree on many of these 
issues, I don't doubt for a moment that he understands the issues and 
he is sincere about the position he has taken.
  I think that is one of the reasons it is very hard to work out some 
of these issues, because, as Thomas Jefferson observed long ago, good 
men with good intentions in a free society often reach different 
conclusions. When that happens, the best we can do is to simply plow 
ahead. And that is what we are doing here.
  Let me try to run through very quickly what I believe are the major 
elements in the Financial Services Modernization Act of 1999 as 
reported by the Senate Banking Committee. First, this bill repeals 
Glass-Steagall. It knocks down the barriers between insurance and 
banking and between securities and banking. It chooses to do this for 
the vast majority of the capital in the banking industry through 
affiliates of bank holding companies. This bill makes the decision that 
it is unwise and dangerous to allow large banks to provide these 
expanded services within the structure of the bank itself.
  The majority of the members of the committee concluded that Chairman 
Greenspan is right, that there are strong safety and soundness 
arguments against allowing banks to provide these expanded services 
within the structure of the bank itself and that this endangers the 
taxpayer through the Federal Deposit Insurance Corporation.
  Additionally, the majority of the members of the committee were 
convinced that to give banks the ability to sell these financial 
products within the structure of the bank, and therefore to give them 
the ability to internalize the inherent subsidies that are built into 
FDIC insurance, plus the ability of banks to borrow from the Fed window 
at the lowest interest rates in the country and use the Fed wire, that 
these implicit subsidies--which the Federal Reserve Board has estimated 
to be as high as 12 basis points--would be big enough to assure over 
time to virtually guarantee a massive degree of economic concentration, 
concentration whereby banks would end up dominating these markets--not 
because they are more inherently efficient but because they would have 
the advantage of the subsidies that come from undertaking these 
provisions within the bank.
  This view was very broadly held last year. Senator Sarbanes, in the 
bill he supported, supported this position last year. This was the 
position of the House bill last year. Now we have a debate as to 
whether or not the Congress, the Senate committee and the House itself, 
should reverse its position. This is not a partisan issue. I don't know 
how the votes are going to fall, and I know partisanship has really 
entered into this area. Historically, on issues like this there has 
been a great division on a bipartisan basis.
  Congressman John Dingell, who is the ranking Democrat on the House 
Commerce Committee that has joint jurisdiction on this issue, has taken 
a very strong position that he will oppose the bill if banks are 
allowed to

[[Page S4619]]

provide these services within the structure of the bank itself. It is 
clear that the House Commerce Committee is going to take the position 
of the Senate bill. This is clearly a very important issue.
  An effort was made in the Senate Banking Committee to try to reach a 
compromise on this issue, to let very small banks that in general are 
not big enough to operate holding companies efficiently, yet might in a 
very small way want to get into other financial services such as 
securities and insurance--we set out a dividing line of $1 billion of 
assets and below for smaller banks that together when added up comprise 
about 18 percent of the capital of our banking system, that we would 
allow them to use operating subsidiaries, but with special accounting 
rules so they could expand services and not be precluded from the 
activity based on their size. However, we require any bank with assets 
over $1 billion or that has a holding company to use subsidiaries of 
holding companies so that these services are provided outside the bank.
  We allow banks to underwrite municipal revenue bonds. We follow 
functional regulations so that whatever industry you are in, no matter 
what name is on your marquee, and no matter what business it is 
associated with, you will be regulated by the regulators who regulate 
that particular type of activity. We make a strong effort to reduce 
regulatory burden and streamline the process by giving the Federal 
Reserve Board the umbrella supervisory ability but requiring them in 
most instances to use the audits of other agencies.

  The committee bill takes a very strong position in reaffirming the 
State regulation of the insurance business. We reaffirm that McCarran-
Ferguson is the law of the land, and we require that any institution 
that is selling insurance in any State comply with the licensing 
requirements of that State. Our requirement on the State is simply that 
they have nondiscriminatory requirements.
  We expand the resolution process, knowing that in the future there 
will be debate about what products are insurance products or banking 
products or securities products. We have a resolution process. Then we 
give equal standing to the contesting regulators before the court. We 
go to extra lengths to protect small banks and their trust departments.
  Between 15 percent and 20 percent of the income of many small banks 
comes from trust departments. There is a very real concern that banks 
which are providing trust functions that might never get into financial 
services modernization, that might never open up a securities affiliate 
or op-sub could find themselves regulated by the Securities and 
Exchange Commission and have a dual regulatory burden, are being forced 
to set up an op-sub or set up a subsidiary simply to continue to do the 
same things in their trust department that they have always done.
  We have a very strong provision to protect these small banks, and 
basically have the preemptive provision that if a bank is providing the 
service in a trust department today that they cannot be required to set 
up a separate entity to conduct those same services.
  We have two CRA provisions in the bill. The first provision has to do 
with integrity. It is a very simple provision. Unfortunately, in this 
debate one of my great frustrations is that many people don't want to 
debate the issue before the Senate. As almost always happens in these 
cases, especially when you have an emotionally charged issue, people 
change the subject; they set up straw men and knock them down.
  Let me make it clear that nothing in this bill in any way repeals 
CRA. This bill, as reported by the Senate Banking Committee, does two 
things in CRA. First, it has an integrity provision which says if banks 
have historically been in compliance with CRA, if in their annual 
evaluations they have been found to be in compliance not once, not 
twice, but three times in a row, if they are currently in compliance, 
then if protest groups or objectors want to come in and object to a 
bank action, then objector or protester has to present some substantial 
evidence to suggest that the bank--which has been in compliance 3 years 
in a row and is currently deemed to be in compliance--is out of 
compliance.
  As I will discuss in just a moment, we have a long history of case 
law as it relates to what ``substantial evidence'' means. But that is 
the first requirement. It is simply an integrity requirement. It says 
that if you are in compliance with CRA and you have a long history of 
being in compliance, someone can't rush in at the last minute on a 
major bank merger, where hundreds of millions of dollars are at stake, 
and say they want to undertake a merger and file a protest saying that 
these two banks are racist or these two banks are loan sharks. These 
are words that have been used by people who filed these protests--
without presenting one scintilla of evidence. In fact, one of the 
definitions of substantial evidence is ``more than a single scintilla 
of evidence.''

  So this amendment simply says, if you are going to try to prevent a 
bank from doing something that it has been certified historically on a 
continuing basis as being in compliance to do, you have to present some 
substantial evidence to suggest that all these evaluations have been 
wrong or that something has happened since the last evaluation.
  I do not understand, personally, why anyone would object to that 
amendment. We already require in case law that the decisions of 
administrators at the Federal level be based on substantial evidence. 
So we are really requiring by statute what is already required under 
case law, and I will talk about that a little more in just a moment.
  Our second amendment exempts very small, rural banks from CRA. These 
are banks that have less than $100 million of assets. These are banks 
that often have between 6 and 10 employees. And these are banks that 
are outside standard metropolitan areas. I will talk more in a minute 
about the regulatory burden that is imposed by CRA on these very small 
banks, but since many figures have been used by people who have been 
critical of this proposal, let me say that while 38 percent of the 
banks and S&Ls in America are very small, rural institutions, together 
they have only 2.7 percent of the capital that is contained in our 
banking system nationwide. The basic argument here, which has strong 
roots in existing banking law and which is supported, to some degree on 
a bipartisan basis, is that these very small, very rural banks that do 
not have a city to serve, in most cases, much less an inner city, 
should not have massive regulatory burden imposed on them through CRA.
  The next provision of the bill is that we eliminate the SAIF special 
reserve fund, allowing that money to go into the SAIF itself.
  We cut off the unitary thrift holding company provision. This is a 
controversial issue. It will be debated. Let me just give a brief 
summary of the thinking of the majority of the members of the Banking 
Committee on this issue. Current law permits commercial companies to 
own an S&L. This is called a unitary thrift, and a decision was made in 
our bill to end this provision.
  So, then the question is what are you going to do about commercial 
entities that already own S&Ls? The decision we made was to cut off, 
effective as of the date that we introduced the committee mark, any 
further applications for a commercial company to own an S&L, so that 
all of those applications which were filed prior to that date can be 
evaluated by the Federal regulator, but no new applications would be 
allowed.
  There is a second question as to whether we should go so far as to 
limit the ability of commercial entities that already have thrifts to 
sell their thrift to another commercial interest. The majority of the 
members of the Banking Committee concluded that we could go as far as 
not allowing any new entities to come into existence. But an ex post 
facto law that goes back and changes the rules that thrifts operate on, 
after people have already invested their money--many of these entities 
came in and made investments of hard money during the S&L crisis; many 
of these commercial entities were encouraged to invest this money and 
in doing so they saved the taxpayer literally billions of dollars--and 
to come in now and say not only are we not going to allow any more 
unitary thrifts to come into existence, something that this bill 
supports, but we are going to limit what you can do with the thrift you 
already have, we believe that runs afoul of the takings provision of 
the fifth amendment of the Constitution.

[[Page S4620]]

  We think it is very important to be aware of that conflict with the 
Constitution because recently savings and loans have filed suit against 
the Federal Government based on another bill, FIRREA, where Congress, 
on an ex post facto basis, went back and took back provisions when 
these companies entered into a contract with the Federal Government. 
And we are now told, based on a ruling by the Supreme Court, that we 
can expect billions of dollars of payments to these S&Ls because the 
Federal Government has breached its contract. We have set out a line 
that we are not willing to go over, and that line is we are not willing 
to violate the Constitution.

  We have provisions that allow community banks of less than $500 
million to be members of and to use the Federal Home Loan Bank. We also 
allow them to use small business, small farm and small agriculture 
lending as collateral for loans, and we believe this will improve the 
liquidity of small banks and their ability to serve their communities.
  We have a 3-year freeze on existing FICO assessment. We are 
discussing this issue at great length, but basically when we made a 
decision to move the two insurance rates to the same level, there was 
also a discussion about merging the two insurance funds. But Congress 
never acted on that issue. The majority of the members of the committee 
in our underlying bill believed there ought to be a discussion about 
that issue and that we ought to make a decision on that issue.
  Finally, in terms of the bill itself, we mandate a major GAO study of 
subchapter S corporations that are engaged in the banking business as a 
first step toward changing the way we tax very small banks. Many of our 
colleagues will remember that last year we were able to allow small 
banks with fewer than 75 shareholders to be taxed as individuals under 
subchapter S. We are now trying to expand that out to 150 shareholders. 
This is a very important provision for small banks.
  Let me review briefly the two major issues of contention in the bill. 
Operating subs versus affiliates; Chairman Greenspan and all former 
living Chairmen of the Federal Reserve Board and most former 
Secretaries of the Treasury have argued that it is unwise and dangerous 
to let banks provide these broad financial services within the 
structure of the bank itself; that they should be required to separate 
securities, separate insurance, separate these other industries from 
the capital of the bank itself because the bank is insured by the 
American taxpayer. So the first argument is a safety and soundness 
argument. The second argument is that the implicit subsidies to banks 
will give them an unfair advantage in providing these services if they 
are allowed to do them within the bank.
  I just want to read a couple of quotes from Alan Greenspan. This is 
Alan Greenspan in his April 28 testimony before the House Commerce 
Committee. ``I and my colleagues''--and by ``colleagues'' he means 
every member of the Board of Governors of the Federal Reserve Board. I 
want to remind our colleagues, meaning Senators, that most of those 
members of the Federal Reserve Board were appointed by Bill Clinton, by 
this President. Chairman Greenspan said:

       I and my colleagues accordingly are firmly of the view that 
     the long-term stability of U.S. financial markets and the 
     interest of the American taxpayer would be better served by 
     no financial services modernization bill, rather than one 
     that allows the proposed new activities to be conducted by 
     the bank as proposed in H.R. 10.

