H.R. 10—THE HNANCIAL SERVICES MODERNIZATION ACT OF 1999 Y 4.B 22/1:106-2 " — H.R. 10 - The Financial Services Modernization Act of 1999, Serial No. 106-2, February 10, 1^1, m12,i199/9 uvl^.N^G^Sr>. BEFORE THE COMMITTEE ON BANKING AND FINANCIAL SERVICES U.S. HOUSE OP REPRESENTATIVES ONE HUNDRED SDCTH CONGRESS FIRST SESSION FEBRUARY 10, 11, 12, 1999 Printed for the use of the Committee on Banking and Financial Services Serial No. 106-2 "r'^iX/i UnnA i'pQ\/ H.R. 10—THE HNANCIAL SERVICES MODERNIZATION ACT OF 1999 HEARINGS BEFORE THE COMMITTEE ON BANKING AND FINANCIAL SERVICES HOUSE OF REPRESENTATIVES U.S. ONE HUNDRED SDCTH CONGRESS FIRST SESSION FEBRUARY 10, 11, 12, 1999 Printed for the use of the Committee on Banking and Financial Services Serial No. 106-2 U.S. GOVERNMENT PRINTING OFFICE 54-744CC WASHINGTON : 1999 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice.Washington,DC 20402 ISBN 0-16-059392-1 HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES JAMES A. LEACH, Iowa, Chairman BILL McCOLLUM. Florida, Vice Chairman MARGE ROUKEMA, New Jersey JOHN J. LaFALCE, New York DOUG K. BEREUTER, Nebraska BRUCE F. VENTO, Minnesota RICHARD H. BAKER, Louisiana BARNEY FRANK, Massachusetts RICK LAZIO, New York PAUL E. KANJORSKI, Pennsylvania SMPIECNHCAEERL BN.ACCAHSUTSLEII.I,DAellaabwaarmea MCAAXRIONLEYNWAB.TEMRASL,ONCaElYif,orNnieaw York PETER T. KING, New York LUIS V. GUTIERREZ, Illinois TOM CAMPBELL, CaUfomia NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York JACK METCALF, Washington KEN BENTSEN, Texas ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut BOB BARR, Georgia DARLENE HOOLEY, Oregon SUE W. KELLY, New York JULIA M. CARSON, Indiana RON PAUL, Texas ROBERT A. WEYGAND, Rhode Island DAVE WELDON, Florida BRAD SHERMAN, California JIM RYUN, Kansas MAX SANDLIN, Texas MERRILL COOK, Utah GREGORY W. MEEKS, New York BOB RILEY, Alabama BARBARA LEE, California RICK HILL, Montana VIRGIL H. GOODE Jr., Virginia STEVEN C. LaTOURETTE, Ohio FRANK R. MASCARA, Pennsylvania DONALD A. MANZULLO, Illinois JAY INSLEE, Washington WALTER B. JONES Jr., North Carolina JANICE D. SCHAKOWSKY, Illinois PAUL RYAN, Wisconsin DENNIS MOORE, Kansas DOUG OSE, California CHARLES A. GONZALEZ, Texas JOHN E. SWEENEY, New York STEPHANIE TUBBS JONES, Ohio JUDY BIGGERT, IlUnois MICHAEL E. CAPUANO, Massachusetts LEE TERRY, Nebraska MARK GREEN, Wisconsin BERNARD SANDERS, Vermont PATRICK J. TOOMEY, Pennsylvania (II) CONTENTS Page Hearings held on: February 10, 1999 1 February 11, 1999 101 February 12, 1999 197 Appendixes: February 10, 1999 253 February 11, 1999 480 February 12, 1999 623 WITNESSES Wednesday, February 10, 1999 Beard, E. Lee, President and CEO, First Federal Bank, Hazleton, PA, and Chair, America's CommunityBankers 46 Creighton, David O. Sr., President, Bryton Companies, West Des Moines, lA, onbehalfofthe NationalAssociation ofProfessional InsuranceAgents .. 84 Fink, MatthewP., President, InvestmentCompany Institute 48 Greenwood, William B., President, Lawton Insurance, Central City, KY, and President, Independent InsuranceAgents ofAmerica 77 Huber, Richard L., Chairman, Presidentand CEO,Aetna Inc 14 Jones, R. Scott, Chairman and CEO, Goodhue County National Bank, Red Wing, MN, and President,American BankersAssociation 42 Kilbride, James J., Chairman and CEO, Morse, Payson & Noyes Insurance, Portland, ME, and Chairman, Council ofInsurance Agents and Brokers 82 Komansky, David H., Chairman and CEO, Merrill Lynch & Co., Inc 7 McCoy, John B., PresidentandCEO, BANKONE CORPORATION 11 McQiullan, William L., Chairman, President and CEO, The City National Bank, Greely, NE, and President, Independent Bankers