Abstract
It is my intent to review the legislative framework of financial regulation, assess public and private sector accountability for the economic trauma loosed in 2008, and appraise the legislative aftermath. 1My thesis is that the economy and the financial security of the country were unnecessarily jeopardized by the unchecked greed of a few; that, at critical moments, politics and ideology dominated regulatory decision making; that the regulators, the invisible government, allowed excess leveraging out of excess confidence in risk-based mathematical modeling; that a conflicted Congress emboldened risk taking at Fannie Mae and Freddie Mac; and that problems in commercial bank regulation related less to what Congress did than what it didn’t do. As both a participant and observer in the legislative process, I have designed this review in part as a chronicle of Congressional interactions between the parties and with the Executive branch, and in part as a take on regulation itself. Accordingly, I apologize for presumptuous overuse of the “I” word and the presentation of an unavoidable personal perspective
This chapter also appeared as Networks Financial Institute Policy Brief 2010-PB-04.
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Notes
- 1.
A former 15-term Congressman, Leach chaired the Banking and Financial Services Committee from 1995 to 2000. Currently he is chairman of the National Endowment for the Humanities. The views expressed are of the author and are not to be construed as an official reflection of the views of the National Endowment for the Humanities or the United States Government. The perspective taken is based in part on two addresses the author delivered, one to a conference on “Regional and National Financial Crises: Roots, Results and Responses,” held at the Policy Research Institute at the Woodrow Wilson School at Princeton University on November 7, 2008, and one prepared for the “Symposium on Shaping Global Financial Reform,” sponsored by the Bretton Woods Committee and the Boston University School of Law, held in Washington, DC, on April 22, 2009.
- 2.
In an effort to reduce the intensity of banking industry lobbying for this change in the late 1990s, I sent letters to the CEOs and general counsels of the largest banks with an analysis of the relative value of commercial firms to banks on public exchanges. Only one bank (Citicorp) at the time was in the top 20 (it was 20th) in market value of companies on the New York Stock Exchange. At the risk of presumption, I suggested that it was naïve for bankers to assume that a law suddenly allowing the merging of commerce and banking would put bankers in the mergers and acquisitions driver’s seat. Wouldn’t, I asked, companies like Amoco, Microsoft, Wal-Mart, and G.E. not quickly move to control major financial institutions? Months later, at a luncheon in which I addressed a Federal Reserve advisory committee composed of major bank CEOs, a banker wryly noted that my letter had been widely discussed. The consensus, he noted, was that while he and his colleagues disagreed with my position, they understood this might be an inopportune time to proceed with so profound a breach of Glass Steagall. Nevertheless, the lobbying on Capitol Hill never abated.
- 3.
In my last year as the term-limited chairman of the House Banking Committee, I objected strenuously both to the judgment and rule-making process that regulators followed and to no avail provided Treasury’s Inspector General with a detailed complaint.
- 4.
The report was printed as an appendix to a hearing before the Committee on Banking, Finance, and Urban Affairs. See Safety and Soundness Issues Related to Bank Derivative Activities: Hearing Before the Committee on Banking, Finance, and Urban Affairs, House of Representatives, One Hundred Third Congress, first session. Washington, U.S. G.P.O., 1994.
- 5.
For statement and bill, see the Congressional Record 140.2 (January 26, 1994), statement 29.Available at http://www.gpo.gov/fdsys/pkg/CREC-1994-01-26/html/CREC-1994-01-26-pt1-PgH54.htm.
- 6.
See Testimony by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking and Financial Services, U.S. House of Representatives, July 24, 1998. http://financialservices.house.gov/banking/72498fed.shtml.
- 7.
There are many examples of the extraordinary reach of Fannie Mae and Freddie Mac on Capitol Hill. Three personal anecdotes are illustrative: Late 1 week, I circulated a battery of amendments to Fannie Mae and Freddie Mac legislation that would have radically reformed their manner of operating. The next Monday I received phone calls from three of my party’s leaders in the House with the same message: the approach, even if it got out of committee, would not be scheduled for consideration in the House. The same day an ex-Member called to underscore how much he shared the views of House leadership, but after going down his talking points, he burst out laughing to tell me how fortuitous it was for him that I had proposed the reform initiative. Upon learning of its existence, Fannie Mae management, which had extensive ties to Democrats on the Hill, decided they needed more Republican assistance and offered my ex-colleague what he described as a much appreciated retainer to join their stable of lobbyists. Several weeks later I received a letter from the mayor of Washington, DC objecting to my approach, even though one of its provisions would have removed the unprecedented exemption the two housing GSEs have to paying state and district income taxes, a change in law that would have provided multimillion dollar benefits to the budget of the District of Columbia as well as every state in the country.
- 8.
On issues like abortion rights and the Iraq War, I was philosophically out of step with my party but my position as chairman of the Banking Committee was more jeopardized by refusal to play the political action committee funding game than any stance on any issue.
References
Greenspan A (1998) Testimony by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking and Financial Services, U.S. House of Representatives, 24 Jul. http://financialservices.house.gov/banking/72498fed.shtml
Hale T (ed) (2008) Regional and national financial crises: roots, results and responses. Policy Research Institute, The Woodrow Wilson School at Princeton University, 7 Nov
Leach JA (1994) Derivative regulations. Congressional Record Online (26 Jan) 140(2), House, Page H. http://www.gpo.gov/fdsys/pkg/CREC-1994-01-26/html/CREC-1994-01-26-pt1-PgH54.htm
Leach JA (1995) H.R. 20 risk management improvement and derivatives oversight act. U.S. House of Representatives. http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=104_cong_bills&docid=f:h20ih.txt.pdf
Leach JA (2009) Address at the symposium on shaping global financial reform. Sponsored by the Bretton Woods Committee and the Boston University School of Law, Washington, DC, 22 Apr. http://www.brettonwoods.org/events/index.php/54/Shaping_Global_Financial_Reform
Paulson HM Jr, Steel RK, Nason DG (2008) Blueprint for a modernized financial regulatory structure. The Department of the Treasury, Mar. http://www.ustreas.gov/press/releases/reports/Blueprint.pdf
United States. Congress. House. Committee on Banking, Finance, and Urban Affairs (1994) Safety and soundness issues related to bank derivatives activities: hearing before the Committee on Banking, Finance, and Urban Affairs, House of Representatives, One Hundred Third Congress, first session. U.S. G.P.O, Washington, DC
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Leach, J.A. (2011). The Lure of Leveraging: Wall Street, Congress, and the Invisible Government. In: Tatom, J. (eds) Financial Market Regulation. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-6637-7_12
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