  And I would say in the Sarbanes-Daschle substitute.
  In other words, every member of the Board of Governors of the Federal 
Reserve Board says that for the safety of the taxpayer in FDIC 
insurance, and for the general competitiveness of the economy, if we 
had a choice between letting banks provide these broad services within 
the bank or having no bill at all, they unanimously would prefer having 
no bill rather than doing it the wrong way, as they concluded.
  Greenspan goes on to say that allowing these services to be provided 
within the bank ``leads to greater risks for the deposit insurance 
funds and for the taxpayer.''
  Secondly, John Dingell, long-time chairman of the House Commerce 
Committee and, in the minds of many, the most influential Democrat in 
the House of Representatives, has said that, ``absent significant 
changes in H.R. 10''--that is, the House bill, and the same provisions 
are in the Sarbanes substitute--``that I will be compelled to oppose 
this bill with every bit of strength I have.''
  So this is a very important issue and an issue which we will vote on 
as part of the general substitute that will be voted on first, and then 
perhaps we will vote on again.
  Let me turn to a discussion of CRA. Most people think of the 
Community Reinvestment Act as being a very small program. And it was a 
very small program until 1992.
  In 1977, Senator Proxmire put a little provision in a housing bill 
that nominally required banks to make loans in the communities where 
they collected deposits. A North Carolina Democrat objected to the 
provision. There was a vote to strip it out of the bill, and the vote 
failed on a 7-7 tie. This so-called CRA provision went on to become the 
law of the country and became far more important than the bill to which 
it was attached.
  Prior to 1992, if you added up all the CRA agreements and all the 
bank capital allocated by the CRA requirements, these provisions had 
allocated only about $42 billion worth of capital.
  Today, 6 years later, CRA is allocating $694 billion in 1 year. That 
is loans, that is commitments to lend, and that is hard cash payments. 
To put this in perspective, that is bigger than the gross domestic 
product of Canada. It is bigger than the combined assets of General 
Motors, Ford, and Chrysler. It is bigger than the total discretionary 
Federal budget of the U.S. Government.
  Especially troubling is the $9 billion of cash payments which have 
been made as part of CRA agreements.
  In 1977, nobody ever contemplated that under a requirement of law 
which required banks to meet credit needs of the communities where they 
collected deposits that someday banks would pay out and commit $9 
billion of cash payments as part of this process.
  Let me explain these cash payments: As part of every CRA agreement we 
have been able to obtain, there is a requirement that the banks pay 
cash to individual protesters and protest groups, in return for which 
they generally sign an agreement that they will withdraw their 
objection to the banks taking the activity which they objected to.
  Our provisions relating to CRA are very simple. Let me begin with the 
integrity provision.
  Under current law--or under current practice, because the law is a 
very general law--it is possible for a protest group, say, in Boston to 
protest a bank merger in Illinois and, in essence, not go away until 
its ``expenses'' in a cash payment to it are made.
  It has now become fairly common for protest groups from one State or 
region to protest bank actions in another State or region, entering 
into the process to file a complaint or to threaten a complaint. But 
often official complaints are not filed. You are going to hear figures 
about there being complaints in only 1 percent of the bank 
applications. Remember, most applications are only to close or open a 
branch. The big applications are merger applications, and one of the 
reasons we have had an explosion in CRA and the cash payments in the 
last 6 years is from these mergers.

  None of these agreements is public--every agreement we have seen, and 
we now have three that I have read, and we are getting more every day--
every one of them requires the bank to keep the agreement private, so 
no one knows what percentage of the face value of the loan goes to the 
community group in a cash payment. No one knows how much in direct 
payments occurs. No one knows how much the community group collects in 
classes, say, that it makes the borrowers go to and then pay it cash 
money.
  But basically our first amendment tries to deal with the following 
problem: The last-minute protest, or where the protester does not file 
with the Comptroller of the Currency but simply goes to the bank in 
question and says, ``Look, I'm going to file this complaint. Here is a 
letter that I'm going to send to the Comptroller of the Currency 
calling you a racist and calling you a loan shark. And these are the 
protests that I'm going to hold in these

[[Page S4621]]

various locations. And I wanted to see, before I did all this stuff, if 
you were willing to `comply' with the law.''
  Basically what is happening in these cases is, there is immense 
pressure on the bank to make a cash payment or to enter into some kind 
of agreement in order to be able to move forward on their merger.
  Here is what our amendment says. If a bank has been in compliance 
with CRA--the bank has been evaluated by any of the Federal regulators 
who have jurisdiction to come to the bank, evaluate it, review its 
records, and determine that it is complying with CRA--if the bank has 
complied 3 years in a row, and if it is currently in compliance, then a 
protester is not precluded from protesting. You are going to hear some 
people say this is a safe harbor. It is not a safe harbor. Legally, it 
is a rebuttable presumption. The bank is assumed to be in compliance if 
it has been in compliance three times in a row and is deemed by its 
regulators in compliance now, unless the protester or protest group can 
present substantial evidence of noncompliance.

  Now, what does ``substantial evidence'' mean and where does the term 
come from? Substantial evidence is referenced 900 times in the United 
States Code. It is probably the best defined legal term in the American 
system of jurisprudence. There have been 400 major cases defining what 
substantial evidence means.
  Title 5 of the United States Code relating to administrative law--
that is, how agencies function--already requires that agency action be 
based upon substantial evidence, not on arbitrary or capricious action. 
So the reality is, it is already the law that bank regulators should be 
using this standard right now for evaluating CRA. In fact, all banking 
laws and procedures and the judicial review of all banking laws and all 
banking procedures use one standard--substantial evidence.
  Now, what does substantial evidence mean? I have a good counsel, and 
she has gone back and researched all these 900 laws and all of these 
court rulings. Here is what substantial evidence means. In order for a 
protester to stop a bank merger or have its protest become a formal 
part of the consideration for a bank application, the protester must 
present substantial evidence that the bank is either not in compliance 
or won't be in compliance after its action.
  Now, what does substantial evidence mean? It means ``more than a mere 
scintilla.'' In other words, you have a bank that is engaged in a 
transaction where it could literally lose $100 million a day by being 
unable to consummate its agreement, and the standard that we require 
for you as an individual to come in and throw a rock in the gear and 
potentially stop this whole process is that you have to present more 
than a mere scintilla of evidence that this bank, with a long history 
of compliance, where the regulators say it is in compliance right now, 
all you have to do is present more than a mere scintilla of evidence 
that in fact the bank is not in compliance.
  Now, what is onerous about that? In fact, should we have a procedure 
in a free society where professional protesters, without presenting a 
mere scintilla of evidence, can literally hold up institutions and 
potentially impose hundreds of millions of dollars of costs on them and 
their customers without presenting a scintilla of evidence? Who could 
be against that proposal?
  A second definition defined in case law and in statute is, such 
relevant evidence as a reasonable mind might--it doesn't say ``has 
to''--accept as adequate to support a claim; real, material, not 
seeming or imaginary; considerable in amount, value, and worth.
  So I ask my colleagues and anybody who might be interested in this 
debate, is it unreasonable for a bank which has historically been in 
compliance with the CRA law, has been meeting the requirements as 
judged by the regulators who have responsibility for judging, having 
been in compliance 3 years in a row, being in compliance now, if 
somebody wants to come in and prevent them from doing things which the 
regulator has already judged in their last evaluation that at least as 
of that point they were in compliance with the law to allow them to do 
that, is it unreasonable to ask that they present at least one 
scintilla of evidence, that they present evidence that a reasonable 
mind might accept as adequate to support a claim, that their evidence 
be real, material and not seeming or imaginary, or that it be 
considerable in amount, value, and worth? How could anyone think that 
standard is too high?
  The second issue related to CRA has to do with small banks. Small 
banks in rural areas have a very small percentage of the capital that 
is available in the American banking system--about 2.7 percent. But I 
think of greater importance is the following figure, and I think it 
proves one thing conclusively: Small banks in communities that are 
outside metropolitan areas--that is, generally don't even have a city 
much less an inner city--are doing an excellent job of serving their 
communities.

