Nov 09 2002



Thank you for inviting me here - I appreciate the opportunity to be here with you.

You make up an industry that is very, very important to America. From helping people achieve the American dream of home ownership to providing much of the sustaining force in our economy today, YOU are a crucial part of the American marketplace.

We have just been through a very tough election cycle and as you could imagine there are a few of us who are quite happy with the results. In the Senate races, I think the combination of good candidates, hard work, the President's efforts, and some good luck provided us a great night on Tuesday.

With the dust just now settling it is now probably a good time to glimpse into the future. Before doing so, however, I want to quickly highlight some observations from my experiences serving on the Senate Intelligence Committee.

For the previous eight years I have served on the Senate Select Committee on Intelligence. For six of those years I served as either Chairman or Vice Chair of the Committee. It is my view that national security is the preeminent obligation of the federal government. In as much, Congressional oversight of our national security agencies is a tremendous responsibility. And I have always felt it is very important that the Committee take those responsibilities very seriously. I believe that this requires the Intelligence Committee to be extremely thorough, detail oriented, and to be highly mindful of the serious consequences associated with its actions.

I raise my experiences on the Intelligence Committee because I see many parallels for my future role as Chairman of the Banking Committee.

While the subject matter under the jurisdiction of the Banking and Intelligence Committees greatly differs, the relative significance of the issues they cover does not.

The Banking Committee has oversight responsibility concerning areas that are at the very heart of the economy. As the national security matters under the Intelligence Committee's purview require careful consideration, it is my belief that the national economic issues covered by the Banking Committee must be appropriately handled as well. For these reasons it is my intention to bring the same deliberative, reasoned approach to consideration of the policy and oversight activities of the Banking Committee.

I believe the approach the Committee adopts will be tested quite frequently.

The dynamic nature of our financial markets present continuous challenges to lawmakers and regulators. The main thrust of the challenge involves striking a balance which allows advancements in technology and entrepreneurial activity to provide new and more useful financial products and services while preventing those activities which threaten the safety and soundness of the overall system.

One area where this challenge may be the most difficult to address and involves the most serious consequences is the question of how much mixture of banking and commercial activities should be permitted. At stake in this debate are extremely weighty issues such as: job creation, the competitiveness of financial services firms and economic growth on the one hand; and the effect on credit availability, market consolidation, bank solvency and the stability of the financial system, on the other. Where we draw the line will have far reaching effects on our economy.

During my 24 years of service in the Congress this particular issue has come up, in one form or another, numerous times. We have often varied the manner in which we have dealt with it - sometimes adopting a permissive approach and at others a very restrictive one.

There has been a long history of failed experiments in this regard. Most significantly, I think a large part of the Thrift crisis of the late 80's and early 90's can be attributed to the changes that permitted greater mixture of banking and commerce. I was present when the final bill was sent to the American taxpayer and it is not something I want to see happen while I am in Congress or ever again.

Beyond our shores there also been breakdowns within financial markets when banking and commerce were mixed too closely.

In places like Korea, Thailand, Indonesia and Japan, outright ownership by or close affiliation between banks and commercial firms was permitted. This over extension of the banking sector ultimately led to major financial and currency crises that threatened the entire global economy.

In general, there seem to be some important patterns that we must remain mindful of. When banks get involved in other business sectors, they often lose focus on their core mission as financial intermediaries and fail to maintain the appropriate arms length distance with their customers. Lending decisions are made based on business ties rather than credit worthiness. The healthy skepticism lenders need to bring to the lender-borrower relationship is routinely lost.

The ultimate consequence can be that the capital banks control is inefficiently distributed and overall economic performance is diminished.

I do want to point out, however, that the reason I care about maintaining the general separation between banking and commerce is because my ultimate concern lies with what I feel is best for the economy. I am not so much interested in adhering to a rule simply because such rule has been around for a while or because it may provide some protection from competitive forces for some groups. I am concerned about ultimate economic outcomes. From what I have witnessed, the best outcomes are achieved by maintaining some limits on the permissible activities available to banks. Again, I want to highlight, this is not necessarily about a rule per se, this is about results.

This issue was obviously the subject of much debate during the consideration of financial modernization legislation.

Our challenge in updating the banking laws was probably best summarized by Federal Reserve Board Chairman Greenspan, who noted: "In designing financial modernization legislation,...Congress should focus on achieving two essential and indivisible objectives: removing outdated, competitively stifling restriction on financial affiliations, and, most importantly, adopting a framework that promotes the safety and soundness of our banking and financial system and prevents extension of the federal subsidy."

With that charge, Congress developed a legislative framework to replace the then more than 60 year old Glass-Steagall financial services regime. The approach that was adopted was largely mindful of the need to maintain some separation of banking and commercial activities. However, the legislation did allow for closer relationships between banks and commercial firms in some areas to accommodate changes in the banking, securities, and insurance businesses.

The legislation also outlined specific activities as being "financial in nature" and activities that are complimentary to financial activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally and provided that it is permissible for banks and financial holding companies to conduct such activities.

The process for determining the activities included in this initial list, which, I have to mention, was purposefully delineated in the text legislation, was one of the areas where we, Congress, had to pay closest attention - to the lessons we had learned from our experiences and those of other nations, to changes in the marketplace for financial services, to increases in technological capability, to increasing competition from global financial services firms, and to new consumer demands.