Association of America 43 Menefee, W. Neal, President and CEO, Rockingham Group of Insurance Companies, on behalf of the National Association of Mutual Insurance Companies 86 Patterson, Michael E., Vice Chairman, J.P. Morgan & Co. Inc., and Chair- man, Financial Services Council 9 Pope, Mark A., Vice President and Director of Federal Relations, Lincoln National Corporation, Ft. Wayne, IN, on behalf of the American Council ofLife Insurance 78 Rhulen, Hany, Chairman, President and CEO, Frontier Insurance Group Inc., Rock Hill, NY, onbehalfoftheAmerican InsuranceAssociation 80 ZSumciktehr,bMerigc,haReolyP.J,.,PrLeismiidteendt,PNaretwneYro,rGkoBladnmkaenr,sSAascshoscia&tiCoon., and Chairman, 50 Securities IndustryAssociation 39 APPENDIX Prepared statements: Leach, Hon. JamesA. 254 Gutierrez,Hon. LuisV 255 Hooley, Hon. Darlene 256 Kanjorski, Hon. WPaul E 257 KeUy, Hon. Sue 258 Mascara, Hon. Frank 259 (III) Page — Prepared statements Continued 260 Paul, Hon. Ron 261 Weygand, Hon. Bob g-^Q Beard, E. Lee 453 CFrienikg,hMtoant,thDeavwiPd O. Sr g4-0^3g Greenwood, William B " g04 Huber, Richard L 322 Jones, R. Scott 442 KKiolmbarindsek,yJ,aDmaevsiJd H 226927 McCoy, John B •• ••• 356 McQmllan, William L. (with attachments) ^gg Menefee, W. Neal 282 Patterson, Michael E 4JY MarkA Pope, 43^ Rhulen, Harry 393 Smith, Michael P 3J0 Zuckerberg, RoyJ Additional Material Submitted for the Record Jones, R. Scott: 335 ABAInsurance Association, policy statement ABASecuritiesAssociation, policy statement ^°"?^Fei'n^an'criSalnfLUanwesrifcoar'tsheF2i1nsatncCieanlturCyo,m"oJetaintuiavreyne1s9s9.9 Modernizing U.S. ^o» ^""^R^s^S^slt^questions from Hon. RickHill and Hon. StephanieJones 401 Alliance ofAmerican Insurers, policy statement • NationalAssociation ofIndependent Insurers, pohcy statement (IV) WITNESSES Thursday, February 11, 1999 Cuny, Hon. Thomas J., Commissioner of Banks, Commonwealth of Massa- chusetts, onbehalfofthe Conference ofState Bank Supervisors 146 hbleihra;litfofANtorJt'h^ATm^eri?c•'anCSoemcmuirsitsiieosnAedrmionfisOthriaotorDsivAisssioocniaotfionSe,cuIrnicties,"on 148 GoCldebnetregr,toDrebCoormahm,umNteiyghCbhoarnhgoeod....Reinvestment Specialist, on behalf of the 174 Greenspan, Hon. Alan, Chairman, Board"ofGovemors7Federki"R^^^^^ system .. MGriiReferfszinew,airnMcsahkriyG,roEIudnpsmuurnadn,ceCCoounnssueml,erCoPnrsougmrearmsUDniiroenc"t.o".r', U.Sr'PiibUc"interest -if^i^o Nader, Ralph, consumeradvocate ."."... j^^ Reider, Hon. George M. Jr., Connecticut Commissioner of"insiii^ance'Presi^ dent, NationalAssociation ofInsurance Commissioners i«sn &tion President and CEO, National Community"Reinvestment APPENDIX Prepared statements: Cuny, Hon. ThomasJ 494 Geyer, Hon. Thomas E. (with attachment) t^o Goldberg, Deborah 5^f Greenspan, Hon. Alan T^i Griffin, Mary l°l Mierzwinski, Edmund ^k^o Nader, Ralph Reider, Hon. George M. Jr =07 Taylor,John E 0^/^17 Additional Material Submitted for the Record National PeoplesAction, policy statement 619 (V) WITNESSES Friday, February 12, 1999 Goldschmid, Harvey J., General Counsel, Securities and Exchange Commis- sion 236 Hawke, Hon. John D. Jr., Comptroller, Office ofthe Comptroller ofthe Cur- rency 231 Rubin, Hon. Robert E., Secretary, Department ofthe Treasury, accompanied by Richard S. Camell, Assistant Secretary of the Treasury for Financial Institutions 197 Seidman, Hon. Ellen, Director, OfficeofThrift Supervision 234 Tanoue, Hon. Donna, Chairman, Federal DepositInsuranceCorporation 229 APPENDIX Prepared statements: Leach, Hon. JamWesA 624 KeUy, Hon. Sue 635 Goldschmid, HarveyJ 853 Hawke, Hon. JohnD. Jr. (with attachment) 747 Rubin, Hon. RobertE 687 Seidman, Hon. Ellen (with attachment) 825 Tanoue, Hon. Donna (with attachment) 705 Additional Material Submitted for the Record Bachus, Hon. Spencer: 1988 reportofS.1886 as reported from the Senate BankingCommittee .... 