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The political desires of Chairman Gonzalez.

The Political Desires of CHAIRMAN GONZALEZ

Childhood is often the time when one hears proud tales of one's ancestors. Not so for a quiet, Mexican-American boy in San Antonio who would one day be a powerful chairman of the House Banking, Finance and Urban Affairs Committee, Henry B. Gonzalez. When he entered public school in the 1920s, the family's past was a blank. He knew little of his Mexican heritage except that he spoke only Spanish and the first-grade teacher spoke only English. He loved learning, however, and became a budding scholar as a youth, in spite of his growing awareness of anti-Mexican prejudice.

The legends of the Gonzalez family could have been a comfort to him then. Instead, they were kept locked up in his father's mind until the last five years of his 90-year life span. When his father, Leonides, began in the 1950s recounting the family's past as the landed gentry of a small Mexican village, Mapimi, in the state of Durango, Henry B was already established as a leading Mexican-American politician, fighting against Jim Crow segregationist laws in the Texas legislature.

Those family stories touched the heart of Henry Gonzalez and left an indelible mark on his memory and widened his world view. From the narrow vantage of the Mexican-American community in San Antonio, which tended to view itself as a "country in exile" waiting to return to Mexico, Gonzalez's view of life expanded vastly in time and space. Papa Leonides told him his family traced its roots back to the 16th century immigration of two brothers from the Basque region of Spain, who, like so many adventurous young Spaniards, came to the New World in search of a great fortune. Instead of El Dorado, however, they struck it rich when they found silver deposits near Mapimi. Generations of Gonzalez family member mined and shipped the silver by ox cart over the Sierra Madre Mountains to the West Coast, and then to China.

Papa Leonides was a patrician jefe politico in Mapimi, a kind of aristrocratic mayor and village patron combined, who was forced into exile in the United States in 1910 after an armed band of Mexican revolutionaries threatened his life. Facing death by firing squad, he was saved at the last minute by a friendly revolutionary, Juana Lopez, who intervened because Leonides had once saved her husband and son. Leonides was allowed to leave Mexico with his wife and two children, in return for giving up nearly all his worldly possessions, including the family's 400-year-old homestead and the mining operation. Leonides settled in San Antonio in 1911. He kept alive the political hopes of the Mexican exile community in Texas for 45 years as managing editor of La Prensa, a Spanish-language daily that was often shipped across the border as "the only free voice for Mexico," Gonzalez recalls.

Ironically, "At home we were all scared off from politics" by Papa, Gonzalez says, apparently from fear that they might one day face the same fate that nearly cost Leonides his life. As a result Gonzalez, like his brothers, first studied engineering. Later, however, he earned a law degree at San Antonio's St. Mary's University. From there it was a short step to public service, and then a run for the San Antonio city council.

Long before he came to Washington, D.C., Gonzalez's fascination with the sweep of history gave him an equally broad view of national and international banking, thrift and housing policy. Today, he looks back over the past 60 years in the United States and sees a tragic pattern of the federal government "stumbling from one jerry-rigged contrivance" to another, leaving shaky financial structures resting on the shifting sands of the regulatory regimes of the 1930s and 1940s. That old order has been unable to stand up to a vastly changed world, paving the way for the nation's descent into financial instability that began not in the 1980s, but in the 1960s, when the Johnson administration and Congress abandoned fiscal responsibility and sought to finance the Vietnam War and the Great Society social programs on deficit spending.

No one has noticed, says Gonzalez, that the financial regulatory regimes created years ago were never viewed as a permanent solution, but as a "very temporary" arrangement. By the mid-1970s, he says, "it was obvious the country was in the throes of speculative money." The advent of money market funds and real estate scandals of that time revealed that "powerful forces were disintermediating the more traditional [depository] institutions." It has taken first the thrift calamity of the 1980s and now a banking crisis to bring the message home.

Gonzalez saw evidence of the gathering storm in 1961, five years after he arrived in Washington, when the stable economic conditions of the post-war era began to unravel, and the economic "jungle" of volatile international money flows began to make waves on the American pond. In 1966, he wrote a paper, "The History of Interest Rates," which traced the havoc wreaked by unstable interest rates on other countries and other times. "It should have been obvious that there had to be some long-range planning and some interim bridging effort, given an unstable interest rate market" that spelled doom for thrifts.