While we established a hard and fast initial list, it was also recognized that part of the failing of the Glass-Steagall regime was the fact that there was no way short of passing a new law to adapt to the rapidly changing financial services landscape. Frankly, Congress does not move at the same speed as the business world and American businesses were faced with the constant challenge of dealing with the limits placed on them by a Depression era legal framework.

Therefore, the modernization legislation provided for a consultative process whereby the Department of the Treasury and the Federal Reserve could make determinations as to whether certain additional activities could be deemed financial in nature or incidental to financial activity and be added to the list of permissible activities by regulation.

Obviously, by empowering the Secretary and the Chairman to take action, the legislation makes it easier for the banking regulators to keep pace with an ever-changing environment. On the other hand, providing them with the authority to act without a specific Congressional directive raises the potential for some troubling outcomes.

Our concern that the Chairman and the Secretary could overreach in one of these decisions led us to include some very clear guidance for them in the modernization legislation. We required them to take into consideration the general purpose for the legislation, which paraphrasing Chairman Greenspan, was to eliminate archaic law while maintaining the safety and soundness of the banking system. We also instructed them to consider such factors as changes in the marketplace, technological changes, the competitiveness of American firms, and customer demand. Which leads us to where we are today.

In one of the first cases presented to the Treasury and the Federal Reserve, surprisingly not long after passage of the modernization bill, the banks petitioned for a determination as to whether real estate brokerage is a financial activity or incidental to a financial activity. If Treasury and the Federal Reserve conclude that real brokerage is a an activity that is financial in nature, it would then be permissible for financial holding companies and subsidiary national banks to engage in that line of business. In other words, banks would be allowed to get into real estate activities.

Some would ask, "what is the big deal in allowing banks to move into this area?"

I think the best response can be drawn from the factors Congress required the Secretary and the Chairman to consider before they move forward on expanding the list of permissible activities.

At a minimum, adherence to the general purposes of the Gramm-Leach-Bliley Act, legislation designed to maintain the safety and soundness of the banking system while allowing modernization of financial services activities, requires close scrutiny of all the decisions Congress made regarding banking and commerce.

While there are some areas where greater intermixture is now permitted, these new activities are limited to discrete areas that are closely regulated. I do not believe it was the purpose of the new law to open the door to an anything goes climate or to provide the Secretary and the Chairman the authority to later create one themselves. We had simply learned too much from too many bad experiences to be casual about banking and commerce issues.

And I want to point out that it is my view that real estate brokerage is definitely a commercial activity. I think that it is hard to argue that there is any real difference between a sale of land and the sale of any other product. Consider the slippery slope involved in the line of reasoning that deems brokerage to be financial in nature. What thereafter would NOT be financial in nature? Sale of jewelry, of automobiles, furniture, groceries?

Basically, any transaction involving the exchange of money for goods or services could be considered financial in nature or incidental to a financial transaction and therefore be a permissible bank activity.

I do not believe this is in line with the appropriate role for banks in our economy. I think banks serve best as financial intermediaries, providing financing or other financial services as independent third parties.

I do not feel they should act on multiple sides of commercial transactions. Just think of the additional leverage banks could gain if they controlled both the sale of some particular good and the financing necessary to purchase it. The opportunities to create "packages" that benefitted only the bank-seller would be too great to resist.

The basis for questioning whether banks should be permitted to engage in real estate brokerage activities does not end with the banking and commerce issue. Again, referring to the modernization bill, the Secretary and the Chairman are required to consider changes in the marketplace and in technology and determine whether those changes are significant enough to warrant adding new items to the permissible activities list.

And recall, Congress included this consultative process so that some time down the road, when the landscape had changed and new realities had come into play, there would by a method to bypass the full legislative process and allow the regulators to conduct an expedited review and provide new rules as necessary. In other words, having taken 60 plus years to overturn Glass-Steagall, we wanted to provide flexibility for dealing with unforseen events in the future.

I do not think a few months into the future was what we had in mind. We could have very well included real estate brokerage in the list of permissible activities that we included in the legislation that became law in late 1999. We did not.

I do not think any changes occurred in either the marketplace or technology between the time the bill passed and the time the banks sought to have real estate brokerage included as a new permissible activity. Frankly, it appears to me that the ink was barely dry on the new legislation and the banks were seeking to expand their existing powers.

Lastly, I can not imagine that the Secretary or the Chairman could determine that competitiveness or consumer demand issues exist in the current real estate market. As one of the few sectors in our economy that has been thriving recently, its pretty clear that the market structures and market participants are performing at an exceptionally high level and are providing true service and value for consumers.

So at this point, Secretary O'Neill and Chairman Greenspan have a very important, precedent establishing decision to make.

Due to the thousands of comments your members submitted and through your work in Washington, it appears that a final decision will not be made until sometime next year.

Additionally, companion versions of widely-supported, bipartisan bills which preclude the Secretary and the Chairman from determining that real estate brokerage activities are financial in nature are pending in both the House and the Senate. There is also language contained in one of the House appropriations bills which would limit the Secretary of the Treasury's ability to move forward with a determination that real estate brokerage activities are financial in nature.

I am not sure where any of these particular legislative provisions will end up so I will not speculate about them at this time.


I will add this - it is essential that you remain engaged on these issues. Your voices matter. We do hear you in Washington and we need to understand your perspective about this and other issues that will shape our economic future.

I thank you for inviting me here today and I look forward to working with you in the near future.