  Since 1990, there have been 16,380 CRA exams on small, rural banks. 
Many of the small bankers from all over America who have written the 
Banking Committee have estimated that CRA compliance costs them about 
$60- to $80,000 a year. They have to name a CRA compliance officer. 
Many of these banks have between 6 and 10 employees. By the time they 
do all the paperwork and comply with all of the regulations, by the 
time they name a CRA compliance officer--normally that is the president 
of the bank--they are having to pay between $60- and $80,000 a year to 
comply. Sixteen thousand, three hundred and eighty of them have been 
examined for CRA compliance since 1990, and only three small rural 
banks and S&Ls have been deemed to be out of compliance. That is, 3/100 
of 1 percent of the evaluations have turned up just three small banks 
and small S&Ls in rural areas that are out of compliance.
  In return for having turned up 3 supposed bad actors, you have had 
16,380 evaluations, 40 percent of the entire enforcement mechanism for 
CRA. What I do not understand is why CRA advocates don't want to take 
that enforcement and put it where the money is, in the urban areas and 
in the big banks.
  I have numerous letters--and I will read some of them--from small 
bankers, several of whom have been Federal regulators enforcing these 
very laws in the past, outlining how hard it is for them to comply with 
these regulations and that they are already lending to everybody in 
town just to stay in business. These are very small communities, and 
they have a very small lending base.
  Now, I have spent a lot of time going through these issues, but I 
think they are important issues. I look forward to debating this issue. 
I hope we can pass a good bill. I agree with Alan Greenspan and I agree 
with every one of the Board of Governors of the Federal Reserve Board, 
however, on one point: It is better to have no bill than to have a bad 
bill.
  I want a bill that is going to promote competition, not reduce it. I 
want a bill that is going to reduce regulation and redtape and cost, 
not increase it. I want a bill that is going to expand financial 
services, not reduce them. I want a bill that is going to lower the 
costs of financial services, not increase them. I believe we have such 
a bill before the Senate.
  I hope my colleagues will listen very carefully to the debate. I hope 
they will enter it with open, not necessarily empty, minds. I think if 
they listen to the two major issues we are going to debate--and those 
issues are: Should banks provide these expanded services within a bank, 
or should they have to provide it outside the bank structure?--and as 
they listen to the issue about whether or not we want integrity and 
relevance in CRA, which has become, now, the largest program undertaken 
by the Federal Government, if measured against direct government 
spending.
  It seems to me that the conclusions they will reach are obvious, and 
in reaching those conclusions we will have the additional benefit of 
passing a bill that will expand financial services and reduce costs. I 
thank my colleagues for their patience.
  I yield the floor.
  Mr. SARBANES addressed the Chair.
  The PRESIDING OFFICER. The Chair recognizes the Senator from 
Maryland.
  Mr. SARBANES. Mr. President, for the fourth time in 11 years, the 
Senate is debating legislation to modernize the structure of the 
financial services industry. We are addressing this issue

[[Page S4622]]

because we want our financial services statutes to keep pace with 
forces that are changing the financial marketplace, forces such as 
globalization, technological change, and the development of new 
products.
  Many experts agree that the time has come to allow affiliations 
between banks, securities firms, and insurance companies; in other 
words, those actors within the financial services industry that 
heretofore have been kept separate by existing statutes--although those 
statutes have, to some extent, been eroded either by regulatory 
decisions or by court decisions. It is, therefore, felt that financial 
services modernization legislation would be useful in helping to set 
the structure within which financial institutions are to operate, to 
provide a certainty and a stability that is now missing under the 
existing arrangements, and which is not altogether clear along the 
borderline of what activities are permitted and what activities are not 
permitted.
  Now, we have not only no objection, we are supportive of the effort 
to allow these affiliations to take place within the financial services 
industry. Therefore, we are anxious to obtain the enactment of 
financial services modernization legislation. However, it is important, 
in the course of doing that, that we achieve or preserve certain 
important goals: obviously, the safety and soundness of the financial 
system; the continuing access to credit for all communities in our 
country; protecting consumers, who, after all, are Mr. and Mrs. 
America. We are concerned that in this effort to create a new structure 
we don't lose sight of the very specific problems that relate to the 
ordinary American with respect to credit; and finally, maintaining the 
separation of banking and commerce. There are some who would like to 
cross that line as well, but we think that would be a great mistake to 
do that.
  Now, just a little bit of history here. Last year, every Democratic 
member of the Senate Banking Committee voted for financial services 
modernization in the form of what was then referred to as H.R. 10, the 
Financial Services Act of 1998. That bill was reported by the Senate 
Banking Committee on a bipartisan vote of 16-2. So there was a joint 
bipartisan effort last year, to try to obtain enactment of financial 
services modernization legislation, which didn't prove out--
unfortunately, in my view.
  Now, this year, unfortunately, the bill brought out of the Committee 
was on a vote of 11-9, a straight party vote, which I regret. I 
particularly regret that, since last year we were able to bring a bill 
out on a 16-2 vote, which, in effect, was a very strong bipartisan 
statement. That obviously raises the question: Why this dramatic change 
from last year to this year? I think, very simply, it is because the 
bill brought to the Senate now, S. 900, does not meet the important 
goals that I set out earlier of continuing access to credit for all 
communities in our country, protecting consumers, and maintaining the 
separation of banking and commerce.
  Before this year, the efforts of the Banking Committee to modernize 
financial services,--in other words, taking earlier efforts to which I 
referred, in which we moved legislation out and, on occasion, even 
moved it through the Senate, but weren't able to get it passed in the 
House--those efforts were, in each instance, bipartisan efforts. We 
reported legislation with support from both sides of the aisle. That 
effort, of course, earlier on, and certainly last year, reflected 
compromises among Committee members and among industry groups on a wide 
range of issues and, in fact, last year's bill was not opposed by a 
single major financial services industry association.

  Now, this year, the consensus so carefully developed last year has 
been abandoned. That decision, of course, has made this bill a 
controversial one and has led to opposition to it. As I indicated, all 
of the Members on this side of the aisle in the Committee opposed the 
Committee bill. Some financial industry groups oppose aspects of the 
Committee bill. Civil rights groups, community groups, consumer 
organizations, and local government officials also strongly oppose the 
Committee bill, especially with respect to the Community Reinvestment 
Act provision, which is an extremely important issue, as Members are 
well aware.
  Lastly, let me note, because it is highly relevant to the process in 
which we find ourselves, that the White House--the President himself--
strongly opposes this legislation. The President sent a letter to the 
Committee at the time of the markup, saying:

       This administration has been a strong proponent of 
     financial legislation that would reduce costs and increase 
     access to financial services for consumers, businesses and 
     communities. Nevertheless, we cannot support the Financial 
     Services Modernization Act of 1999, as currently proposed by 
     Chairman Gramm, now pending before the Senate Banking 
     Committee.

  They then go on to indicate their difficulties with the Community 
Reinvestment Act provisions, noting that:

       It is a law that has helped to build homes, create jobs and 
     restore hopes in communities across America.

  They reference that:

       The bill would deny financial services firms the freedom to 
     organize themselves in the way that best serves their 
     customers, prohibits a structure with proven advantages for 
     safety and soundness, which is the op-sub affiliate issue.
       The bill would provide inadequate consumer protections and, 
     finally, the bill could expand the ability of depository 
     institutions and non-financial firms to affiliate at a time 
     when experience around the world suggests the need for 
     caution in this area.

  The President concludes that letter by saying:

       I agree that reform of the laws governing our Nation's 
     financial services industry would promote the public 
     interest. However, I will veto the financial services 
     modernization act if it is presented to me in its current 
     form.

  I ask unanimous consent that the President's letter be printed in the 
Record at the conclusion of my remarks.
  The PRESIDING OFFICER (Mr. Enzi). Without objection, it is so 
ordered.
  (See Exhibit 1.)
  Mr. SARBANES. Mr. President, the administration has also just 
submitted a Statement of Administration Policy, which starts out:

       The Administration strongly opposes S. 900, which would 
     revise laws governing the financial services industry. This 
     Administration has been a strong proponent of financial 
     modernization legislation that would best serve the interests 
     of consumers, businesses, and communities, while protecting 
     the safety and soundness of our financial system. 
     Consequently, it supports the bill's repeal of the Glass-
     Steagall Act's prohibition on banks affiliating with 
     securities firms and of the Bank Holding Company Act's 
     prohibitions on insurance underwriting. Nevertheless, because 
     of crucial flaws in the bill, the President has stated that, 
     if the bill were presented to him in its current form, he 
     would veto it.

  And then it enumerates their concerns with the bill, most of which 
repeat the points made in the President's letter to the Committee of 
March 2.
  Mr. President, I ask unanimous consent that this Statement of 
Administration Policy be printed in the Record at the conclusion of my 
remarks, and following the letter from the President to the Committee.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See Exhibit 2.)
  Mr. SARBANES. Mr. President, my colleague from Texas, the chairman of 
the Committee, indicated in his remarks that he had doubts about the 
administration's seriousness about the bill. I don't quite know where 
those doubts come from. But let me simply say that I don't think they 
could be more serious about it than they have indicated, and I know the 
very strong feeling that the Secretary of Treasury and indeed the 
President hold on a number of these issues that we are debating here 
and seeking to try to resolve on the floor of the U.S. Senate.
  We have this situation where it is clear that unless these concerns 
enumerated and expressed by the President are resolved in a favorable 
way we are heading down a path towards a veto. That doesn't seem to me 
to be the most constructive or productive path on which to proceed in 
terms of trying to enact legislation.
  The Democratic Members of the Banking Committee have joined with 
Senator Daschle in introducing Senate bill 753, the Financial Services 
Act of 1999. That bill largely encompasses the compromises that were 
developed last year in the bipartisan legislation.
  It differs in one important respect, and that is with respect to the 
bank operating subsidiary provisions. I will discuss those in a little 
more detail

[[Page S4623]]

shortly. But that alternative which reflects essentially last year's 
bipartisan agreement will be offered as an amendment in a the nature of 
a substitute to S. 900.
  That in fact will be the first amendment that will be offered. And 
obviously we expect to do that at the conclusion of opening statements 
when Members have had an opportunity to make their opening statements. 
We expect them to go to the alternative, and we will discuss it 
obviously in some detail. It is I think a very important proposal.
  If in fact the alternative were substituted for the bill we would be 
well on the way to getting legislation enacted into law, because it 
would remove the veto threat at the end of this path and would in 
effect put the Senate essentially in the same ballpark, although not 
exactly, with where the House Banking Committee was when it reported 
out, on a vote of 51 to 8, a bipartisan piece of legislation.
  It is quite true that bill now has to go through the House Commerce 
Committee because of the division of jurisdiction on the House side, 
and presumably differences between how the House Commerce Committee 
sees issues and how the House Banking Committee has seen them will have 
to be resolved on the floor of the House of Representatives.
  But at this stage, the first step, what the House Banking Committee 
has done--I underscore score again on a very strong 51 to 8 vote, an 
overwhelming bipartisan endorsement--parallels, is very similar, to 
what is contained in the alternative that we will be offering as an 
amendment as a substitute for the bill that is now before us.
  Let me turn to the bill that is now before us with special emphasis 
on its differences from the Committee reported bill last year with the 
16 to 2 vote that we had in the Committee.
  It is important I think to try to develop a consensus on these 
issues. The Committee in the past has essentially worked in a 
nonpartisan way. We have divisions within the Committee but they have 
not usually been on a straight party basis.

