The Democrats Bow to the Megabanks.

Never underestimate the ability of Congress to repeat its mistakes. A decade ago, after it gambled and lost on deregulation, Congress was forced to launch a $500 billion taxpayer-financed bailout of the savings and loan industry. Congress has just rolled the deregulation dice again. This time, the outcome may be even more costly.

The current gamble, which President Clinton signed into law on November 12 to the enthusiastic applause of Congressional leaders, makes the savings and loan schemes of the 1980s look like schoolyard marble games.

Congress and the White House have come up with the granddaddy of all financial deregulation, the "Financial Services Modernization Act," which wiped out the Glass-Steagall Act of 1933 and removed the major restrictions of the Bank Holding Company Act of 1956. In so doing, Congress and Clinton have opened the door for banks, securities firms, insurance companies, and in some cases nonfinancial corporations to combine into a handful of giant conglomerates.

These conglomerates will be the financial equivalent of nuclear bombs. The explosion of even one could have a disastrous impact not only on the U.S. economy but on financial systems around the world.

Federal Reserve Chairman Alan Greenspan concedes that such consolidations carry large risks for the economy. "We face the reality that the megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risk in the national and international economy should they fail," Greenspan said in a speech on October 11.

Even before Congress's latest move, the banking system was becoming more concentrated--and more vulnerable. The Federal Deposit Insurance Corporation released a study in September that warned that consolidation in the banking industry between 1990 and 1997 "has increased the risk of insurance fund insolvency by 50 percent." That risk has grown in the last two years, the report says, and is "becoming inseparable from the health of the twenty-five largest banking organizations which already control 54.5 percent of the [U.S.] banking assets."

These, of course, are the very institutions that will be combined with insurance companies and securities firms in the new too-big-to-fail conglomerates.

But if there were any concerns about the risks being created, they were well hidden by a Congress satiated with record campaign contributions and lulled into complacency by a roaring stock market and quarter after quarter of record financial profits.

For most of three decades, banks--in more recent years joined by their securities and insurance brethren--have been knocking on Congressional doors in an effort to repeal or render ineffective any statutes that might impede their economic expansion.

Glass-Steagall, a major New Deal reform, had to be pushed aside in order for the securities industry to be a major player. For six and a half decades, it separated the business of commercial banking from investment banking to prevent the conflicts of interests and compounded risks that had contributed to the financial disarray of the 1930s.

The Bank Holding Company Act, which became law two decades later, required banks to limit their activities to those "closely related to banking." This was a restriction, for example, which kept banking and insurance underwriting separate. Eliminating these restrictions was a critically important lobbying task for Citigroup, since Citicorp had combined its banking operations with Travelers Group, a multinational corporation with worldwide insurance operations. Without the passage of the legislation, Citigroup would have been forced to divest itself of major insurance holdings, possibly as early as next April, and suffer a big loss. So intense was the lobbying by Citigroup that the legislative effort at times took on the appearance of a private bill for the giant conglomerate.

While Citigroup's political muscle and deep pockets were particularly visible, none of the major players in the banking, securities, or insurance industries were timid about turning up the lobbying heat or in passing out record campaign funds.

The nation's financial corporations were taking no chances after near misses in the 104th and 105th Congresses. This year, they staked everything on winning. The financial sector tossed in $155 million to Congressional candidates in the 1998 election, according to the Center for Responsive Politics. The industry's political action committees are on a pace to exceed these numbers in the current campaign cycle. The House-Senate conferees, who made the critical decisions on the final shape of the legislation, received more than $16 million among themselves.

The vote on final passage revealed the abject surrender of the Democrats to the demands of the financial services industry. In the Senate, the vote was 90 to 8 for the bill, and in the House it was 362 to 57.

The fight had simply gone out of the Democrats--with some courageous exceptions. The Democratic leadership in both Houses cast their votes for the legislation. Democratic leaders, with hopes of gains in next year's elections, clearly were reluctant to make the bill a party issue for fear that the well of contributions from the banks, securities firms, and insurance companies would go dry.

Some Democrats, like Senators Chris Dodd of Connecticut and Charles Schumer of New York, became little more than handmaidens for Senate Banking Chairman Phil Gramm, Republican of Texas, who dominated negotiations over the differences between the House and Senate versions of the legislation. The Dodd-Schumer assistance in closed-door negotiations was a key to locking in the final compromises that were put together at 2:00 A.M. on the final day of the conference, compromises that allowed Gramm to boast of victory.