"The first time I heard the words `credit crunch' was in 1966," he recalls, when mortgage rates hit the previously unheard-of level of 7 percent. "It was obvious to me then that Congress ought to face the issue, no matter how simplistically, to devise a long-term solution," he says. Nothing was done, and that crisis passed. During the 1970s, rising inflation and interest rates played havoc with the savings and loans and made it harder for first-time buyers to afford a home. States that still had usury laws began to lift them to allow interest rates to rise.

Congress and the Reagan administration failed an important test in 1983 when savings and loan "reform" was foolishly combined with an increase in deposit insurance coverage, under the leadership of former House Banking Chairman Fernand St Germain (D-RI). Lobbyists for the thrift industry were saying, "All you have to do is enlarge powers and make the S&Ls competitive," Gonzalez recalls. "In effect they were asking a flyweight to get into the ring with a heavyweight." This led to a risk-taking binge by many thrifts that included loading up on junk bonds and shaky loans.

Why was Gonzalez, a politician who had devoted his career to issues like segregation, juvenile probation and housing, so focused on financial matters? As a populist, he resented the power and arrogance of many big banks toward consumers, and he saw stable interst rates as the foundation of a stable society. The end of stable rates, he believes, both hastened the demise of thrifts, the biggest source of funding for home mortgages, and made homeownership more difficult for young couples, especially minorities. He also felt it was the responsibility of political leaders to minimize the damage of economic cycles and support programs that increase the stability of family life.

Armed with the passion of his cause - low interest rates, Gonzalez went about trying to get the Johnson administration and Congress to take some kind of action. Calling his approach "legislative advocacy," he wanted to anticipate the problem and do something to head it off. For a relatively obscure congressman, he had unusual access to the centers of power primarily because he was from Texas. Not only was the president a Texan and a Democrat, but so was the chairman of the House Banking Committee, Wright Patman.

In fact, Gonzalez and other Texas legislators often had the ear of the president when they were given free rides to Texas on Air Force One, the presidential jet. (Gonzalez, who was in the motor cavalcade in Dallas the day President Kennedy was assassinated in 1963, saw Jacqueline Kennedy, caked with blood from her husband's wounds, bend over his dead body at the hospital, kiss him and place a ring from her finger on his. His first trip on Air Force One came that same day when he flew back to Washington with Lyndon Johnson.)

In the clubby atmosphere of Air Force One, Gonzalez could often talk directly to the president. "Let's anticipate inflation," Gonzalez told the president in 1965, one year after the American role in the Vietnam War escalated. Gonzalez encouraged President Johnson to adopt steel, copper and credit controls. He also suggested a nest-egg trust, to be funded by a special one-time tax. The trust was adapted from his studies of Europe's experience with inflation. The tax would dampen inflationary pressures and, if the inflation never materialized, the money would be returned to the taxpayers, explains Gonzalez. After capturing the president's tentative interest in the plan, Gonzalez wrote to the powerful House Ways and Means Committee Chairman Wilbur Mills, who was in a position to make or break it. Mills, "the rich, princely son born with a silver spoon in his mouth," never replied to Gonzalez's letter to him. That snub still rankles Gonzalez.

In 1966, Gonzalez brought his idea again to the president, and Johnson finally admitted to Gonzalez that Congress might have to pass a tax to curb inflation. This time Gonzalez made an appointment and went to Mills' office to present his nest-egg trust idea on behalf of the president. "I'll be damned if I'll give Lyndon any tax," Mills snorted, Gonzalez recalls. "Oh dear, there goes Lyndon," Gonzalez recalls thinking at the time, expecting the economic woes that would accompany inflation to drive Johnson from the White House. Finally, President Johnson introduced his own tax plan, a 10 percent surtax in 1967, with a sunset provision. It went down in flames in the Senate.

Gonzalez never gave up on his idea of a trust, but adapted it to a new purpose: it would become a revolving fund that would buy down interest rates to 6 percent, the stable rate of the halcyon days of the 1950s, and assist in providing down payments for first-time home buyers. The idea gained even more appeal with Gonzalez after he became head of the Subcommittee on Housing in 1981, when mortgage rates went through the roof to 15 percent. While new housing initiatives were spurned during the Reagan years, Gonzalez brought his trust plan back to the bargaining table in 1990 when, as chairman of the House Banking Committee, he was finally in a position to bargain with other power centers in Washington and get his pet idea into law.