  I share the regret expressed by the chairman that we have not been 
able to work this matter out this year in a way to avoid these sharp 
party differences. But the failure to do so relates back directly to 
these very critical issues that are at stake. These were issues on 
which last year we were able to work out accommodations and in fact the 
provisions we are advancing in the substitute are last year's agreed-
upon provisions, the consensus provisions from last year with the one 
exception of the operating sub-affiliate issue which I will address 
shortly.
  Clearly one obvious and extremely important problem with S. 900, the 
bill now before us, brought out by the Committee is the treatment of 
the Community Reinvestment Act, or CRA. The agreement that we have 
reached in terms of the order of procedure provide that an amendment 
specifically directed to CRA will be in order as fourth in the line.
  We set out this order just for the first four amendments in an effort 
to structure at least the outset of the consideration of this very 
important legislation.
  I share the chairman's perception that this is very important 
legislation. It is an issue we have wrestled with for many years. It 
pertains to the workings of our financial services industry, which in 
turn, of course, pertains to the workings of our economy and our 
position in the international economic scene. These are important 
matters to which we are addressing ourselves.
  I echo the chairman's hope that Members will pay close attention. I 
assume that Members will pay close attention, and that they will come 
to it with an open mind as they weigh the various considerations that 
are before us.
  Let me turn to the CRA provisions.
  Let me first say that the Community Reinvestment Act, in the judgment 
of most objective observers, has played a critical role in expanding 
access to credit and investment in low- and moderate-income 
communities. We think it has been of critical importance in providing 
access to credit, which very frankly is, in today's context when we 
talk about civil rights in terms of economic opportunity, a very 
important aspect of civil rights.
  In 1977, the CRA was enacted to encourage banks and thrifts to serve 
the credit needs of their entire communities. Consistent with safe and 
sound banking practices, banks and thrifts must serve not just upper-
income areas but low- and moderate-income neighborhoods, as well. CRA 
reflect the view that banks and thrifts receive public benefits such as 
deposit insurance, access to the Federal Reserve discount window and 
the Federal Reserve payment system, that they draw deposits out of 
these communities and that they have a responsibility to make loans 
into the communities in order to serve the entire community.
  In fact, the loan-to-deposit ratio is often an important standard to 
measure the extent to which the institutions drawing deposits out of 
the community are providing a flow of credit back into those 
communities.
  Now, my colleague, the chairman of the Committee, has talked about 
these very large amounts of money that have been committed for 
community reinvestment purposes. First of all, let me say those figures 
are grossly overstated. The figures cited reflect commitments made by 
financial institutions projected 10 years into the future. They are not 
the commitments for 1 year. He is upset by the size of them. I wish 
they were for 1 year. I am not upset by the size of them. I would like 
to see these kind of commitments made into reinvesting in our 
communities. In any event, in order to get this debate on an apples and 
apples basis, I think it is very important to understand that the 
figures that were being tossed around by the chairman reflect 
commitments made by the institutions over an extended period of time 
and not what is going to take place this year.
  CRA has significantly improved the availability of credit in 
historically underserved communities. There are any number of success 
stories. Obviously, we will address those when we turn to the specific 
CRA amendment. Let me just simply point out that CRA has been credited 
with a dramatic increase in homeownership by low- and moderate-income 
individuals. Between 1993 and 1997, private sector home mortgage 
lending and low- and moderate-income census tracks increased by 45 
percent. CRA has helped spur community economic development. The number 
of loans for small business in low- and moderate-income areas has 
increased substantially.
  Now, the chairman says there has been this sharp increase in the 
amount of commitments. That is true, but there has been a very sharp 
increase in the amount of mergers and acquisitions which helped to 
trigger the CRA process. There has been a more receptive attitude 
toward CRA on the part of the regulatory agencies. In fact, regulatory 
agencies, community groups, local and State elected officials and many 
bankers agree that CRA has been beneficial. Chairman Greenspan 
specified that ``CRA has very significantly increased the amount of 
credit in communities,'' that the changes have been ``quite profound.''
  The U.S. Conference of Mayors has promoted CRA as an essential tool 
in revitalizing cities, while the National League of Cities has listed 
CRA preservation as a major Federal priority for 1999.
  Bankers have been able to work with CRA, made it very effective and 
developed new relationships with their communities. As a consequence, 
the chairman and CEO of BankAmerica, Hugh McColl, stated earlier this 
year,

       My company supports the Community Reinvestment Act in 
     spirit and in fact. To be candid, we have gone way beyond its 
     requirements.

  CRA has accomplished these goals by encouraging banks and thrifts to 
make profitable market rate loans and investments. Chairman Greenspan 
noted last year that there is no evidence that banks' safety and 
soundness have been compromised by low- and moderate-income lending and 
bankers often report sound business opportunities. In fact, the CRA 
legislation requires that these loans are made consistent with safety 
and soundness criteria.
  My colleague suggests that somehow the CRA was put into law sort of 
unbeknownst to everyone, that the only vote was a 7-7 vote in Committee 
on an amendment to take the provision out of a bill that had been laid 
out for markup. When that bill came to the floor an amendment was 
proposed to

[[Page S4624]]

strike the CRA title of the bill. That amendment was defeated on a vote 
of 31 in favor and 40 against.

  For whatever it is worth, I simply want to put down this notion that 
somehow this matter wasn't considered at the time it was first put into 
law in the Senate. It was considered in the Committee and it was 
considered on the floor of the Senate. It was voted on in both places 
and it remained in the law. That is the provision that we now have with 
some subsequent modifications.
  In the mid-1990s an effort was made to revise the CRA regulations and 
deal with the complaint that was being received from a number of 
financial institutions that the regulatory process was overly 
burdensome. Secretary Rubin actually took the lead in doing that. I 
think he did a very successful job, in effect trimming down CRA 
requirements, in order to ease that burden. In fact, at the time his 
work was received with great approval.
  Let me talk very quickly about the defects that are in the bill with 
respect to CRA. As I said, we had good agreement on this last year. 
This year, unfortunately, we really have had a major conflict over this 
extremely important issue.
  The chairman makes a number of assertions about CRA but we have never 
held any hearings to substantiate those assertions. We are constantly 
being told about how extensive the abuse is. I am prepared to consider 
the possibility that on occasion abuses occur, but I think the ones 
that took place and most of the ones talked about took place in the 
early years of the CRA and that, by and large, now the CRA process is 
working quite well.
  I know that doesn't meet my colleagues concern. I'm a little bit 
reminded of the story of the program that was working well in practice, 
but the objection was raised, Is it working well in theory? As I listen 
to this debate, I'm reminded of that story.
  Let me talk about the provisions in the bill as it differed from last 
year's approach. The bill eliminates the need to have a 
``satisfactory'' CRA rating as a precondition of expanded affiliations. 
In other words, the substitute we will offer will provide that if a 
bank wants to go into securities or into insurance, that the bank must 
have a ``satisfactory'' CRA rating. In other words, a bank that has an 
unsatisfactory performance rating would not be able to move into those 
activities. It is asserted that that is a major expansion of CRA. The 
major expansion is the ability of the banks to go into those activities 
which heretofore they have been precluded from. That is the expansion.
  Our position is if that is going to take place, a CRA screening with 
respect to the bank's performance--not to the securities or insurance 
affiliate, the bank's performance--is a perfectly reasonable 
requirement to expanding the activities. Otherwise, this bill is not 
neutral. I mean, it allows the banks in effect to shift assets out. If 
they do not have the requirement of a ``satisfactory'' CRA rating, you 
would dramatically undermine CRA as it now exists. In fact, Secretary 
Rubin stated:

       If we wish to preserve the relevance of CRA at a time when 
     the relative importance of bank mergers may decline and the 
     establishment of non-bank financial services will become 
     increasingly important, the authority to engage in newly 
     authorized activities should be connected to a satisfactory 
     CRA performance.

  The financial institutions are prepared, willing, to live with this 
requirement. They are not clamoring that it be dropped from the 
legislative package. In fact, they were supportive of it last year and 
accepting of it this year.
  Second, and I am touching on them very quickly because I know there 
are other Members wishing to make an opening statement.
  Mr. WELLSTONE. Mr. President, might I just interrupt my colleague and 
ask a question?
  Mr. SARBANES. Surely.
  Mr. WELLSTONE. I am a little uneasy he is being rushed along. My 
understanding is at 12:15 we were going to go into morning business; is 
that correct?
  The PRESIDING OFFICER. There is not an order to that effect.
  Mr. WELLSTONE. There is or is not?
  The PRESIDING OFFICER. There is not.
  Mr. WELLSTONE. I say to my colleague I did not want him to rush. I 
will come after the caucuses and speak.
  Mr. SARBANES. As I understand it, there are a number of people who 
want to make opening statements. Presumably we would complete opening 
statements after lunch if we have not completed them before lunch.
  Mr. GRAMM. Will the Senator yield?
  Mr. SARBANES. Certainly.
  Mr. GRAMM. Mr. President, let me just ask our colleague how long he 
needs after lunch to speak?
  Mr. WELLSTONE. I have a fairly lengthy statement because I am 
probably one of the few Senators who objects to this bill and I want to 
lay out my case. I want to talk strongly in the positive about some of 
what Senator Sarbanes is presenting. So I think probably about 40 
minutes, I would need.
  Mr. GRAMM. Let me say I do not object. I think we should go back and 
forth. So if we have a Republican who would like to speak after Senator 
Sarbanes, we can do that. If the Senator wants, he can have 40 minutes 
or an hour and 40 minutes. We would like to hear it.
  Mr. WELLSTONE. If I could just do this, because I do not want my 
colleague from Maryland rushing along and there are other colleagues 
out here: I ask unanimous consent I be allowed to speak this afternoon 
before we get to amendments?
  Mr. SARBANES. You don't have any objection to that?
  Mr. GRAMM. Sure.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  Mr. WELLSTONE. I thank the chair.
  Mr. SARBANES. Second, Mr. President, is the provision for a safe 
harbor for banks with a ``satisfactory'' CRA rating. Actually, what 
this provision would do is effectively eliminate public comment on CRA 
performance. Banks that had received a ``satisfactory'' or better 
rating at the recent exam, and during the preceding 3 years, would be 
deemed to be in compliance with CRA and immune from public comments on 
CRA performance. That would be the case unless you had substantial, 
verifiable information to the contrary--which of course is a very heavy 
burden of proof.
  Actually the regulators oppose this. Comptroller of the Currency 
Hawke stated:

       Public comment is extremely valuable in providing relevant 
     information to an agency in its evaluation of an application 
     under the CRA, convenience and needs and other applicable 
     standards--even by an institution that has a 
     ``satisfactory'' CRA rating. This amendment would limit or 
     reduce public comment that is useful in our application 
     process.
  And there is a similar comment from Ellen Seidman, the Director of 
the Office of Thrift Supervision.
  Public comment is useful because many banks or regulators sample only 
a portion of the markets to determine the institution's CRA rating. 
Public comment provides an opportunity for community members to point 
out facts and data that have been overlooked in a particular 
examination.
  Actually, 97 percent of the institutions get a ``satisfactory'' 
rating so you, in effect, are going to exclude out from this CRA review 
most of the institutions.
  None of the statistics support these assertions that there are too 
many challenges, that there is too much delay. In fact the percentages 
are quite small, in terms of the number of challenges that are filed, 
and then the number of instances in which the challenge gains any 
recognition from the regulators.
  The regulators, of course hear all of the comments. Individuals 
seeking to comment on other aspects of the bank's performance--
financial and managerial resources, or competitive implications--are 
not going to have their rights similarly curtailed. We do not think the 
rights on CRA should be so curtailed. We will develop this, of course, 
later in the debate.
  Let me now turn very quickly to the small bank exemption. The 
exemption for the rural institutions would exempt a vast number of 
institutions in underserved rural areas. It is asserted that these 
banks by their very nature serve their communities. But small banks 
have historically received the lowest CRA ratings. In fact, FDIC 
statistics show that 57 percent of small banks and thrifts have loan-
to-deposit ratio below 70 percent, with 17 percent of those having 
levels below 50 percent.