633 Testimony of Hon. Donald T. Regan, Secretary of the Treasury, before the Senate BankingCommittee, July 18, 1983 andJan. 16, 1984 625 LaFalce, Hon. JohnJ.: "Explodingthe Subsidy Myth,"BNA'sBankingReport, Jan. 11, 1999 636 "The Federal Safety Ne1>—Subsidy Effects In and Outside of Banks," TheBankersRoundtahle, May 1997 639 Roukema, Hon. Marge: Comptrollerofthe Currencyletter, March 24, 1999 676 FDeedpearratlmReensterofvethSeyTsrteeamsvleutytelre,ttMear,rcFheb.3,213,9919999 , 666618 Federal Reserve System letter, April 30, 1999 682 Goldschmid, HarveyJ.: Written response to questions from Hon. KenBentsen 870 Hawke, Hon. John D.: OCC news release, Oct. 26, 1987 758 "Piercing the Corporate Veil: An Empirical Study," Cornell Law Review, July, 1991 759 Testimony of Hon. Emory W. Rushton, Deputy Comptroller of the Cur- rency, before the Committee on Energy and Commerce, Feb. 3, 1988 795 "The OCC's Primary Concerns AboutH.R. 10," Feb. 12, 1999 807 Written response to a question from Hon. Sue W. Kelly 824 Rubin, Hon. RobertE.: "Subsidiariesv. Affiliates: Questions and Answers,"Feb. 11, 1999 695 Written response toquestions from Hon. SueW. Kelly 692 Seidman, Hon. Ellen: Writtenresponse toquestions from Hon. Sue W. Kelly 851 Tanoue, Hon. Donna: Writtenresponse toquestions from Hon. SueW. Kelly 745 NationalAssociation ofIndependentInsurers, prepared statement 874 The Bankers Roundtable, prepared statement 877 (VI) H.R. 10—THE FINANCIAL SERVICES MODERNIZATION ACT OF 1999 WEDNESDAY, FEBRUARY 10, 1999 U.S. House of Representatives, Committee on Banking and Financial Services, Washington, DC. The committee met, pursuant to call, at 10:00 a.m., in room 2128, Raybum House Office Building, Hon. James A. Leach, [chairman ofthe committee], presiding. Present: Chairman Leach; Representatives McCollum, Roukema, Baker, Lazio, Royce, Metcalf, Ney, Barr, Kelly, Paul, Weldon, Ryun, Hill, Manzullo, Ryan, Ose, Sweeney, Biggert, Terry, Green, Toomey, LaFalce, Vento, Frank, Kanjorski, Waters, Watt, Bentsen, J. Maloney of Connecticut, Hooley, Weygand, Sherman, Lee, Mas- cara, Inslee, Schakowsky, Moore, Gonzalez, Jones, and Capuano. Chairman Leach. The hearing will come to order. Today we begin the first of three days of public hearings on legislation to modernize our Nation's archaic. Depression-era banking laws which were long ago overtaken by market developments. This is, as everyone here knows, an issue which has been under consider- ation in Congress for several decades. Last fall we came close to achieving consensus and the bill before us reflects compromises hammered out over four years ofconsideration. Today we are starting offthese hearings with broader support for the legislation than has ever existed before. An impressive number of large and small commercial banks, regional and money center securities firms, insurance companies and agents support the approach on the table. The bill before us was introduced by myself. Vice Chairman McCollum, the chairs of all of our subcommittees and other Mem- bers. A bill with similar goals will apparently be introduced later today by Mr. LaFalce, which reportedly will largely have Adminis- tration support. I consider this to be a constructive addition to the policy dialogue. Thus, I hope we are in the final lap in winning congressional ap- proval offinancial services modernization. In conclusion, let me stress that ifwe fail to move on legislation of this