The Cranston-Gonzalez National Affordable Housing Act of 1990 contains a modified version of Gonzalez's nest-egg trust program, with modest initial funding of $250 million in 1991 and $522 million in 1992. Titled the National Homeownership Trust, it is one of Gonzalez's proudest achievements. The trust will provide enough money to lenders to reduce the mortgage rate to 6 percent, and the lenders will repay the subsidy when the house is sold or the owner moves out of the home. The subsidy will then be returned to the trust. The program will begin as a demonstration project in selected cities. The trust might turn out to be a bust, though, if homebuyers who use it have a high default rate. But, at least the idea will finally be tried.

The National Homeownership Trust was just part of the sweet taste of victory for Gonzalez. Even more important was the whole housing act, the first major new housing law in 14 years. It signaled a renewal of commitment by the federal government to sustain low-income public housing. Gonzalez says it goes far toward "rectifying a most egregious and inhumane situation," found during the years of neglect of the 1980s. In terms of housing policy, it may even be the most significant new law since 1968. It's "a victory for the progressive housing ideas of the 1990s and a defeat for the status quo of the 1970s," according to Representative Steve Bartlett (R-TX), who says "Gonzalez and other old-time Democrats adjusted their views substantially to achieve a new emphasis" in the new law.

Bartlett's assessment may be a little optimistic, both in the potential impact of the bill and in the changes that have taken place among Democrats. Gonzalez, for one, is not swayed by changes in housing paradigms. He simply believes his own life experience has taught him that public housing works. He was deputy director of the San Antonio Housing Authority from 1951 to 1953, where he oversaw a major expansion of public housing. He got to know many people in a public housing project in Our Lady of Guadalupe parish. "My gosh, you had families living there that were broke, not poor," he says. Later, he says, he did a follow-up study of those who used to live in that project and found that 93 percent of the original families "ended up being homeowners later on."

The battle to put together a housing act was probably even more bruising than the battle over the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which authorized the savings and loan bailout. Gonzalez's acceptance of some unpopular compromises, particularly reform in the FHA's mortgage lending program, brought him the wrath of some fellow committee members.

In spite of some euphoria on Capitol Hill over the new housing act, it looks less like the decisive victory Congress declared it to be from outside the Capitol Beltway. Indeed, to most of middle-class America, it looks like a Mississippi River raft of very different housing initiatives, cobbled together by the rope of political compromise by some clever legislative Huckleberry Finns. The metaphor may be all the more appropriate since the housing act, like most major new laws coming out of Congress, seems to illustrate well a famous maxim once offered by Mark Twain. Twain warned that there were only two things a person should never watch being made: sausages and legislation.

The scope of the act is so vast that it took the Housing & Development Reporter 30 pages just to summarize its contents. One of its biggest skeptics is Carl Horowitz, a housing expert at the Heritage Foundation. "It's about one-third good, two-thirds bad," Horowitz says. He wonders if its host of new programs will be an efficient allocation of federal spending resources. This is certainly the question most taxpayers will be asking as they hear about the act's 8 percent increase in housing outlays, from $18.7 billion in 1990 to $20.2 billion in 1991, and a projected 14 percent increase to $23 billion in 1992. Huge jumps in budget authorizations are even more shocking, rising a mind-boggling 65 percent from $14.1 billion in 1990 to $23.2 billion in 1991.

The major reason the housing bill is so expensive is that most of the power players who had a hand in it got more or less what they wanted. This is also the reason the housing act seems to lack any overall coherence or unity of purpose, making it what Congress often euphemistically calls a "comprehensive" law. Not everyone thinks this is a problem. "It's unrealistic to think that any housing bill is not going to be a hodgepodge," says Anthony Downs of the Brooking Institute. "Special interests rule the land - that's nothing new. That's been the case forever," he says.

While, as Winston Churchill once said, "this pudding lacks a theme," the housing act does have a number of coherent sub-themes. One sub-theme is rehabilitation, and it can be found in a section called the HOME program, developed as a set of coherent policy recommendations after a three-year study by Donald Campbell, staff director for Senator Alan Cranston's (D-CA) Subcommittee on Housing. That study concluded that new rehabilitation of existing structures was more likely to produce more public housing units at a lower cost than new construction, which would be necessary only where there were no viable structures to rehabilitate.

