September 13, 1991
Hearing: Subcommittee on Telecommunications and Finance
Committee on Energy and Commerce
102nd Congress
A bill to Amend the Federal Securities Laws to Equalize the Regulatory Treatment of Participants in the Securities Industry
STATEMENT OF STEPHEN P. PIZZO
Mr. PIZZO. Thank you, Mr. Chairman, for an opportunity to address this committee. To get right to the point, this so-called bank reform legislation is nonsense. It is dangerous nonsense.The premises on which it is being peddled to Congress are contrived, cynical, and transparent. They are the same arguments, the very same arguments, recycled from a decade ago, only then it was the U.S. League of Savings Institutions that was peddling them, rather than the ABA and the Association of Banking Holding Companies.
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Instead, the administration and many in Congress have chosen to listen to the failed portion of the banking industry, America's big and super-big banks. It is these colossal failures that many in Congress and the administration now want to accommodate with even broader banking powers. If only you would let them stay out later and associate with new friends, they promise they will straighten up and fly right.
Well, to veterans of the S&L crisis, all of this has a Mad Hatter's tea party quality to it, and I am here to layout in the starkest terms I can what I believe will happen if Congress accommodates the desires of these tumor-like money center banks.
As for allowing corporate ownership, corporations want to be affiliated with banks for the very same reason that Bonnie and Clyde and Willie Sutton wanted to be affiliated with banks, because that is where the money is. And if you facilitate this union between banks and commercial interests, you will effect the most fundamental change ever in how and where capital flows to American business.
Big banks owned by Fortune-500-size corporations will favor the corporate culture. Credit will inevitably begin flowing away from small, family-owned and closely held businesses and into subsidiaries owned by large corporations. Since small business, not corporations, create the majority of jobs in America, the demise of the small business community will translate into higher unemployment and the accompanying cost to government. In the end, Washington will have to rescue job-creating small businesses through a massive and expensive government-backed loan program.
Corporate ownership of banks will also give big business a critical tool with which it can engineer society and the competitive business environment in ways heretofore out of their reach. Suppliers who accommodate a corporate bank's department store chain, for example, will find credit plentiful and easy, while those who do not play ball will find the same credit tight, expensive, and at critical times, unavailable.
The Mafia built its empire on just such subtle, difficult-to-prove, extortive, and anticompetitive relationships....
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As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. One of the favorite methods was to link up like-minded thrifts in the daisy chains through which they could circulate inflated assets and hide their rotten loans to each other and to each other's customers from regulators.
Banks that need to get money to a trouble securities affiliate will do exactly the same thing. By linking up three or more banks, each with its own securities subsidiary, a daisy chain will facilitate a round robin of reciprocal loans in times of need. Then, the next time we have a Black Monday on Wall Street, this daisy chain will swing into action as a handful of mega-banks try to prop one another's securities subsidiaries and their customers as the market plummets.
In such a scenario, billions of federally insured dollars will disappear in the twinkle of a few program trades.
That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up....
Excellent post on #223. That is exactly has happened to the banking industry. Banking and brokerage and mortgage and real estate firms firms should have never been allowed to be ‘the same’ corporation.