Pssst! Reform Really Did Let Commerce In

Article excerpt

The way Peter J. Wallison sees it, bank regulators and lawmakers don't have much time left to confront the fact that they have obliterated any meaningful separation of banking and commerce. House Banking Committee Chairman Jim Leach and other lawmakers may ardently insist that the Gramm-Leach-Bliley Act fortified that separation. But by letting banks affiliate with securities and insurance firms, Congress actually removed any remaining pretense that such a difference exists, argues Mr. Wallison, a fellow at the American Enterprise Institute and a former partner in the Washington law firm of Gibson, Dunn & Crutcher. "I would say we have five or 10 years before the walls will have to start coming down because they are no longer tenable," Mr. Wallison said in an interview, echoing a similar prediction by Senate Banking Committee Chairman Phil Gramm. "It is no longer possible to make a principled argument on where the line is between financial activities and commercial activities," he said. And as those walls crumble, he argues, so will the Federal Reserve Board's authority to regulate financial holding companies. The word "financial" will be interpreted more broadly, he predicts, and the central bank's regulatory expertise will be stretched beyond its limits. For many years, one of the principles of bank regulation in this country has been the idea that banks are somehow "special" -- that they need to be insulated from commercial activity in order to preserve the public's trust in the banking system. Not so, says Mr. Wallison. "This business about the banks needing some kind of special restriction is nonsense unless you assume that bankers are somehow more dishonest than everybody else," said the former Treasury Department official and counsel to President Reagan. The primary reason for keeping banking and nonfinancial activities separate was the concern that banks affiliated with commercial companies might make preferential loans to their affiliates or decline to lend to competitors of their affiliates, giving one an unfair advantage over the other. Additionally a bank affiliated with a troubled commercial concern might be called on to bail it out -- for example, by making a loan that it would not normally make. Why, Mr. Wallison asks, does Congress believe there is a difference in this case between a company that sells widgets and a company that sells securities? "If you think about it, it doesn't matter whether the affiliated company is an automobile manufacturer, a steel company, or a software developer or securities firm. If a bank is affiliated with a securities firm it is just as likely -- if it was ever likely -- that the bank would make a preferential loan to its securities affiliate or that it would refuse to lend money to the competitors of its securities affiliate," he said. "Despite all the rhetoric about banks being special, the law that was passed suggests that they have lost their exceptionalism," he continued. "As happens frequently, Congress' rhetoric and the language that is used to sell a particular piece of legislation . …