Special Interests in Banking
Lobbyists’ Dance On Banking Reform Becomes Tangled TangoBy Justin Pritchard
LEGI-SLATE News Service
Web posted: Friday, Dec. 19, 1997
WASHINGTON -- The Sunday gathering was, in the words of one participant, “just like having friends to your backyard.” But this was the backyard of Rep. Jim Leach, R-Iowa, chairman of the powerful House Banking and Financial Services Committee, and the talk was far from idle banter.
Leach had opened his northwest Washington home to some 20 delegates from the Independent Bankers Association of America that September afternoon. Over iced tea, they discussed reforming the financial services system.
Leach’s reform legislation [H.R. 10] had wheezed out of his banking panel in June and was gasping for air on the operating table of the House Commerce Committee, which shares jurisdiction over the bill. If it died, the IBAA’s 5,500 community and rural banks would not mourn.
The IBAA viewed Leach, a genteel moderate in his 11th term, as an important ally in past House battles. But now the roles were reversed, as Leach sought IBAA help in his fight to revive the legislation.
His message was direct: “Be a part of the process rather than just being out and out opposed,” recalls Bob Sierk, CEO and president of First National Bank, Iowa City, one of 38 IBAA banks in Leach’s district. The bankers listened, but left the meeting still opposed to the bill.
So on Sept. 30, Leach made another overture. In a three-page letter, he asked the association to adopt four specific policies it had rejected.
“If the community bankers do not reassess tactics ... it is a certitude that small banks will be competitively disadvantaged for years to come,” Leach wrote IBAA Executive Vice President Kenneth Guenther.
Leach was in an odd position of lobbying a lobby that often lobbied him.
“I think that occurs now and again,” he said in an interview. “The end result has to be a bill in the public interest and a bill that is considered fair between inter-industrial groupings. ... That is one of the reasons that you want to talk to all parties.”
Leach was part of a complex legislative dance: lawmakers and lobbyists became partners and changed the lead position often enough that it became unclear who was responsible for the bill’s movement.
When Congress reconvenes next year, that dance will resume.
“There never can be a major banking bill without the major industry groups agreeing,” says Rep. Bill McCollum of Florida, a top Republican on the House Banking panel. “Is that good government? That’s reality.”
A DELICATE BALANCE
Since the 1950s, that reality has pushed banking reform bills to dead ends in Congress. Most reform attempts sought to break down walls between banking, insurance and securities industries that were erected by the Glass-Steagall Act of 1933 and subsequent laws.
Regulatory and Supreme Court rulings have opened cracks between those markets. Banking behemoths like Chase Manhattan sell life insurance policies and Wall Street houses like Merrill Lynch offer low-fee money market accounts. Congressional reformers say it’s time for the country’s law books to catch up with marketplace realities.
But Congress has been unable to answer some difficult questions that are at the heart of reform. Should banks be allowed to affiliate with commercial businesses? Which federal agency should oversee securities firms if they also sell insurance?
“A lot of lobbyists and senior members of committees either had dark hair or hair on top of their heads when this began,” jokes Rep. Ken Bentsen Jr., D-Texas, a relative newcomer on the Banking Committee.
The task is complicated by disagreements even among members of the same industry. “Sometimes two different arms of the same bank say different things,” says Rep. Michael Castle, R-Del., a Banking subcommittee chairman.
Such intricacies force lawmakers into a delicate balancing act. If banks -- which oppose the bill as now written -- win concessions, insurance or securities interests could shift from tenuous support to opposition.
“There’s a great amount of self-interest involved by all these entities,” laments Castle. “You’re going to make a lot of people unhappy. They may be in your state, they may give you money.”
Castle should know. Of the $31,500 in political action committee money he reported raising between January and June 1997, $25,500 came from either banking, insurance or securities groups, an analysis of campaign records by LEGI-SLATE News and the nonpartisan Center for Responsive Politics shows.
Other members of the Banking and Commerce panels received even greater proportions of their PAC funds from the three industries. Many also lean heavily on the expertise of the affected interest groups to explain nuances that might elude an over-extended lawmaker.
As a result, some interest groups practically had a seat at the Banking Committee’s negotiating table, ambushing Leach in the process.
On June 17, the first day of action on Leach’s bill, the committee rank and file undercut their chairman and added language that allows bank holding companies to own commercial firms. For example, a bank’s parent company could acquire an Internet company to deliver financial products, an arrangement known as a “commercial basket.”
The vote was the culmination of a two-year effort by a coalition of industry groups called the Alliance for Financial Modernization. The Alliance draws members from a dozen trade groups and institutions, although it notably lacks support from insurance agents.
Last January, Banking Committee members Rep. Marge Roukema, R-N.J. and Bruce Vento, D-Minn., introduced a bill [H.R. 268] that several Alliance members said they drafted. That bill was “one and the same” as an Alliance proposal that included the commercial basket, according to member Sam Baptista, president of the Financial Services Council.
Although the Roukema-Vento bill never moved, the pair joined with Reps. Richard Baker, R-La. and John LaFalce, D-N.Y., to add a commercial basket provision to Leach’s bill. Baptista said the Alliance helped lawmakers distill provisions from H.R. 268 into the basket amendment.
