Frankly, Barney, We Give A Damn

Democratic Congressman Barney Frank of Massachusetts, the ranking Democrat on the House Banking Committee and a long-time champion of the "little guy" (being himself not Bunyanesque) against greedy, bloodsucking banks, introduced legislation last week that attempts to derail the pending applications of Wal-Mart and Home Depot (and any other similar commercial enterprise) with the FDIC to start or acquire Industrial Loan Corporations (ILCs) in Utah. Co-sponsored by Republic Paul Gilmore of Ohio, the "Industrial Bank Holding Company Act of 2006" (H.R. 5746) would prohibit commercial firms (those that derive more than 15% of their annual gross revenues from non-financial activities) from owning ILCs after June 1, 2006. It would "grandfather" existing relationships for ILCs chartered prior to October 1, 2003, although it would not grandfather a change of control after May 31, 2006 and would not permit the holding company to acquire control of any other depository institution after May 31, 2006.

The carefully orchestrated announcement of the bill's introduction coincided with the stoking of the ant-ILC flames by other players with skin in the game. Scott Alvarez, General Counsel of the Federal Reserve Board testified before the House Financial Services Subcommittee on Financial Institutions and Consumer Credit on July 12 that continuing to permit commercial firms to own ILCs "could threaten the soundness of the U.S. banking system." So could an unchained Godzilla on the loose in D.C. (especially if Mothra appears on the scene). The moon spinning out its orbit, crashing into Earth, killing all life (at least, life as we know it); that, too, would be very, very bad for the U.S. banking system. I mean, there are so many occurrences that could threaten the U.S. banking system, that we need to take a deep breath and parse through all the nuances before we act precipitously.

Scott also criticized the fact that ILCs constitute a "blind spot" in the federal regulatory scheme.

When Fed regulators have a "supervisory blind spot," they can't protect depositors and taxpayers from poorly run banks, he said.

Scott also said: "However, the scales will drop from the cataract-inflicted eyes of the regulatory system if you will simply alter the bill's provisions from requiring the FDIC to regulate ILC holding companies and put the FRB in charge." Actually, Scott didn't say that, but I bet he thought it. The Fed likes Jim Leach's bill better, inasmuch as it would make the Fed, not the FDIC, the federal regulator of ILC holding companies.

During the course of the hearing, Scott was seized by a fit of sound reasoning and logic.

"The question of whether to allow broader mixings of banking and commerce has broad-reaching implications for the structure and soundness of the American economy and financial system particularly because, if permitted, any general mixing of banking and commerce is likely to be difficult to disentangle," Alvarez said. "Consequently, the nation's policy on this important issue should be set by Congress only after deliberate and careful consideration; it should not be allowed to occur unintentionally through the exploitation of an exception by individual commercial firms."

That was way too calm and reasonable. He must have been listening to my warnings about "parsing the nuances." I wasn't present at the hearing, but I assume that fevered proponents and opponents both looked momentarily thunderstruck by the very idea of "deliberate and careful consideration" of any piece of legislation. Partisan maneuvering and over-the-top "speechifying" are the weapons of choice in any legislative battle. I'm sure everyone was embarrassed by Scott's naivete. Does he really think that Congress is a deliberative body?

Other opponents of ILCs also piled on at the same hearing.

"The flood of new applications for ILC charters threatens to eliminate the historic separation of banking and commerce and undermine the system of holding company supervision, harming consumers and threatening financial stability," said Terry J. Jorde, ICBA chairman, at the hearing. "Each time Congress has been confronted with loopholes like the one the committee is addressing today it has reaffirmed the separation of banking and commerce and the importance of holding company supervision. Congress closed the unitary thrift holding company loophole in 1999 and closed the non-bank bank loophole in 1987. It is now time to close the ILC loophole."

Nothing...and I mean nothing...scares an independent banker like competition that isn't hamstrung by the same regulatory impediments to running a bank on a sound business basis that commercial banks have to deal with every single day. With much justification, they argue: "If I have to suffer this brain damage, why do ILCs get a pass?"  In addition, since many members of the ICBA are former thrifts, they're bitter about the loss of the unitary thrift holding company "loophole" (which they fought like the blazes to retain for years). So bitter, in fact, that many of them have suffered amnesia on this point.

Of course, the National Association of Realtors chimed in. NAR's been flogging this horse for quite  awhile now, as part of its campaign to keep banks out of the real estate "bidness" (as we call it in Texas). NAR President Tom Stevens, in written testimony submitted to the Committee, opined:

"When commercial firms are allowed to engage in banking, the bank's commercial parent runs the risk of using the bank to further the corporate objectives of the company, creating an inherent and irreconcilable conflict of interest. The best interests of the customer, competitors, the bank subsidiary, and our financial system could all take a back seat to the parent company."

The only exception to that rule would be a bank holding company controlled by a commercial enterprise like, say, Remax or Century 21. The mere mention of that scenario by an acolyte caused President Stevens to experience a beatific vision so profound that it left him speechless and prevented him from verbally testifying (outside of a charismatic church pew, that is).

All of this is very interesting as an academic exercise in trying to influence the FDIC on pending and future applications of this nature. Notwithstanding what happens in the House (where there is opposition), a Reuters article states the obvious problem for the legislation's backers.

However, the House legislation is unlikely to become law because it faces opposition in the Senate.

Among those who are strong defenders of ILCs is Robert Bennett of Utah, the second-ranking Republican on the Senate Banking Committee. His state is home to nearly 40 ILCs, according to the Utah Department of Financial Institutions.

Bob Bennett aka "Fly-in-the-Ointment" Bennett, will never let such legislation see the light of day. Bank on it.