Chances for financial reform this year grow dim

Bengtson, Tom

In last week’s Fax Update, I noted that the developments surrounding financial reform legislation are changing daily. While I believed the reform bill’s chances looked good a week ago, those chances have since diminished.

The developments surrounding Long-Term Capital Management, the global hedge fund, are raising serious questions about bank involvement in these kinds of funds. The Federal Reserve ended up lending the hedge fund $3.5 billion. Members of Congress already are asking questions. Rep. Jim Leach’s House Banking Committee intends to hold hearings on hedge funds. The timing of Long-Term Capital Management’s problems couldn’t have come at a worse time for proponents of H.R. 10. If our existing banking system exposes us to hedge fund problems, how eager is Congress going to be to open up the financial system to new product and service lines that may lead to even more problems?

Also, the CRA issues remain a factor. Even though senators seemed to have agreed enough to pass a bill out of committee Sept. 11, some senators have yet to be pacified. Sen. Richard Shelby apparently remains committed to limiting the impact of CRA. He does not want new financial reform legislation to include provisions that increase CRA’s reach.

(In addition to holding up H.R. 10 over CRA, Shelby may hold up confirmation hearings on the administration’s nomination for Comptroller of the Currency. Shelby reportedly believes Jerry Hawke is too supportive of CRA. The Independent Bankers Association of America, in it weekly newsletter, points out however, that as general counsel for the Fed, Hawk helped lead the Fed’s opposition to CRA when Congress passed it in 1977.)

Also, Secretary of the Treasury Robert Rubin on Sept. 28 reiterated President Clinton’s intent to veto H.R. 10 if passed in its current form. I question the president’s desire to spend political capital on this bill. The best thing Clinton may have going for him, however, is the calendar. If Congress passes H.R. 10 and then adjourns, Clinton can veto it simply by not signing the bill. When Congress is in session, unsigned bills automatically become law. But when Congress adjourns, unsigned bills die by the socalled “pocket veto.” Adjournment prior to a formal presidential veto also means the senate gives up its chance to override a veto.

One development in favor of financial reform is the agreement the American Bankers Association and insurance groups reached on insurance provisions in H.R. 10. At the request of the Senate Banking Committee, negotiations between the banks and the insurance groups were held on a few disputed items. The dispute between banks and insurance agents historically had been the main stumbling block to financial reform.

The agreement in light of the Long-Term Capital mess, however, is small potatoes. With time running out, it becomes less likely Congress will pass a financial reform bill this session. In order to get a bill passed in the current environment, Congress would have to be convinced that the hedge fund situation would not be exacerbated by financial reform, and Sen. Shelby would have agree to shelve his opposition to the bill’s CRA provisions.

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