Because the Bush administration accepted the Democrats' major recommendations from the study done by Cranston's staff and Gonzalez's homeownership trust, both the Senate and House Democrats were willing to give a hearing to the Republicans' new ideas. These ideas came primarily from Housing and Urban Development Secretary Jack Kemp. Having moved swiftly and quickly to clean up an agency whose name had become synonymous with corruption under previous HUD Secretary Sam Pierce, Kemp won the hearts and minds of Congress. In the process, he also won much of what he wanted in the way of reform of the mortgage lending guidelines of the FHA's single-family program, gained significant funding for his own original program called HOPE, (Home Ownership for People Everywhere) and gained a considerable allocation for housing vouchers out of the costly program of re-subsidizing expiring subsidized rentals. Democrats had long opposed housing vouchers on principle, preferring subsidies and new construction.

The HOPE program is easily the glamour gal in Kemp's roadshow of housing initiatives. It is an expansion of a Reagan-era experiment that transfers management and ownership of public housing projects to their tenants. HOPE's most notable success, the Parkside-Kenilworth housing project in Washington, D.C., has become the model for others around the country. The HOPE program will also work to transfer a considerable stock of distressed FHA multifamily and single-family properties to first-time homebuyers. HOPE got very little funding in fiscal year 1991, but is seeking $865 million in fiscal year 1992. Ultimately, however, HOPE could end up being as costly as the old-style liberal housing programs.

The cost of the housing act's new initiatives is, like an iceberg, mostly submerged under the water. Most of the hidden danger lurks in an initiative to keep as many as 350,000 housing units in the low-income housing basket. The subsidies for these units began expiring last year, as originally planned in the enabling legislation. The owners had originally obtained below-market interest rates on their 40-year mortgages. In return, they had to produce low-income rental housing for 20 years. After that, they were allowed to raise the rents to market levels. Even after the budget compromise lowered the cost, this part of the housing act is estimated to cost $30 billion over the next 20 years, according to a Congressional Quarterly report. That's nearly $88,000 in subsidies for every unit.

The high cost of the housing subsidies came as a compromise between House and Senate versions of the bill, the former being voluntary with more units and the latter being mandatory with fewer units, according to the language in the bills. The mandatory version was believed to invite court challenges by the owners. "It was a contentious issue," recalls Staff Director Campbell. "The question was how to avoid a fight" between the political factions and the special interests (housing advocates, the owners and state housing officials). Under a compromise worked out by Representative Bartlett, the owners were to be compensated at market value. The government, in essence, is paying the difference in rents the owners could have earned on the private market. Not all units will be retained as subsidized housing, as Gonzalez wanted. This limit on the number of units helped keep the cost down and opened the door for more funding for housing vouchers, a less costly way of subsidizing rents.

Gonzalez is proud of winning one important battle with the Bush administration in the final conference between the House and Senate - $500 million for new public housing construction. The Bush administration's heavy lobbying to defeat new construction seemed like "the specter of the Reagan administration," Gonzalez recalls. Gonzalez took pride that this program would bring 500 new housing units to San Antonio alone.

One part of the housing act leaves butterflies in congressional stomachs. That's the FHA reform measures pressed relentlessly by Kemp. One housing lobbyist says it is too restrictive and will lead to a loss of 100,000 new homeowners a year to the FHA program. A study by the National Association of Realtors predicts a loss of between 40,000 and 60,000 potential homeowners a year. One disappointed housing lobbyist says that while the housing act gives to the poor with one hand, it may be taking away from the working poor and the middle class with another hand. Early reports from mortgage bankers in the field suggest that the changes in FHA rules that require an additional $830 in upfront cash are causing a big falloff in the traditional FHA-based business.

The lobbyist reports that HUD sources have found there has been a stunning 20,000 a month drop in the number of FHA mortgages since the housing act passed, falling from 60,000 to 40,000 mortgages. While some of that may be due to a drop-off in demand caused by the recession, "about 10,000 to 15,000 represents business that would have gone to FHA but instead is going to private financing," reports the lobbyist. They're choosing private lenders "because it costs more to go to FHA," he adds.