Even if they couldn't defeat the bill, the Democrats squandered a great opportunity to demand a quid pro quo for bolstering consumer protections, strengthening the Community Reinvestment Act (CRA), and protecting individuals' privacy rights in the financial realm. Given the frenzy the industry was in to gain passage of the legislation, the Democrats had leverage to demand something in return. But they exerted little of that leverage.

The Congressional Democrats and the Clinton Administration--led by its Treasury Department--played around the edges, tossing in an occasional crumb for consumers but never putting up a fight that would have placed the central issues on the table.

Many of the liberals--like Senator Paul Sarbanes of Maryland and Representative Bruce Vento of Minnesota, who in previous Congresses might have stood up to the financial industries--this time around wanted a bill more than they wanted a fight on bedrock consumer and community issues.

It seems incomprehensible that this bill, which changes the nation's financial system so radically, could move through both houses and be signed by a President without any effort to strengthen our weak regulatory system. But that's what happens when industry lobbyists get to dictate the law.

Take insurance companies. Many of them are huge multinational corporations but they remain under the regulation of understaffed, underfunded state insurance departments, most of which maintain a cozy relationship with the very companies they are supposed to oversee. Even in the handful of states where insurance departments are reasonably funded and staffed, the emergence of hundreds of companies that do business across state lines as well as overseas makes it impossible for a single state regulatory agency to monitor and assess risks. Adding to the difficulty is the growing complexity of investments that these companies engage in.

So what did Congress do to ensure the stability of the insurance industry? It prohibited federal regulators from forcing insurance companies to keep a minimum amount of money in reserve or even from examining the companies except under extraordinary circumstances. Yet the failure of a single insurance company could bring down an entire conglomerate containing taxpayer-backed banks.

And in a gratuitous slap at consumers, the legislation preempts state laws that protect holders of mutual insurance policies. Under a new provision, mutual insurance companies will be allowed to slip away in the dark of night and set up domicile (on paper) in states with lax laws governing policyholder rights. This puts at risk tens of billions of dollars of the policyholders, who are, after all, the legal owners of the mutual companies.

Meanwhile, the new law is keeping the archaic system of regulation intact. Six federal agencies and myriad state agencies will continue to oversee the financial system. Regulators, banking officials, financial analysts, members of Congress, and the General Accounting Office have all pointed to the inefficiencies of this system, with its conflicting interpretations of regulations and diffuse accountability. Now Congress has loaded enormous new responsibilities on this rickety regulatory machinery. It not only fails to repair the machinery, it weakens it still further.

Charles Bowsher, former head of the General Accounting Office, used to beg Congress to coordinate this regulatory system. In 1993, he testified: "The current regulatory structure has evolved over more than sixty years as a patchwork of regulators and regulations.... We question the ability of the current regulatory structure to effectively function in today's complex banking and thrift environment."

If it couldn't function back then, how is it going to function now?

On consumer and community issues, Congress took a decidedly antagonistic approach, ignoring pleas to modernize consumer protections to keep pace with the new world of finance being created by the legislation.

For more than a year, Senator Gramm used his Banking Committee chairmanship to conduct a bitter attack on the CRA and community activists. The CRA requires banks to help meet the credit needs of their communities, including low and moderate income neighborhoods. Repeatedly, Gramm--protected by the privileges of the Senate--charged community organizations with operating "protection rackets" that extorted funds from banks. Gramm never produced the evidence, and most of the presumed supporters of the CRA looked the other way, avoiding a direct challenge to the Senator. Emboldened by the silence, Gramm inserted language in the Senate bill that set up a special government program that requires community organizations--if they challenge merger applications--to file reports with the regulators detailing agreements they enter into with banks.

Not covered by the Gramm language are developers, corporations, and others who enter into agreements with banks. Only community groups, composed largely of low and moderate income and minority citizens, are singled out. The provision--which Gramm cynically labeled "sunshine"--was clearly intended to intimidate community organizations from commenting on bank mergers and to discourage banks from entering into agreements with community groups. These agreements have been of mutual benefit to banks and communities and have served to enhance the development efforts generated by the CRA.