[[Page S4625]]

  The Madison, Wisconsin Capital Times, in an editorial, summed up this 
practice in many rural communities as follows:

       [M]any rural banks establish a very different pattern [than 
     reinvesting in their communities], where local lending takes 
     a lower priority than making more assured investments, like 
     federal government securities. Thus, such banks drain local 
     resources of the very localities that support them, making it 
     much harder for local citizens to get credit.

  We revised the regulations, I think in a very effective way, to slim 
them down in terms of the burden on the small banks. We don't think an 
exemption is necessary to relieve the regulatory burden. They now have 
a streamlined examination process. They generally do not need to keep 
paperwork or records beyond what they would do in the ordinary course 
of business.
  OTS Director Ellen Seidman stated:

       Small banks should be subject to CRA. The simple assumption 
     that if an institution is small it must be serving its 
     community is not entirely correct.

  Let me turn very quickly to the banking and commerce issue. Again, 
that is an area in which there is a difference between what was worked 
out last year and the bill that has been brought to the floor this 
year.
  A wide range of commentators including, interestingly enough on this 
issue, Chairman Greenspan and Secretary Rubin, former Federal Reserve 
Chairman Paul Volcker, banking industry associations and public 
interest groups, support retaining the separation of banking and 
commerce.
  Chairman Greenspan said:

       It seems to us wise to move first toward the integration of 
     banking, insurance and securities and employ the lessons we 
     learn from that important step before we consider whether and 
     under what conditions it would be desirable to move to the 
     second stage of the full integration of commerce and banking.
  And Secretary Rubin stated, ``We continue to oppose any efforts to 
expand the integration of banking and commerce.''
  The Committee bill permits the continued existence of what is called 
a unitary thrift loophole; and, therefore, it permits a major breaching 
of the separation between banking and commerce.
  The American Bankers Association and the Independent Community 
Bankers of America have written to the Senate urging us to support the 
Johnson amendment on unitary thrifts that would prohibit existing 
unitary thrift holding companies to sell themselves to commercial firms 
going forward. I think it is very important that we try to check this 
loophole which continues to exist in the law.
  I simply say to the chairman that I share his view that we ought not 
to cross any line that is violative of the Constitution. We do not 
think this provision is violative of the Constitution. We think there 
is a lot of very good case law that would support that position.
  In addition to the unitary thrift loophole, the Committee-reported 
bill--and I will just touch on these--allows unnecessary, open-ended 
merchant banking investments. It permits holding companies to engage in 
any nonfinancial activities that regulators believe are 
``complimentary'' to financial activities, which is, of course, a 
potentially very large stretch of these activities.
  Former Federal Reserve Chairman Paul Volcker gave very strong 
testimony on this very issue. And careful observers of the issue have 
said that they regard the failure to maintain this distinction between 
banking and commerce, which we have had in our law for a very long 
period of time, as one of the reasons that contributed to the Asian 
financial crisis.
  Economist Henry Kaufman warned us. He said that it would lead to 
conflicts of interest and unfair competition in the allocation of 
credit. He said:

       A large corporation that controls a big bank would use the 
     bank for extending credit to those who can benefit the whole 
     organization. . . . The bank would be inclined to withhold 
     credit from those who are, or could be, competitors to the 
     parent corporation. Thus, the cornerstone of effective 
     banking, independent credit decisions based on objective 
     evaluation of creditworthiness, would be undermined.

  And Paul Volcker, in commenting about the Asian financial crisis has 
written:

       Recent experience with the banking crises in countries as 
     different in their stages of development as Japan, Indonesia 
     and Russia demonstrates the folly of permitting industrial-
     financial conglomerates to dominate financial markets and 
     potentially larger areas of the economy.

  Now, let me turn very quickly to some consumer protection issues 
which we think will be more adequately covered in our alternative than 
in the Committee bill.
  The alternative, which reflects last year's bipartisan agreement, 
provides mechanisms for regulators to receive and address consumer 
complaints. It provides that Federal regulations that provide a greater 
protection for consumers would apply rather than weaker State 
regulations. It provides that the securities activities of banks would 
be more closely checked on the broker-dealer question and with respect 
to mutual fund investors.
  The Committee bill extends the assessment differential on the special 
deposit insurance assessment paid by thrifts. We do not do that in our 
alternative.
  Let me turn quickly to the operating subsidiary issue. This is one 
area where we do differ from last year's joint bipartisan bill. We were 
much impressed by the fact that the Treasury Department agreed to 
significant additional safeguards regarding the scope and regulation of 
bank subsidiary activities. Therefore, we thought it now reasonable to 
permit activities to take place in an operating subsidiary with the 
safeguards the Treasury came forward with.

  First, that insurance underwriting may not take place in a bank's 
subsidiary; secondly, that the Federal Reserve shall have exclusive 
authority to define merchant banking activities in bank subsidiaries; 
thirdly, that the Treasury agrees that the Secretary and the Federal 
Reserve shall jointly determine which activities are financial in 
nature, both for a holding company and for a bank subsidiary, and that 
they shall jointly issue regulations and interpretations under the 
financial-in-nature standard.
  So we think that these changes on the part of the Treasury--including 
the requirement that every dollar of a bank's investment in a 
subsidiary would be deducted from the bank's capital for regulatory 
purposes, that a bank could not invest in a subsidiary in an amount the 
bank could not pay its holding company as a dividend, and the strict 
limits which now apply to transactions between a bank and its 
affiliates would apply to transactions between banks and their 
subsidiaries--we think this will level the playing field, eliminate any 
economic benefit, and provide for safety and soundness.
  So we take the view now, on the basis of this agreement that the 
Treasury has made, that permitting bank operating subsidiaries can be 
consistent with the goals of preserving safety and soundness, 
protecting consumers, and promoting comparable regulation.
  I ask unanimous consent that an article entitled ``Ex-FDIC Chiefs 
Unanimously Favor the Op-Sub Structure'' be printed in the Record at 
the end of my remarks.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (See Exhibit No. 3.)
  Mr. SARBANES. In conclusion, let me simply state, Mr. President, that 
on this side of the aisle we are very much committed to trying to get 
financial services modernization legislation. All of us supported it 
last year. In the Committee again this year we supported legislation 
which would accomplish that purpose. We do not believe that the bill 
brought forward by the Committee meets the very important goals which I 
outlined at the outset.
  I think the legislation introduced by Senator Daschle, and joined in 
by us, is a balanced, prudent approach to financial services 
modernization. It reflects last year's carefully struck bipartisan 
compromises. It is not opposed by any financial services industry actor 
or player. It is similar to the bill passed, by a broad bipartisan 
vote, by the House Banking Committee, and it is clearly the approach 
most likely to achieve the enactment of financial services 
modernization legislation.
  If you want to get legislation, given that at the end of the line it 
must not

[[Page S4626]]

only pass the Congress, but be signed by the President, this approach 
is clearly the one that is most likely to achieve the enactment of 
financial services modernization legislation.
  When the opportunity presents itself, I urge my colleagues to shift 
off the path that is before us and to move on to that path.
  I yield the floor.

                               Exhibit 1


                                              The White House,

                                        Washington, March 2, 1999.
     Hon. Paul S. Sarbanes,
     U.S. Senate, Washington, DC
       Dear Paul: This Administration has been a strong proponent 
     of financial legislation that would reduce costs and increase 
     access to financial services for consumers, businesses and 
     communities. Nevertheless, we cannot support the ``Financial 
     Services Modernization Act of 1999,'' as currently proposed 
     by Chairman Gramm, now pending before the Senate Banking 
     Committee.
       In its current form, the bill would undermine the 
     effectiveness of the Community Reinvestment Act (CRA), a law 
     that has helped to build homes, create jobs, and restore hope 
     in communities across America. The CRA is working, and we 
     must preserve its vitality as we write the financial 
     constitution for the 21st Century. The bill would deny 
     financial services firms the freedom to organize themselves 
     in the Way that best serves their customers, and prohibit a 
     structure with proven advantages for safety and soundness. 
     The bill would also provide inadequate consumer protections. 
     Finally, the bill could expand the ability of depository 
     institutions and nonfinancial firms to affiliate, at a time 
     when experience around the world suggests the need for 
     caution in this area.
       I agree that reform of the laws governing our nation's 
     financial services industry would promote the public 
     interest. However, I will veto the Financial Services 
     Modernization Act if it is presented to me in its current 
     form.
           Sincerely,
                                                     Bill Clinton.

                               Exhibit 2

                                Executive Office of the President,


                              Office of Management and Budget,

                                      Washington, DC, May 3, 1999.

                   Statement of Administration Policy


  s. 900--Financial Services Modernization Act of 1999 (Gramm (R) TX)

       The Administration strongly opposes S. 900, which would 
     revise laws governing the financial services industry. This 
     Administration has been a strong proponent of financial 
     modernization legislation that would best serve the interests 
     of consumers, businesses, and communities, while protecting 
     the safety and soundness of our financial system. 
     Consequently, it supports the bill's repeal of the Glass-
     Steagall Act's prohibition on banks affiliating with 
     securities firms and of the Bank Holding Company Act's 
     prohibitions on insurance underwriting. Nevertheless, because 
     of crucial flaws in the bill, the President has stated that, 
     if the bill were presented to him in its current form, he 
     would veto it.
       In its current form, the bill would undermine the 
     effectiveness of the Community Reinvestment Act (CRA), a law 
     that has helped to build homes and create jobs by encouraging 
     banks to serve creditworthy borrowers throughout the 
     communities they serve. The bill fails to require that banks 
     seeking to conduct new financial activities achieve and 
     maintain a satisfactory CRA record. In addition, the bill's 
     ``safe harbor'' provision would amend current law to 
     effectively shield financial institutions from public comment 
     on banking applications that they file with Federal 
     regulators. The CRA exemption for banks with less than $100 
     million in assets would repeal CRA for approximately 4,000 
     banks and thrifts that banking agency rules already exempt 
     from CRA paperwork reporting burdens. In all, these 
     limitations constitute an assault upon CRA and are 
     unacceptable.
       The bill would unjustifiably deny financial services firms 
     holding 99 percent of national bank assets the choice of 
     conducting new financial activities through subsidiaries, 
     forcing them to conduct those activities exclusively through 
     bank holding company affiliates. Thus the bill largely 
     prohibits a structure with proven advantages for safety and 
     soundness, effectively denying many financial services firms 
     the freedom to organize themselves in the way that best 
     serves their customers.
       The bill would also inadequately inform and protect 
     consumers under the new system of financial products it 
     authorizes. If Congress is to authorize large, complex 
     organizations to offer a wide range of financial products, 
     then consumers should be guaranteed appropriate disclosures 
     and other protections.
       The bill would dramatically expand the ability of 
     depository institutions and nonfinancial firms to affiliate. 
     The Administration has serious concerns about mixing banking 
     and commercial activity under any circumstances, and these 
     concerns are heightened by the financial crises affecting 
     other countries over the past few years.
       The Administration also opposes the bill's piecemeal 
     modification of the Federal Home Loan Bank System. The 
     Administration believes that the System must focus more on 
     lending to community banks and less on arbitrage activities 
     and short-term lending that do not advance its public 
     purpose. The Administration opposes any changes to the System 
     that do not include these crucial reforms.
       In addition, the Administration opposes granting the 
     Federal Housing Finance Board independent litigation 
     authority. Such authority would be inconsistent with the 
     Attorney General's authority to coordinate and conduct 
     litigation on behalf of the United States.