nature, American international preeminence in financial markets will come into question, the American consumers will be denied the benefits which would flow from greater competition within the financial arena, and many rural areas will be precluded access to a broad range of financial products. Here, let me remind everyone that two years ago Treasury Secretary Rubin estimated (1) the consumers could save an estimated $15 billion annually as a result ofpassage ofmodernization legislation. In the interest of time to hear from our distinguished witnesses, I will recognize Mr. LaFalce for an opening statement. Following Mr. LaFalce, I will recognize the Chairman and the Ranking Mem- ber ofthe two subcommittees with primaryjurisdiction. John, you are recognized. Mr. LaFalce. Thank you very much, Mr. Chairman. First I would like to commend you personally and your efforts to move for- ward expeditiously on this very important issue of financial mod- ernization. This is something that I have pursued the entirety of my tenure in Congress, and that is over two decades now, and it has eluded us. And I hope it will not elude us this Congress. I hope we will pass it this year. As a result of the deliberations of the last Congress, most espe- cially in the Senate, consensus emerged regarding many ofthe cen- tral components of viable modem legislation, and you have intro- duced legislation which in large part reflected that consensus. However, I do have some doubts whether the best vehicle at the end ofthe last session is the most appropriate vehicle for beginning what will necessarily be a new process involving new players and possibly new issues. As a result, this afternoon I will be introducing legislation along with Financial Institutions Subcommittee Ranking Member Bruce Vento, and Capital Markets Subcommittee Chairman Richard Baker, he takes a somewhat different approach. And while there are some differences in starting points, what is clear upon exam- ination of both bills, is that we agree on far, far more than we dif- fer on. For example, we agree new affiliation authority for financial services providers; the nature of those products and services we consider financial in nature, the appropriate regulatory framework, the importance offunctional regulations, to namejust a few. As we proceed and even before markup, I think the best ap- proach for us is to obtain as broad a bipartisan support as we can to maintain consensus where we clearly have it, to avoid conten- tious issues that are not central to the changes we must make and achieve compromises that I believe are readily obtainable on those few but vital issues where we differ. If we are to get beyond committee and have a bill that actually can be enacted into law, there is one central player in this discus- sion that we cannot ignore, and that is the Administration. And so most importantly the bill we will introduce this afternoon will in- clude language on the controversial operating subsidy issue that the Treasury can enthusiastically support. Now, that is very important, because without Administration support, we risk legislating in vain. And without that support, it will prove extremely difficult to obtain the broad bipartisan support that is essential if we are to succeed. There are a few issues that are going to be difficult, Mr. Chairman, and one deals with the thrift charter. Our bill is going to be silent on that. I think modernization should be about moving forward, not tak- ing existing authority from institutions when there is no real legiti- mate case, in my judgment, that there is a problem that they pose safety and soundness risks.