Apparently Congress failed to consider the impact of one part of the reform on the FHA's competitive position in the marketplace. Initial reports suggest the periodic premium, applied annually to the outstanding principal, is making FHA loans less competitive than many conventional mortgages. For example, the annual premium, at 0.5 percent, adds an extra $27 to the monthly payment on a $65,000 mortgage. This is equivalent to paying more than 50 extra basis points on the interest rate on a fixed-rate 30-year mortgage rate. This 0.5 annual premium, then, along with the current 3.8 percent upfront fee, requiring more cash to close, has increased the cost of FHA mortgages dramatically. As a result, "the FHA is rapidly becoming the lender of last resort," the housing lobbyist says.

How did the Bush administration prevail on FHA reform? The simple answer is that, by agreeing to the Democrats' expensive new housing programs, the Bush administration was able to get Democratic support for its version of FHA reform. On the House side, the equation was not quite that simple. Any deal between Kemp and Gonzalez also faced a relatively hostile House. When it looked like Gonzalez would accept some FHA reform, a bipartisan group launched its own FHA reform initiative that would correct some of the mistakes made in 1983, but would keep the size of the FHA market essentially unchanged. That bipartisan initiative was spear-headed by Representatives Bruce Vento (D-MN) and Thomas Ridge (R-PA), who wanted to limit insurance to mortgages no greater than the appraised value of the property, reduce the upfront premium from 3.8 percent to 1.35 percent and add a new periodic or annual premium of 0.6 percent. This had the effect of lowering the down payment. They quickly lined up 200 cosponsors, close to a House majority.

The Bush administration had already moved quickly and successfully on the Senate side. The prospect of a potential taxpayer bailout of FHA's Mutual Mortgage Insurance Fund (MMIF) was used to cow the Democratic opposition. The Bush administration won without a fight when "they held up the bloody shirt of the S&L crisis," says one housing lobbyist. The key players there, Senators Cranston and Don Riegle (D-MI), chairman of the Senate Banking, Housing and Urban Affairs Committee, were both very vulnerable on the S&L crisis. They are two of the "Keating Five" alleged to have improperly interfered with regulators on behalf of S&L kingpin Charles Keating. "It was an issue of major pain in the Senate," recalls Campbell. "No one wanted to get close to it with a 10-foot pole." While Cranston had a proposal for FHA reform that was closer to the Vento-Ridge proposal, it never got anywhere. The Senate-passed version of FHA reform, therefore, retained the 3.8 percent upfront premium, but also gave FHA the right to add on loans with low down payments.

Having prevailed in the Senate, the Bush administration was prepared to take on the more powerful opposition in the House. Gonzalez recalls that Secretary Kemp came to him and asked that the FHA reform be appended to the housing bill. "My first reaction was that the Secretary was acting very hastily. I wanted it to rest on its own bottom, as a separate bill," Gonzalez recalls. A Price Waterhouse study of the MMIF, however, changed the political equation. That study reported the fund fell to $2.6 billion in 1989 from $3.4 billion in 1979 and could go broke in a few years without reform. The study called for $1,300 more in upfront cash on the average $65,000 mortgage financed by the FHA to make the fund solvent. This would be done by keeping the upfront premium charged by the FHA at 3.8 points and allowing only 33 percent of the closing costs to be financed. Previously, all closing costs could be financed. Swayed by the Price Waterhouse study, Gonzalez decided caution was the better part of valor and decided to hold hearings in June 1990. "The secretary might have been right," he recalls worrying.

The Price Waterhouse study itself was contested by some congressmen, who claimed its assumptions were wrong. "The administration was rigging the debate with their own set of figures," says Campbell. So, the Democrats ordered the Government Accounting Office to get Price Waterhouse to do a second study with different assumptions. The second study said that only an additional $830 upfront was needed.

Some in Congress fingered the Office of Management and Budget (OMB) as the villain in the debate. Bartlett agrees that the OMB did complicate the debate by making changes in HUD proposals before releasing them to Congress. The proposals were spiked by "remnants of Kudlowism," Bartlett says, referring to Lawrence Kudlow, a former deputy director of the OMB in early Reagan years "who opposed FHA's very existence." Many of Kudlow's hires are still there and still support his agenda, Bartlett says. "The new OMB guys," by comparison, says Bartlett, "wanted to be certain there were no additional one-year or short hits on the deficit" from the FHA reform. The HUD people "were genuinely concerned about the solvency of the fund," says Bartlett, and it was this concern that eventually prevailed on Congress.