                         Pay-As-You-Go Scoring

       S. 900 would affect direct spending and receipts. 
     Therefore, it is subject to the pay-as-you-go requirement of 
     the Omnibus Budget Reconciliation Act of 1990. OMB's pay-as-
     you-go scoring of this bill is under development.

                               Exhibit 3

             [From the American Banker, September 2, 1998]

         Ex-FDIC Chiefs Unanimously Favor the Op-Sub Structure

   (By Ricki Tigert Helfer, William M. Isaac, and L. William Seidman)

       The debate on banks conducting financial activities through 
     operating subsidiaries has been portrayed as a battle between 
     the Treasury and the Federal Reserve. The Treasury believes 
     banks should be permitted to conduct expanded activities 
     through direct subsidiaries. The Fed wants these activities 
     to be conducted only through holding company affiliates.
       Curiously, the concerns of the Federal Deposit Insurance 
     Corp. have been largely ignored. The FDIC, alone among the 
     agencies, has no ``turf'' at stake in this issue, as its 
     supervisory reach extends to any affiliate of a bank. The 
     FDIC's sole motivation is to safeguard the nation's banks 
     against systemic risks.
       In the early 1980s, when one of us, William Isaac, became 
     the first FDIC chairman to testify on this subject, he was 
     responding to a financial modernization proposal to authorize 
     banks to expand their activities through holding company 
     affiliates.
       While endorsing the thrust of the bill, he objected to 
     requiring that activities be conducted in the holding company 
     format. Every subsequent FDIC chairman, including the current 
     one, has taken the same position, favoring bank subsidiaries 
     (except Bill Taylor who, due to his untimely death, never 
     expressed his views). Each has had the full backing of the 
     FDIC professional staff on this issue.
       The bank holding company is a U.S. invention; no other 
     major country requires this format. It has inherent problems, 
     apart from its inefficiency. For example, there is a built-in 
     conflict of interest between a bank and its parent holding 
     company when financial problems arise. The FDIC is still 
     fighting a lawsuit with creditors of the failed Bank of New 
     England about whether the holding company's directors 
     violated their fiduciary duty by putting cash into the 
     troubled lead bank.
       Whether financial activities such as securities and 
     insurance underwriting are in a bank subsidiary or a holding 
     company affiliate, it is important that they be capitalized 
     and funded separately from the bank. If we require this 
     separation, the bank will be exposed to the identical risk of 
     loss whether the company is organized as a bank subsidiary or 
     a holding company affiliate.
       The big difference between the two forms of organization 
     comes when the activity is successful, which presumably will 
     be most of the time. If the successful activity is conducted 
     in a subsidiary of the bank, the profits will accrue to the 
     bank.
       Should the bank get into difficulty, it will be able to 
     sell the subsidiary to raise funds to shore up the bank's 
     capital. Should the bank fail, the FDIC will own the 
     subsidiary and can reduce its losses by selling the 
     subsidiary.
       If the company is instead owned by the bank's parent, the 
     profits of the company will not directly benefit the bank. 
     Should the bank fail, the FDIC will not be entitled to sell 
     the company to reduce its losses.
       Requiring that bank-related activities be conducted in 
     holding company affiliates will place insured banks in the 
     worst possible position. They will be exposed to the risk of 
     the affiliates' failure without reaping the benefits of the 
     affiliates' successes.
       Three times during the 1980s, the FDIC's warnings to 
     Congress on safety and soundness issues went unheeded, due 
     largely to pressures from special interests.
       The FDIC urged in 1980 that deposit insurance not be 
     increased from $40,000 to $100,000 while interest rates were 
     being deregulated.
       The FDIC urged in 1983 that money brokers be prohibited 
     from dumping fully insured deposits into weak banks and S&Ls 
     paying the highest interest.
       The FDIC urged in 1984 that the S&L insurance fund be 
     merged into the FDIC to allow the cleanup of the S&L problems 
     before they spun out of control.
       The failure to heed these warnings-from the agency charged 
     with insuring the soundness of the banking system and 
     covering its losses-cost banks and S&Ls, their customers, and 
     taxpayers many tens of billions of dollars.
       Ignoring the FDIC's strongly held views on how bank-related 
     activities should be organized could well lead to history 
     repeating itself. The holding company model is inferior to 
     the bank subsidiary approach and should not be mandated by 
     Congress.

  Mr. GRAMM addressed the Chair.

[[Page S4627]]

  The PRESIDING OFFICER. The Chair recognizes the Senator from Texas.
  Mr. GRAMM. Mr. President, I am going to yield to the Presiding 
Officer and come up and preside so he can give his opening statement, 
if he would like to do that. Before doing that, however, I will make a 
couple of points in response to Senator Sarbanes' statement.
  First of all, the substitute that Senator Sarbanes will offer is not 
last year's bill. In fact, it is fundamentally different from last 
year's bill on the most important issue in financial services 
modernization. That issue is, should the modernization occur within the 
structure of the bank, or should it occur through the holding company? 
Last year's bill followed the proposal which has been made and 
supported by all of the members of the Federal Reserve Board and its 
Chairman, Alan Greenspan, whereas this bill----
  Mr. SARBANES. Will the Senator yield on that point?
  Mr. GRAMM. I am happy to yield.
  Mr. SARBANES. The Senator isn't suggesting that I didn't lay out in 
the course of my statement the fact that it differed in this respect 
from last year's bill, is he?
  Mr. GRAMM. No. I am simply making sure that everybody understands--
because there were a lot of references made between last year's bill 
and this year's bill--that how someone voted last year is interesting 
and may, to some extent, be relevant, but on the fundamental issue that 
is before us, whether or not these new services should be provided 
within the bank or outside the bank in holding companies, the 
substitute which the Senator will offer later today is a very different 
bill from last year's bill. That is the only point I am making.
  The second thing I will make clear is, I didn't object to the growth 
in CRA and the commitments made to CRA. I did make the point, however, 
that when in a given year--in fact, last year--the loans, the 
commitments to lend, the cash payments, and the commitments to pay cash 
in the future are bigger than the Canadian economy, bigger than the 
discretionary budget of the Federal Government, perhaps it is time to 
look at potential abuses.
  Now, granted, the Senator made the point that not every loan was made 
this year, and not every cash payment was made this year. I was simply 
using the data the way community groups presented it. I was very 
careful to say that the $694 billion was loans, commitments to lend, 
cash payments, commitments to pay cash in the future. I stand by those 
numbers, and those are the numbers of the community service groups.
  Mr. SARBANES. Will the Senator yield for a question?
  Mr. GRAMM. I am happy to yield.
  Mr. SARBANES. Was the Canadian GNP figure the Senator was using a 1-
year figure or a 10-year figure?
  Mr. GRAMM. It was a 1-year figure.
  Mr. SARBANES. I thank the chairman.
  Mr. GRAMM. There will be more agreements next year and next year and 
next year. The point is, this has grown from a very small program into 
a very big program. I believe, and the majority of the members of the 
committee believe, it is time to look at this program and look at 
abuses, and we are going to have plenty of time to debate this later.
  Let me also note that, under current law, a bank is not required to 
get CRA approval to sell insurance. Under current law, there are a 
limited number of banks that do have some insurance powers. They are 
not required under current law to get CRA approval to engage in those 
security powers.
  Now, in terms of the CRA reforms in the bill reported by the Banking 
Committee, those reforms have been endorsed by the American Bankers 
Association, by the Bankers Roundtable, and by the Independent Bankers 
Association of America. When our colleague says everybody is happy with 
the provisions of his substitute, I want people to know that three 
major banking groups have endorsed the provisions of our bill.

