New Banking Deregulation Places Public at Risk, Says Nader

by Scott Harris

The bill, known as S900, removes many of the Depression-era safeguards put in place to prevent the creation of giant financial institutions that combine banking, insurance and investment services under one roof.

In a decade-long effort to deregulate the country's financial system, the banking, insurance and securities industries have lobbied hard in the halls of Congress. Since 1997, the nation's largest financial institutions have spent more than $300 million in campaign contributions to influence legislators.

Between The Lines' Scott Harris spoke with consumer advocate Ralph Nader two days before Congress passed the final bill, who cautioned that deregulating our banking system could jeopardize consumers' right to privacy and result in instability that may lead to billions of dollars in taxpayer bailouts.

Ralph Nader: If banks are shaky and they also own a brokerage house, like a Merrill Lynch or a (corporation) in some other industry, the fear in 1930s by President Franklin Delano Roosevelt and others was that there would be a ricochet effect right through the economy like a domino effect. And so they put up these walls, so that banks cannot own securities firms, insurance companies can't own banks -- and that's all going by the wayside.

What does it mean to you? When you go into a bank, you want to be treated fairly, you don't want to be gouged. You're a small business, you want a loan, but you're dealing with a global, giant bank -- absentee-owners don't know the community like the local community bank -- and you're not likely to get the loan. At least that's the record with these giant banks, they don't respond to small business loan demands like the smaller banks do.

And if you live in a low-income area, you want to buy a house, you want to get a mortgage -- (this bill) will weaken the anti-redlining provisions existing in federal law, making it easier for the big banks to forget about low-income minority neighborhoods.

And if you're a mutual insurance policy holder, like the mutual insurance companies -- John Hancock, Connecticut Mutual and Massachusetts Mutual -- this bill allows the executives of these mutual companies to hop out of a state that has strong protections for mutual policy holders when the managers want to convert the mutual insurance company to a stock company so they get more stock options and get higher pay. An example is (the attitude of): "Aw, New York law, it's too tough, we'll just sign a paper and move the company" -- not physically, just move it legally -- to be domiciled in Nevada, or wherever they let policy holders, who are legally the owners of the company, have their assets shredded by these greedy executives of the company.

And that's roughly the story in addition to a terrible invasion of privacy. If you give your entire financial business to say, Citigroup, that means you are going to buy insurance from Traveler's Insurance, which is under Citigroup. You'll buy your mortgage from the bank, your stock business from the stock securities firm that is under the umbrella of this giant financial conglomerate, and your savings accounts and checking accounts, and your credit cards. If you do that, you're going to get stuck. You're not going to be able to pull out when there are some things you don't like. It's very difficult; there are so many hooks into your financial business.

It's hard enough now for a person to close down a savings account and go to another bank. There's a certain (feeling of), "Naw, I'm not going to do this, it's not the right time." But even worse, is that this giant conglomerate will transfer your health insurance personal information over to your banker when the banks decide whether to give you credit or whether to give you a mortgage. And all kinds of personal information will be swirling around without you having to give the permission either to do it or not to do it.

Between The Lines: Now supporters of this bill will say, 'Bigger is better;' that having all these financial institutions under one roof will be a help to the average consumer. But you're saying there are many dangers lurking there. What is the danger of these huge financial institutions if they fail?

RN: You put your finger on the main problem. The huge concentration of financial assets is in the hands of maybe six giant global corporations in the United States, like Bank of America, Citicorp, Chase Manhattan, which are setting up these financial conglomerates for a taxpayer bailout, as they have in the past. Citicorp, for example, was in trouble in 1990 and was bailed out by the Federal Reserve. If they get in trouble, they become 'too big to be allowed to fail' because of their impact on the economy. Which means you the taxpayer, through good old Uncle Sam, will be their guarantor. Their insurance company, their bailout mechanism is of course, through tax dollars.

Now we tried to get a provision in this bill banning tax-payer bailouts of these conglomerates, and we couldn't get one member of the Senate to introduce it. Which tells you that the implicit assumption of this legislation is that these banks are going to have a government guarantee. Right up to saving them no matter how much trouble, now matter how culpable they are, because they have too many assets. How many assets? Citigroup now has assets of $850 billion. It's getting close to the $1 trillion mark. That's a lot of assets to get in trouble.