Kemp was not content to let moss grow under his feet while OMB fought his battle. He made a visit to Gonzalez's office to press his case. Gonzalez was willing to listen. "We have to maintain a credible rate and premium," he recalls telling the secretary. To do this, Kemp was going to have to "narrow [the gap between OMB and Vento-Ridge] as much as possible," Gonzalez recalls. Kemp asked for a second meeting in Gonzalez's office. At Kemp's suggestion, Vento was not invited, but Representative Chalmers Wylie (R-OH), the ranking Republican on the House Banking Committee and a convert to Gonzalez's leadership style, was asked to attend. "Wylie was caught off guard," Gonzalez recalls. "The secretary told him point blank, `Of course, you'll introduce this."

Gonzalez says he told the secretary that he felt there was some room for flexibility within the Price Waterhouse study and that it might be advisable to wait "and re-examine this on our own," that is, do an in-house study. Frank De Stefano, staff director for the Housing Subcommittee, in fact, came up with a compromise to present to Kemp "that was almost identical to the final report of the conference committee," recalls Gonzalez. Gonzalez then offered his compromise, which was closer to $700 in necessary upfront cash. Wylie backed the Gonzalez proposal, but it was never introduced.

Meanwhile, the Vento-Ridge proposal came up for a vote on the House floor. "Henry, if we get down to the vote, we'll carry it," Gonzalez recalls hearing Kemp say to him. Gonzalez says he warned Kemp: "If your assumption is correct, fine. If it isn't, Vento-Ridge will be accepted [by the House]. Then, when we go to conference with the Senate we won't have any middle ground." Vento-Ridge won handily in the House.

When the Senate-House conference came, the gap between the two sides was wide, $1,300 extra upfront cash on the Senate side and zero on the House side. Gonzalez again offered his $710 plan in a final effort to win over Vento. But, Gonzalez says, Vento "held out to the end," refusing to compromise. Ridge then broke ranks with Vento and offered a compromise of $830 additional upfront costs, provided more of the closing costs (57 percent) were covered than the 33 percent in the Senate version. "Vento quit the conference after that," Gonzalez recalls. One Vento supporter on the Hill says Vento was unfairly cast as an obstacle to compromise. "He's an honorable man; he was just holding out for the best deal possible," the source says. Vento refuses to comment.

The $830 compromise, which included 2.25 percent premium upfront and an annual risk-based periodic premium ranging from .50 to .55 percent, was accepted by the conference, and Gonzalez went along with it. Did Gonzalez lose this one by giving in? "No," Campbell says. "He had been for a middle ground all along. Vento, on the other hand, was in an uncompromising mood."

The FHA issue did not strike Gonzalez as important as the other provisions of the housing bill, Bartlett says, so he was more willing to compromise if the other programs remained intact, including his own pet trust project. The Bush administration also held some winning cards. The OMB said it would get the president to veto the bill unless it contained FHA reform "acceptable to [the OMB]," says Bartlett. Since Congress was unsure about the solvency question, they were vulnerable to such threats. "The fund solvency issue was not provable either way," says Bartlett. "They could not prove it was threatened. We could not prove it was not threatened. In this climate, if the executive branch claimed there was a problem, we had to accept that decision, since they run the fund." Bartlett, like most of the members of the House Banking Committee, does not believe that the administration proved its case. "Neither side was convinced of the other's position. Both sides realized it was necessary to compromise." Gonzalez, too, is not convinced that the final compromise is the right one. "Only time will tell," he says.

With two recent laws under his belt, one might think the going would get easier for Gonzalez. Yet, the banking crisis will probably prove to be his biggest challenge yet. Certainly no House Banking chairman has ever come to the job more suspicious of big banks. He is fond of quoting John Adams' famous salvo: "Banks have done more injury to the religion, morality, tranquility, prosperity and even the wealth of the nation than they can have done or ever will do good." He views the Federal Reserve not as an independent branch of the government but as an appendage to the big money-center banks. When former Federal Reserve Chairman Paul Volcker waged holy was on inflation in the early 1980s by driving up interest rates, Gonzalez's blood nearly boiled. He began impeachment proceedings against Volcker. He has been more tolerant of Alan Greenspan, however, who frequently testifies before the House Banking Committee and has demonstrated respect and deference toward Gonzalez's concerns. FDIC Chairman William Seidman and Comptroller of the Currency Robert Clarke have so far escaped his wrath, and both have been more than willing to endure questioning that sometimes lacks clear focus from some of the committee members.