  Let me say again--and I don't know what you do to get people to use 
the English language--there is not a safe harbor in this bill. A safe 
harbor is where something can't be challenged. There is a rebuttable 
presumption in the bill. There is a big difference between the two. The 
rebuttable presumption in the bill simply says that in order to stop or 
delay a regulatory action, you have to present substantial evidence. 
That substantial evidence is defined in law as more than a scintilla. 
It is defined as such relevant evidence as a reasonable person might 
accept as adequate to support a claim.
  That is not a safe harbor. That simply is giving the evaluation that 
has occurred some standing.
  Our colleague talks about comments. Nothing in the bill prevents 
anybody from commenting on any CRA evaluation. Comments can be made. 
People can submit any comments. All our provision says is, if a bank 
has been in compliance for 3 years in a row, if they are currently in 
compliance in their evaluation with CRA, if the regulator is going to 
stop the process or delay it, they have to have more than a scintilla 
of evidence. In order for the protest or objection to be used to stop 
the process for a bank with a long history of compliance, there has to 
be substantial evidence. People can comment all they want to comment. 
Nothing in this provision prevents comments.
  Finally--and we will have lots of time to debate these--in terms of 
unitary thrifts, unitary thrift holding companies are not a loophole. 
Congress legislated them. We end them in saying that you cannot do any 
more, but to suggest that they are a loophole, an accident, that nobody 
ever intended they come into existence, they have existed for over 30 
years. We are not debating here whether or not we should stop the issue 
of new licenses to commercial interests to create ``new unitary 
thrifts.'' The question is, What do you do with people who already have 
the charters? Do you change the rules of the game on them?
  If our colleagues would indulge me, I yield to Senator Enzi.
  Mr. REED. Mr. President, just a point of information, I presume we 
are going to adjourn at 12:30. Presumptively, that means Senator Enzi 
would be the last speaker this morning.
  The PRESIDING OFFICER (Mr. Gramm). Let the Chair ask Senator Enzi, 
could the Senator tell us how long he intends to speak?
  Mr. ENZI. Mr. President, I think I have about 7 or 8 minutes' worth 
and would be willing to stay for Senator Reed's comments as well.
  Mr. REED. I thank the Chair.
  The PRESIDING OFFICER. The Senator from Wyoming.
  Mr. ENZI. Mr. President, I rise in support of S. 900, the Financial 
Services Modernization Act of 1999.
  I commend the senior Senator from Texas, the chairman of the Banking 
Committee, Mr. Gramm, for his leadership on this important measure, a 
bill that will increase global competitiveness of U.S. financial firms. 
It will increase access to financial services for all Americans, and it 
will decrease costs for consumers.
  I congratulate Senator Gramm on his willingness to meet with all of 
the different groups that have asked to meet with him, the way he has 
reached out and been willing to talk to people on both sides of the 
aisle, as well as spend innumerable hours with those of us who have had 
questions about some of the very detailed technical parts of the bill, 
particularly the operating subsidiaries, for the research that he has 
done. I compliment him on the simplification he has done. There were 
some very complicated issues in last year's bill that, because of the 
end of the year pressure, were included but weren't very concise. They 
seemed to be misunderstood by people on both sides of whatever issue. 
Of course, around here there are more than two sides to every issue.
  The chairman sat down with those people and worked out some 
simplification of language that they say they agree with now. One of 
the results is, it has reduced a 308-page bill to 150 pages without 
damaging anything, but it has greatly increased the readability.
  We have asked the banking industry and we have asked the agencies to 
put this in plain language. The chairman has done that and, I think, 
given people an opportunity to comment on it and discuss it with him in 
private meetings, if they wanted, as well as in other meetings. It is 
long overdue that Congress pass legislation that will allow full and 
open competition at least across the banking, securities and insurance 
industries.

[[Page S4628]]

  I believe now is the best time to pass S. 900 in order for U.S. 
financial intermediaries to be prepared for the challenges of the new 
millennium. The current laws governing our financial sector have been 
eroded by the actions of regulators, the decisions of the courts, the 
continuing changes in technology, and the increasing competitive global 
markets. In addition, these laws limit competition and innovation, thus 
imposing unnecessary costs onto the service provider, and that is 
ultimately additional costs on the consumer.
  There are several provisions in this bill I believe are particularly 
important as several of them are very relevant to small financial 
institutions.
  Section 306 of the bill requires the Federal banking agencies to use 
plain language in all of their rulemakings used to implement this bill. 
Since this legislation will impact both large and small financial 
institutions, this provision will help ensure that small banks will not 
have to hire several lawyers to interpret the new rules resulting from 
this legislation.
  The bill also requires the GAO to study expanded small bank access to 
S corporation status, specifically those provisions relating to Senator 
Allard's bill. I enthusiastically support his efforts to reduce the tax 
burden on small business corporations.
  Additionally, this legislation grants non-metropolitan banks of less 
than $100 million in assets--very small institutions by any standard--
an exemption from the paperwork requirements of the Community 
Reinvestment Act, or CRA. The total bank and thrifts assets exempt from 
this requirement would equal only 3 percent. Small, non-metropolitan 
banks and thrifts by their very nature must be responsive to the needs 
of the entire communities they serve or they will not remain in 
business. The exemption in this bill will help reduce the regulatory 
costs imposed on these smaller institutions. When less time is used to 
comply with the letter of the law, more time can be devoted to comply 
with the spirit of the law by better serving the needs of each customer 
and the entire community.
  Title III of the bill also eliminates the Savings Association 
Insurance Fund (SAIF) special reserve, a top priority of the FDIC. 
Senator Johnson and I have introduced identical language in a stand 
alone bill, S. 377, to ensure that the special reserve is abolished. 
This could save the thrift industry about $1 billion because the funds 
set aside in the special reserve cannot be used until the SAIF reaches 
a dangerously low level. Therefore, if unforeseen circumstances impact 
the SAIF, the FDIC may choose to increase insurance premiums on thrifts 
to recapitalize the SAIF. The elimination of the special reserve 
represents a sound public policy that will save the private sector from 
unnecessary costs.
  I strongly support the approach the chairman of the Banking Committee 
has taken to develop a more streamlined, less burdensome bill. It is 
only 150 pages. The bill reported out of the Banking Committee last 
year was 308 pages--double the length of the bill we are debating 
today. I do not believe more is usually better in terms of the length 
of a bill. Many times that policy means more hoops and ladders the 
private sector must go through, thus creating more inefficiencies and 
higher costs in the marketplace. I believe the bill before us will not 
hamper industries with unnecessary, congressional-created, burdens and 
inefficiencies.
  Before closing, I want to dispel some of the myths surrounding this 
legislation--specifically the allegation that the majority in the 
Banking Committee have abandoned the consensus reached by the Committee 
last year.
  There is no consensus in the substitute bill sponsored by the 
minority members of the Banking Committee. The House Commerce Committee 
held a hearing last week on H.R. 10, which is nearly identical to the 
substitute bill. Members on both sides of the isle were very critical 
of the bill. Ranking Member Dingell was especially harsh in his 
criticism. I mention this to prove there is not consensus on the 
substitute bill.
  Further, this substitute is not the product from last year. It 
differs in a number of respects from last year's bill, most 
significantly with regard to the operating subsidiary provisions. The 
op-sub provisions in the House bill and the minority's bill are those 
that are causing significant heartburn for the House Commerce Committee 
and Federal Reserve Chairman Alan Greenspan.
  In addition, I want to set the record straight about the vote on the 
old H.R. 10 in Banking Committee last year. The bill did pass by a vote 
of 16 to 2. However, I for one can say that I support the bill we are 
now debating, S. 900, much more than the H.R. 10 I reluctantly 
supported last year. My biggest concern with that H.R. 10 was, and 
continues to be, the expansion of CRA.
  It has been mentioned that with CRA there have been more loans, 
houses and businesses. I suggest that, particularly with the time 
period that we are relating to, those are as a result of low interest 
rates, not some kind of effort that we are making under CRA.
  I want to reiterate that there were 16,380 investigations into CRA, 
and three small banks were out of compliance. It takes an extra officer 
to handle CRA, and that is a huge cost to them. To find three people? 
There has to be something better that we can do.
  I strongly encourage my colleagues to support the bill passed by the 
Banking Committee. It represents a sensible approach to forming the 
future framework for our financial services industry.
  Mr. President, I ask unanimous consent that the time for debate be 
extended for Senator Reed to give his remarks, followed by Senator 
Specter.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  At the conclusion of Senator Reed's remarks, Senator Specter will be 
recognized, and at the conclusion of his remarks, we will adjourn for 
the luncheons.
  The Senator from Rhode Island is recognized.
  Mr. REED. Mr. President, I thank Senator Enzi for his graciousness in 
offering the unanimous consent request.
  I want to begin by stating how important I think it is to pass 
financial service modernization legislation as quickly as possible.
  The existing legal framework has become an anachronism over the last 
several years--in fact, even the last decade or so. The industry has 
responded to changes in this market faster than the law has responded. 
It is our obligation to ensure that we have appropriate legal 
standards, so that our financial services industry can be competitive 
in a worldwide market, which is highly dynamic, and which requires more 
flexibility and more responsiveness than is inherent in the current 
system, which began under Glass-Steagall more than 60 years ago.
  So I am a strong proponent of financial modernization. In fact, it is 
ironic that we were very close in the last Congress to passing 
financial modernization legislation, which was agreed to by all the 
major interest groups and which represented a balancing of the need for 
flexibility, the need for new and expanded powers, the need for 
financial services industry to be able to reach across prior lines of 
demarcation to the securities industry, banking industry and insurance 
industry, and at the same time maintain the principles of safety and 
soundness, and also the notion that we have to ensure community access 
to credit. All these things were carefully worked out. Yet, 
regrettably, H.R. 10 failed in the last few moments of the last 
Congress.

  We are back today to begin to address these issues again on the floor 
of the Senate. That is an encouraging point because I think the worse 
thing to do would be to continue to delay and avoid this debate.
  Having said that, let me also recognize that the current legislation 
we are considering, S. 900, significantly deviates from the principles 
and the compromises that were carefully worked out in the last 
Congress. In so doing, I think it raises serious questions about the 
viability of this legislation, regardless of whether it will pass this 
body or the other body. There is a strong question of whether it will 
ultimately become law. It think it should become law and, as a result, 
I think we need to make changes in the form of amendments. In fact, 
unless we can deal with some of the issues, I am prepared to oppose 
this legislation, even though I am strongly committed to ensuring that 
we ultimately achieve a modernization of our financial services 
industry.
  The critical issues that face us with respect to this bill that are 
troubling are, first, with respect to the Community Reinvestment Act. 
Over the last

[[Page S4629]]

several decades, since 1977, over $1 trillion in loans and loan 
commitments have been made under the Community Reinvestment Act. It has 
literally helped maintain and rehabilitate communities, both urban 
centers and rural areas, throughout this country. Without it, this 
would be literally a foreign issue, particularly in urban neighborhoods 
and rural areas. With it, we managed to spark hope and build new 
communities in places that were sadly lacking in significant 
opportunities and significant hope.
  One example of the many in my State is in Woonsocket, RI. It was, at 
the turn of the century, a thriving mill town. In fact, the river was 
crowded with factory after factory after factory. With the demise of 
northern manufacturing, that town has seen difficult times. Through the 
CRA, citizens were able to avail themselves of significant assistance 
and credit when they formed the Woonsocket Neighborhood Development 
Corporation to work toward preserving the neighborhood. I have been 
there. I have visited these neighborhoods. They are rebuilding old 
homes that were built in the 1800s. They receive grants and loans from 
the First National Bank and the Federal Home Loan Bank Board in Boston, 
all under the auspices of CRA. Without these loans, they would not be 
able to rebuild their communities. It is necessary, it is important, 
and it can't be dismissed or short-circuited, as I fear S. 900 attempts 
to do.