Larry LaRocco, managing director of the American Bankers Association securities division, called the Alliance “a legislator’s dream.” As a former Banking Committee Democrat, LaRocco should know.
“It was an effort to try and move financial services modernization with the comfort that a number of formerly competing interests” were at the table, said LaRocco, who served two terms as a House member from Idaho. “[Reps.] Marge Roukema and Vento can speak to this as well because they pretty much used this as the base text for their legislation.”
Roukema disputes the suggestion that the Alliance crafted her bill or amendment, saying she consulted with many groups in the process. “We did not take it without question or without serious in depth analysis,” she said. “These were issues that serious members of the committee recognized were at the heart of financial modernization.
“I’ve met with the insurance people, I’ve met with [bankers], I’ve met with everybody,” Roukema said. “But I also met extensively with the Federal Reserve people ... and every other regulator -- particularly those that are more concerned with public policy.”
The Banking Committee eventually squeezed out its version of H.R. 10 on a 28 to 26 vote on June 20 that augured a rough road ahead.
WHO MOVED THE BILL?
In early July, the bill went to Commerce’s Subcommittee on Finance and Hazardous Materials. But the panel chairman, Rep. Michael Oxley, R-Ohio, held off action as he consulted with the affected players.
“There was a conflict between what are considered two Republican industries” -- large banks and insurers -- over whether banks should be able to sell insurance without state regulatory oversight, said Robert Rusbuldt, a lobbyist for the Independent Insurance Agents of America.
So during the summer, Oxley and GOP Conference Chairman John Boehner of Ohio encouraged negotiations between banks and insurance companies.
“We were practically put in a room and told we were not allowed to come out,” Annie Hall, chief lobbyist for Banc One, said of the talks.
“Yeah, the lobbyists were writing the bill, but they wanted different things,” said one source associated with the meetings.
By early fall negotiations stalled, and Oxley sought to jumpstart them using Commerce staff as referees. But the insurance lobby balked. So on September 17, Oxley offered a bank-friendly draft bill.
Reaction from insurers was swift and loud, and included a threat to scuttle the bill. Instead, they decided to fight draft with draft and turned to an old ally, Rep. John Dingell of Michigan, a powerful presence as the panel’s top Democrat. Dingell, whom the IIAA named its 1997 “legislator of the year,” threatened to offer pro-insurance language if the Oxley draft went before Commerce.
Such a confrontation could hopelessly divide Commerce and sink the bill. So Oxley and Boehner again turned to private sector negotiators and enlisted two home-state interests, Banc One and Nationwide Insurance.
“Obviously, I felt comfortable with two Ohio-based companies that I thought I could trust and that would give me the straight skinny,” Oxley said. “I’ve had that happen on a number of issues. But I think they deserve a great deal of credit for hanging in there.”
While participants said Nationwide was a late-coming player, Banc One stayed at the table and was joined by the American Council of Life Insurance, NationsBank and Indiana-based insurer Lincoln National Corp. Other players joined later.
Commerce Committee counsel Robert Gordon umpired the talks, which lasted from mid-September into early October. When negotiators met face to face, they consulted dictionaries to help define insurance. They also worked the phones, sometimes from their homes and late into the night.
By early October, Oxley gave the group an ultimatum, according to participants: strike a deal or Commerce would proceed on its own. Between Oct. 2 and Oct. 5, a marathon of conference calls and faxes yielded what Hall called a “painfully crafted deal” on insurance.
The compromise defined new products, introduced after Jan. 1, 1997, according to their tax code treatment. Regulatory authority would be based on the product itself -- so states would regulate insurance whether it was sold by a traditional insurer or a bank.
According to several negotiators, Commerce staff took this agreement and inserted it into the bill word for word, but did not include several other aspects of the deal.
If the lawmakers and committee staff seemed at times to be followers rather than leaders, that was fine with some of the negotiators.
“The industry people are going to have to live with the legislation, not the congressmen or the staff,” Lincoln National’s chief lobbyist Mark Pope said. “Enlisting the aid of these financial services corporations ... and using their expertise just makes sense.”
Baptista said private-sector involvement strengthens any bill.
“[Congress] can’t do it without industry input, because otherwise you’re putting forth proposals that in the real world don't work,” he said. “You cannot say that either side clearly won. If you’re going to play the special interests ... you’re going to cede to one side or another.”
On Oct. 8, Oxley announced the deal, breathing new life into the bill. The Commerce panel passed Oxley’s version Oct. 30 by a deceptively comfortable 33-11 margin.
Deceptive because the balance of interests remains fragile. Most banks have now decided the insurance deal was not to their liking, and even Banc One turned against the compromise it originally helped craft.
When Congress reconvenes in 1998, House GOP leaders must figure out how to meld together the different Banking and Commerce versions of H.R. 10 and bring a compromise reform bill to the House floor.
“The challenge for leadership is to not be paralyzed by disagreements,” says Rep. Rick Lazio, R-N.Y., the only lawmaker on both the Banking and Commerce Committees. “I think if you had any one industry fully against it ... you’ll probably, from a good government standpoint, want to take a look at it and say, ‘maybe this bill is not in balance.’”
And in that process, special interest activity will only intensify.
As Roukema says of Glass-Steagall: “It’s only being more heavily lobbied because we’ve gotten closer to one, the truth, and two, enactment.”