The patrician Treasury Secretary Nicholas Brady is, however, quite a different case. In spite of the fact that Gonzalez forged a bipartisan relationship with Treasury in order to devise and enact FIRREA in 1989, a feeling of mutual respect between Gonzalez and Brady has never quite emerged. Nor is it very likely. Gonzalez is still fuming over the high costs paid to bail out thrifts in the waning days of the Reagan administration and is concerned that the Resolution Trust Corporation is spending too much taxpayer money in its bailouts. Brady resents having to come before the House Banking Committee asking for legislative help; it was reported that he refused to testify at one hearing last December.

Yet, Gonzalez's fundamentally independent frame of mind may work to devise a proper solution to the banking crisis. "I didn't become chairman to liquidate the banking system. I seek to improve it," he says. If Gonzalez devises a workable solution, he will still find it difficult to win over the full committee, notes Norman Ornstein, a congressional analyst at the American Enterprise Institute. "If he can do it in a way that doesn't alienate those around him, he will succeed," he says. Just as the FHA reform was hampered by fallout from the S&L bailout, he continues, so will the banking crisis. "One situation will pollute the other," Ornstein warns. Already the House Financial Institutions Subcommittee has taken to promoting the most skeptical and pessimistic views of the banking industry in a study it commissioned last year. That study, reflecting the thinking of banking analyst Dan Brumbaugh, a former economist with the Center for Economic Policy at Stanford University, suggests that the banking crisis is going to be a repeat of the S&L crisis.

The S&L bailout could likely work to strengthen the committee's penchant for populist rhetoric. Already, fellow populist Brumbaugh has noted that the Treasury-backed plan to give banks greater leeway to enter other businesses sounds like a repeat of the solution that was offered to the S&L crisis. Gonzalez, in his own bill aimed at addressing the banking crisis, does not grant banks any major new powers, in spite of the fact he says they need to earn a profit. The Bush administration will, thus, find it a very tall order to prove the need for interstate banking, allowing banks to underwrite securities, allowing non-bank firms to buy banks and allowing banks to get into the insurance business. While nearly all the members of the House Banking Committee seem to be ready to limit deposit insurance, many because they don't want to bail out rich depositors, only Gonzalez seems to see deposit insurance itself as a fundamentally flawed concept. Gonzalez says, "America doesn't have a historical memory," and has forgotten that some states had already tried deposit insurance and found it did not work before the Great Depression led to its adoption as a national policy.

Oklahoma passed a bank depositor's guarantee in 1907, he says, followed by Texas in 1917. "By 1923, when a credit crunch hit, it all came down around their ears for the same reasons we hear today. They couldn't afford to bail out all the banks." Gonzalez would even entertain a discussion on privatizing the deposit insurance system, leaving the federal government as the rescuer of last resort. His own banking bill would allow the FDIC to refuse to insure some banks.

In his skeptical view of deposit insurance, Gonzalez is ahead of the Treasury, which seems to confuse the need to bail out important big banks, those considered too big to fail without causing widespread damage, with the broad deposit insurance question. The Treasury, for example, never even properly considered the idea that deposit insurance could be privatized and has made only timid proposals to restrict it. Conversely, many members of the House Banking Committee are far more concerned about bailing out small banks rather than big ones, downplaying the systemic danger of big bank failures. Since there will be considerable opposition to various parts of Treasury's proposal to free the banks, and endless debates over deposit insurance, the chances for a responsible, effective new banking act that will improve the financial health of the American banking system are slim anytime soon. Gonzalez's best hope of getting the committee to see the crisis as "a matter of life or death," as he puts it, is to get the committee members to focus on the long-term viability of American banking.

Gonzalez might remind his colleagues of George Santayana's warning that those who do not study the past are destined to repeat its mistakes. Some of those history lessons can be found in Congress's own archives. Congress, however, is not studying its past and therefore may be slow to realize that populist nostrums alone will not return the banking industry to financial health. Or worse, the regulatory legacy of Congress's long, stormy affair with big banks may itself be a barrier to restoring the financial health of the banking system.
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Title Annotation:Henry B. Gonzalez, chairman of the House Banking, Finance, and Urban Affairs Committee
Author:England, Robert Stowe
Publication:Mortgage Banking
Article Type:Biography
Date:Mar 1, 1991
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