  One of the other provisions in the bill that specifically cuts back 
on the scope and the effectiveness of CRA is the limitation exemption 
of CRA for rural financial institutions with assets under $100 million. 
We all admit that a $100 million bank is a small institution. But such 
banks represent 76 percent of rural banks in the United States, the 
vast majority of rural institutions. And these banks historically have 
the lowest CRA ratings. They are a bank that, on their own volition, 
aren't responsive going through the data to their local community, and 
by taking away the responsibility of CRA we will make this situation 
worse.
  I think what we will do, in effect, is deny to many rural areas what 
they think is part and parcel of the local bank in the community; that 
is, investment in their own community, in their own neighborhood. The 
reality of this is that people who run banks, which comes as no 
surprise to anybody, want to make money. When they look around their 
community and they see a loan for a community project, for housing 
redevelopment, or a local project to develop a community with a low 
rate of return, and yet they can see they can park their money 
someplace in a big city without CRA, the tendency, the temptation, and 
probably the reality is they will send that money out of that 
community.
  It is the local money that forms the basis of these banks. CRA says 
you have to look at the community, you have to invest in it, you have 
to care for it, and you have to commit to it, but you don't have to 
lose money. There is nothing in the CRA law that says you have to make 
a bad loan. There is nothing in the CRA law that says you have to do 
something unsafe, unsound, or foolish in banking. It does say that you 
have to look for appropriate lending opportunities in your community 
and make those commitments. That is what I think most people assume 
that local community banks do day in and day out.
  What I think will happen by the exemption is you will find in rural 
areas it will be harder to get the kind of credit for those types of 
community projects, rebuilding of housing, small businesses that do not 
have the kind of attraction or a track record yet to get the support of 
the local banks. That is something I think would represent a further 
demise in the community.
  Then there is another provision, which has been referred to as 
``rebuttal of presumption'' by some and ``safe harbor'' by others, 
which is included in the legislation and which essentially says, if you 
have a satisfactory CRA rating, you are presumptively in compliance 
with respect to a proposed transaction unless someone can come forward 
with ``substantial verifiable information'' that your rating is not 
warranted.
  First, you have to ask yourself, who outside of the bank would have 
``substantial verifiable information''? That is typically not in the 
public domain. So you are setting up in this rebuttal of presumption, 
or safe harbor, an impossible task that outside community groups 
particularly would be able to know the inner workings of the bank so 
well that they could come in and present ``substantial verifiable 
information.'' So, in effect, what you are doing is saying, if we get 
your satisfactory rating, we are not going to pay much attention to the 
CRA.

  The practical reality is that in major transactions, the notion that 
CRA is a factor that prompts first these depository institutions to 
behave better before the transaction and, certainly in contemplation of 
the transaction, review carefully their commitment to their local 
community, is one of the most effective and nonintrusive ways, because 
it doesn't represent the Government going in and directing lending or 
directing anything in a nonintrusive way if a bank responds to the 
needs of the community, and to vitiate this by this rebuttal of 
presumption is, I think, a mistake.
  One of the other aspects of this rebuttal of presumption is the fact 
that 97 percent of the institutions have these satisfactory ratings, 
which could lead to the question of how thorough these reviews are by 
the regulatory agencies in the first place.
  It might add a further argument to the fact that perhaps it is only 
in the context of a serious review or serious questions raised by 
outside parties that banking institutions take their CRA 
responsibilities seriously and, in fact, act upon them. But that is 
another factor which I think we have to consider when we are talking 
about dispensing with the opportunity to raise in a meaningful way CRA 
concerns with respect to major transactions.
  Frankly, everything we have read in the paper over the last several 
years, several days, and several months has been about major 
transactions between financial institutions. That has been the driving 
force in the industry and, coincidentally, has helped the bank be more 
committed and more responsive to the CRA concerns, because they know 
this is an item that can be looked at and challenged in a meaningful 
way in a transaction. If you dispense with that, I think that would be 
a mistake.
  There is another provision in the legislation which has been alluded 
to by the ranking member, Senator Sarbanes, and that is essentially 
providing very limited opportunities to conduct activities in a 
subsidiary of a banking institution.
  The bill as it stands today would establish a $1 billion asset cap on 
those banks that may engage in underwriting activities for securities 
and merchant banking in an operating subsidiary. I believe that banks 
of any size should have the opportunity to form themselves in such a 
way that they feel most competitive in the marketplace with respect to 
these two particular functions, securities underwriting and merchant 
banking. Therefore, they can choose to put them in an affiliate holding 
company, which would be a Federal Reserve regulation, or in a 
subsidiary of the depository institution which would be subject to the 
Office of the Comptroller of the Currency.
  I think giving that type of flexibility makes more sense than 
determining that ``one size fits all'' and all has to be done in the 
context of a holding company arrangement.
  I offered last year, because of these views, an amendment to H.R. 10 
which would have allowed banks to engage in securities underwriting and 
merchant banking subsidiaries. I would anticipate another amendment 
with respect to that. In fact, this language is in the alternative 
which Senator Sarbanes will offer later today, or which I would expect 
to be offered to try to reach this point. It is an important point. It 
is not just a point with respect to turf allocations between Federal 
regulators; it is an opportunity to give the banking industry the 
flexibility that all say they deserve.
  There is another problem I see in the legislation. That is with 
respect to the elimination, for all practical purposes, of prior 
Federal Reserve Board approval before allowing a bank to merge or 
engage in a new activity. This once again goes to the heart of the 
regulatory process.
  It is nice to assume that banking institutions and financial 
institutions

[[Page S4630]]

are responsible and appropriate in their conduct of activities and that 
they would only conduct a merger that would be in the best interests of 
not only themselves but the public. But I think that sometimes strains 
credulity.
  It is appropriate, important and, in very practical ways, necessary 
to have the requirement for prior approval of these major transactions 
by the Federal Reserve Board, because the Federal Reserve Board has a 
role independent of the management of the banks. They are trying to 
maximize shareholder value; they are trying to be competitive in a very 
difficult market.

  But it is the Federal Reserve's responsibility to ensure safety and 
soundness, that competition will not be adversely affected, and that 
this transaction will in some way serve the public interest. I don't 
think you can do that by implication. I don't think you can do that by 
checking after the fact.
  Again, the reality is that when multibillion-dollar institutions 
merge and then discover after the fact that it really was a bad idea, 
it is hard to unravel those transactions. To do it right, you have to 
do it up front. Therefore, this legislation should have prior approval 
by the Federal Reserve Board.
  All of my comments have been appropriately addressed by the Democrat 
substitute, which will be offered by Senator Sarbanes.
  Let me conclude with some specific concerns about a question that has 
concerned me throughout the course of our debate not only in this 
Congress but in the last Congress. That is whether or not the 
regulatory framework we are creating will be sufficient to protect the 
safety and soundness of institutions and ultimately protect the public 
interest.
  We are trying to expand opportunities, to break down the old 
hierarchies, the old barriers between different types of financial 
activity, to give the kind of robust, dynamic opportunities that are 
concomitant with this world of instantaneous transfer of information 
and billions of dollars across boundaries. In doing that, we have to 
recognize our ultimate responsibility is to ensure these institutions 
operate safely, that they are sound, and that regulatory 
responsibilities are discharged.
  We expand dramatically the powers of these institutions under this 
legislation. But in some respect we are inhibiting some of the 
traditional regulatory roles of our Federal regulators. For example, in 
section 114, there is a prohibition which prevents the Office of the 
Comptroller of the Currency and the Office of Thrift Supervision from 
examining a mutual fund operated by a bank or thrift. Currently, they 
have limited authority to do such examinations. We are taking that 
away.
  Section 111, another example, prohibits the Federal Reserve from 
examining the securities or insurance affiliate unless there is a 
``reasonable cause to believe'' the affiliate is engaging in risky 
activity. Ask yourself, how do you reasonably believe such activity is 
taking place unless you have the opportunity and indeed the authority 
to at least go in and check periodically what is going on?
  Many of these provisions might create a structure of regulation which 
is just too porous to withstand the kind of pressures that we see in 
the financial marketplace. It is reasonable to conclude how we got 
here. We have emphasized throughout this debate this notion of 
functional regulation, that securities should be regulated by the SEC, 
depositories should be regulated exclusively by banking regulators, and 
that a loose, overarching regulatory provision should be discharged by 
the Federal Reserve.
  Setting up compartments with a loose umbrella invites the notion that 
something will go wrong, something will fall through the cracks. As we 
go through this process, the debate and the continued examination of 
this bill, we have to ask ourselves not only before the legislation is 
passed but if it is passed afterwards, are there any unintended 
loopholes that could be exploited, unfortunately, which would be 
detrimental to safety and soundness?
  There is another provision which I think is important to point out. 
That is the notion that in the context of the insurance business, State 
insurance regulators basically have a veto over Federal Reserve 
authority to demand that an insurance affiliate contribute to the State 
of a holding company. This is a reversal from the traditional authority 
and the traditional regulatory perspective of the Federal Reserve.

  For years, since their active regulation of the Bank Holding Company 
Act, the doctrine of the Federal Reserve has been that the holding 
company is a source of strength to the underlying depository 
institution. That ``source of strength'' doctrine is, in part, repealed 
by this legislation, because within the context of an insurance 
company, and specifically the next great round of mergers will be 
between depository institutions and insurance companies--that is the 
example that Travelers and Citicorp established when these insurance 
companies started merging together with banks, big banks, big insurance 
companies--we are going to have for the first time in our financial 
history, a situation where an insurance regulator can say to the 
Chairman of the Fed, even though that depository institution is ailing 
mightily and my insurance company is very healthy, I'm not going to 
allow any transfer of funds from the insurance entity to the depository 
institution because I don't have to, one; and, two, I'm concerned about 
the long-term viability of the insurance entity, so I will not 
cooperate.
  What that means is that rather than the present model where every 
subsidiary affiliate of a holding company contributes to the health of 
the deposit insurance, we have a situation where the taxpayer, through 
the insurance funds, will be bailing out a bank that very well might 
have a very healthy insurance affiliate.
  These are some of the regulatory examples which I think have to 
continue to be watched, examined, and thought about. I hope as we go 
forward that we could engage the Fed in a constructive dialog with 
respect to their views on how we on a practical basis deal with some of 
the concerns I raised today.
  We have the potential of passing legislation which would be terribly 
helpful to our financial community. I want to pass the legislation. 
Unless we resolve the issue of the Community Reinvestment Act, unless 
we resolve the issue of operating subsidiaries, unless we look more 
carefully and closely and make changes perhaps in some of the 
regulatory framework, this is not the legislation that ultimately can 
or should become law.
  I yield my time.
  Mr. SARBANES. Mr. President, I ask unanimous consent that when the 
Senate resumes its session, I believe it is now scheduled for 2:15--
after the party caucus break--Senator Wellstone be recognized to make 
his opening statement. I think he thought that was the understanding 
but we did not actually have a unanimous consent request. This has been 
cleared by both sides.
  The PRESIDING OFFICER. Without objection, it is so ordered.
  (The remarks of Mr. SPECTER pertaining to the introduction of S. 952 
are located in today's Record under ``Statements on Introduced Bills 
and Joint Resolutions.'')

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