They were warned
by Stephen P. Pizzo
There’s nothing more obnoxious than an “I-told-you” so-er. And that’s not why I’m doing this today. I am doing it because a few weeks ago Paul Muolo called me. Paul co-authored with me and Mary Fricker our best selling book on the savings and loan crisis back in 1989. Paul is now co-authoring a new book, on the new banking crisis.
His call reminded me of a day in 1991 when I received a call from someone in Representative Ed Markey’s office. She said Markey was concerned about pending legislation that would deregulate the commercial banking industry and abolish the post-depression Glass-Steagall Act, which had built a wall between stock market speculators and federally-insured banks.
At the time I was still a working reporter and working reporters simply do not testify on subjects they cover. I knew if I accepted I would not be able to continue covering that beat. After some thought I came to the following conclusion: how much good had my reporting done anyway? After all, here the nation was still trying to pick up the pieces from S&L deregulation, and those fools in Congress were about to do the same thing to the banking industry.
So I agreed, and on September 13, 1991 — nearly 17-years ago — I testified before House Committee on Energy and Commerce.
It was Paul’s call that caused me to dig through my dusty boxes full of crap I’ve saved and find my long-forgotten published testimony. (Forgive me, but the parts in bold are my, “I told you so’s)
I scanned it in and below is my oral testimony. At the end is a link to the more comprehensive written statement submitted to the committee by me and Mary Fricker.
If you have the stomach for it, read both. Then send them to your members of Congress and ask them why they ignored these warnings. And why they are now acting so “shocked, simply shocked” that, doing what they were explicitly warned NOT to do, that “gambling went on.”
It makes me sick to think of the hundreds of billions of dollars Congress once again let the slicksters and tricksters suck out of our economy, our wallets and our homes. Those who voted for this measure need to be held personally and professionally responsible. Because, they were warned, and here’s the proof:
September 13, 1991
Hearing: Subcommittee on Telecommunications and Finance
Committee on Energy and Commerce
A bill to Amend the Federal Securities Laws to Equalize the Regulatory Treatment of Participants in the Securities Industry
Rep. MARKEY. Thank you, Mr. Mayer, very much. Mr. Pizzo.
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.
What is amazing to those of us who remember those days and witnesses the aftermath of Garn-St Germain is that so many in Congress appear eager to follow this demented pied piper a second time.
Members of the committee, we already have a healthy, vital, and dynamic community banking system out there. Of our 12,500-odd banks, the vast majority are community banks that are not in trouble and are not asking for this unwise legislation. But in the Lewis Carroll environment that surrounds this legislation, the success of America’s community banking is being totally ignored.
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. In a matter of a decade after this legislation passes, the competitive marketplace will become the twin of today’s electoral process. Upstart challengers will have almost no chance against established incumbent businesses that have already made their Faustian contracts with the new masters of corporate banking.
As for re-admitting banks into the securities marketplace, bankers will of course readily agree to to firewalls that will prohibit them from using their money to fund or prop up their securities trading affiliate or its customers. But of course, on the street, these firewalls will pose no real barrier at all.
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.
I have a great deal more to say on this subject, which I submit to the committee in my written remarks. I want to end by saying Congress is once again being misled, just as it was when it deregulated the thrifts, at the request of a handful of people in that industry.
For those outside the beltway, and those who now understand the scope of illegal and abusive activities Congress unleashed on the thrift industry, this march towards bank deregulation leaves us bewildered, deeply worried and angry. Voters are yearning for a few Mr. and Mrs. Smiths up here willing to take a stand against the banking lobby and their money and their bought and paid for experts and economists; a few good legislators, who will pull the plug on this Frankenstein, this time before it gets out of the laboratory.
After all, members of the committee, taxpayers who are still trying to grasp the extent of the mess left by Garn-St Germain, will not be amused if Congress now turns this monster loose on them as well.
As I said, in the beginning, I have no illusion that my testimony will sway anyone or that I can overcome the money being lavished on this issue, by the pro-deregulation lobbyists. I did not come here with money; I came, instead, armed only with solid common sense from lessons learned. I can only warn Congress that what they are about to do is unwise.
But, if this bill passes, and it ends badly, as I am certain it will, voters will hold Congress to a much higher standard of accountability than it was in the aftermath of Garn-St Germain. Because this time we know how high the stakes are, and we know that once you destroy barriers between Commerce and the vault, subsequent events will tumble out of control; out of control of regulators, and out of control of Congress.
We have paid a terrible price once already for ignoring this simple known fact. Voters and taxpayers have a right to expect that Congress will not create the conditions for this to happen again.