The new legislation also weakens the CRA by letting most of the nation's banks escape CRA examinations for periods of four to five years, sharply diminishing the ability of regulators to monitor performance or seek remedial action. And once the banks are part of a financial holding company, they will not be required to maintain a satisfactory community lending performance. CRA ratings will be considered only if and when the holding company acquires new firms. Apart from this, the bank holding company will be free to be in substantial noncompliance without facing sanctions.

In another surrender to the insurance lobby, Congress rejected efforts--led by Democratic Representatives Tom Barrett of Milwaukee and Luis Gutierrez of Chicago--to require companies to report where they write policies and make investments. Similar reporting requirements already apply to mortgage lenders and have proved extremely valuable in preventing the "redlining" of low and moderate income and minority neighborhoods.

Congress also rejected a related amendment by Representative Barbara Lee, Democrat of California, which would have denied insurance firms the right to form financial holding companies if they had been found guilty of repeated fair housing violations. The provision was actually adopted by the House Banking Committee but was stripped from the bill by the Republican leadership after protests from insurance companies. Here, too, the insurance interests exercised veto power over consumer protections.

And while the legislation creates untold opportunities for huge profits for the conglomerates, Congress rejected an effort by Representative Maxine Waters, Democrat of California, to help low-income citizens set up limited basic bank accounts.

On privacy matters, the law is a bust.

Under the legislation signed by the President, there will be wholesale invasions of personal privacy as the multitude of affiliates formed by the conglomerates share information and develop consumer profiles to target highly profitable cross-marketing of a vast array of financial products. The affiliates will be allowed to access intimate details of our lives--buying habits, investing patterns, health records, entertainment choices, employment data.

This will be a bonanza for the conglomerates and their telemarketers.

The promoters of the legislation have boasted that the new bill will allow "one-stop shopping centers," which will be a great "convenience" to consumers. In the real world, however, these centers will be spider webs to lure and entrap consumers into buying all of their financial products from a single source, rather than encouraging consumers to shop around for the lowest price and the best choice from a variety of competing financial service providers.

An unlikely alliance of a conservative Republican Senator from Alabama, Richard Shelby, and a liberal Representative from Boston, Edward Markey, came close to stopping the bill in its tracks with a strong provision that would have given consumers the right to stop the marketing of their private information.

But that threw the financial services lobbyists into an uproar, and the Markey-Shelby efforts were defeated. As a result, the privacy protections in the bill are largely a joke, a fig leaf designed to delude the public into believing there are protections where there are none.

Few politicians bothered to consider the effect these megabanks will have ion the concentration of economic and political power in America. Senator Paul Wellstone, Democrat of Minnesota, was one of the exceptions. He warned his colleagues: "This is the wrong kind of [financial] modernization because it encourages the concentration of more and more economic power in the hands of fewer and fewer people. This concentration will wall off enormous areas of economic decision-making from any kind of democratic input or accountability."

It is too bad that the President and the Democratic leadership of both the House and Senate did not heed Senator Wellstone's words. They had the power to stop the bill, or, at a minimum, to force Congress to adopt a pro-consumer, pro-community measure that would have assured a more just and democratic financial system.

As a result of this new law, consumers and small businesses will face fewer choices and higher prices in the new financial world designed for the affluent. They could turn to independent community banks and credit unions, entities that still recognize people, not just numbers. But even these choices may be limited by the tremendous political and market power of these new conglomerates.

Consumers need to band together to protect their interests. What is needed is the formation of Financial Consumer Associations across the nation. These groups would be modeled on the Citizens Utility Boards in Illinois and Wisconsin, which give consumers the means to fight rate increases and promote energy conservation.

Financial Consumer Associations would be state-chartered, nonprofit, nonpartisan organizations. They would be supported by membership dues and would receive no tax money.

Members would elect a board of directors that could hire researchers, organizers, accountants, and lawyers to represent consumers before regulatory and legislative bodies and in negotiations with banks and insurance companies. They would also monitor the availability of financial services to less affluent and minority borrowers and advocate policies to ensure access to credit for all consumers.

These associations would give low and moderate and middle income consumers an opportunity to protect themselves. Otherwise, such consumers may fall prey to the conglomerates that Congress and Clinton just authorized.

Ralph Nader, the consumer advocate, is the founder of Public Citizen. He wrote "Overcoming the Oligarchy" in the January 1999 issue.