Ralph Nader is a moving target who, true to legend, often works long hours, seven days a week. But once you have him cornered, trepidation over interviewing this icon of serious matters, one of the most influential Americans of the 20th century, pronounced Time magazine, quickly fades. He is easygoing and unassuming, and patient, given his breadth and depth of understanding how much of our society functions. After all, his efforts have been instrumental in pressuring lawmakers to create agencies and pass legislation that have saved countless lives; today legions of citizen groups leverage his energy.
The interview was conducted in the portion of the majestic old Carnegie Institute building in Washington, D.C. where Nader maintains offices. We sat at a huge, round conference table in otherwise spartan rooms, past his desk, which is surrounded by a bunker of file cabinets. Serious stuff, only. But one revelation is that Nader actually has a good sense of humor, as when he tweaks the Republicans and Democrats by calling them tweedledee and tweedledum. However one views his no-minced-words opinions, as the interview progressed, it was clear that Nader`s better instincts still have the best of him.
Q: Lobbyists advocate that synergies of one-stop financial shopping will benefit consumers. Wouldn’t you agree that the convenience of consolidating one’s financial business, and the presumably lower overhead that might be passed on to consumers, is attractive?
A: We’re not hearing consumers beating down the door demanding one-stop shopping. We are hearing complaints about deteriorating service and the rise of arbitrary fees imposed on customers, which last year exceeded $18 billion. Now this legislation [H.R. 10] heralds the trapping of captive customers in unwanted, anti-competitive cross-marketing schemes among a multitude of financial affiliates.
What we’ll ultimately see are more variances on a theme reported by the Wall Street Journal on a practice by First Union Corp. of North Carolina, which provides service on the basis of how much profit each customer provides the bank. According to the Journal, First Union monitors each account and color-codes it in the bank`s computer system. When customers call, a computer designates their profitability, indicating the level of service warranted.
Q: What is the potential impact on banks that are not a part of the conglomerates?
A: A lot of independent banks believe they’ll become successful finding a financial niche or boutique role. More likely, they’ll be increasingly roped out of business relationships with commercial affiliates and the suppliers and customers of these affiliates. Moreover, if customers believe a conglomerate is deemed too big to fail and, hence, is likely to get bailed out, they will start to shun smaller operations that are perceived as expendable.
Long term, the concentration of banking and economic resources are not just anti-competitive, they cultivate the kind of crony capitalism that has plagued Japan, Korea, and other Asian countries. Do we want credit decisions made on the basis of incestuous corporate relationships instead of creditworthiness?
And if the insurance companies fall on bad times, with the potential to drag down the entire holding company, including banks with deposits guaranteed by taxpayer-backed insurance funds, do we want the federal safety net, but not federal regulation, extended directly and indirectly to these insurance affiliates?
Q: The merger of many of Wall Street’s investment and commercial banks, brokerages, and insurance companies offers these newly merged firms access to consumers that is concerning the AARP and other groups. Are they overly concerned?
A: These new financial conglomerates will have unprecedented amounts of sensitive information, including account balances, CD maturity dates, sources of deposits, medical histories, and detailed data on the assets of individuals. They can share this information among affiliates, and they can sell it to third parties, such as direct marketers, other financial institutions, or an Internet website’ all without notifying the customer that the information is being shared or obtaining the customer’s consent.
Lobbyists are so keen on the potential for using private consumer information that they are quietly passing the word that they’ll kill the legislation if it includes an opt-out provision. Such a provision would require consumers to affirmatively assert permission for a company to use their information before that information could be used.If an opt-out measure is included, which presumes permission unless a customer objects, it will be inadequate to protect privacy, given the fuzzy, confusing ways information can be conveyed to consumers. Institutions should be required to inform customers what information is to be disclosed and when and to whom for what purposes, and the customer should be able to review it for accuracy.
This potential privacy invasion should be a huge campaign issue, if properly articulated and understood. But both major parties and the presidential hopefuls are awash in money from interests pushing this bill, so we’re not hearing much. And think of the political influence these conglomerates ultimately will have once they can reach into virtually every congressional district in the nation….Even if you allow the concentration of power, it doesn’t mean you invade privacy. You have to keep all these issues very distinct and separate, so if you have computer technology and Internet banking, then you have to deal with it. You don’t say, It’s a new world out there and anyone can compete; therefore you don’t need consumer protection.
Q: It almost seems as though CRA is becoming a settled issue, with major banks like BankAmerica and Chase Manhattan publicly endorsing community reinvestment rules. Do you believe they are sincere?
A: Whether or not these banks are sincere, their decisions will now be influenced by other arms of the conglomerate. As with the recent Travelers Group/Citicorp merger, insurance companies will be the dominant corporate entity in many of the holding companies. Moreover, Sen. Phil Gramm is bullying financial services lobbyists to pressure other senators to support his efforts to weaken CRA.
Q: Why is Gramm so hot on doing in CRA?
A: A number of parties pushing the financial modernization bill want it weakened. And if the Federal Reserve prevails in its turf war with the Office of the Comptroller of the Currency, most of the nonbank activities will be housed in a holding company structure where CRA does not apply. CRA opponents don`t want such affiliates to have to meet a CRA-like community test.Gramm’s attacks on CRA sound increasingly shrill, like something ginned up by Joe McCarthy. He’s called it perhaps the greatest national scandal in America and a way to extract bribes and kickbacks. He`s compared it to gangsters and protection rackets and pre-Civil War slavery. But if you ask him for specific examples, he can`t supply them. The U.S. Conference of Mayors calls the CRA’s role in the revival of our cities and surrounding regions absolutely critical, and they take great offense at the characterization of community-based organizations as racketeers.The Community Reinvestment Act is one of our great economic success stories. It has helped generate a trillion dollars of commitments of bank credit in underserved urban and rural areas, opening new markets for lenders. By encouraging the investment of private funds, it has saved local, state, and federal governments millions of tax dollars.
Q: What about the relationship between Internet banking and CRA? Is Congress making any moves to address it? I would imagine some banks might be quite concerned about potential competitors who did not have to figure in CRA.
A: That`s very hard, because what`s the market area? Funny thing is, Ellen Seidman, the director of OTS, raised this in a speech, and the thanks she got for having the foresight to look to where CRA was going earned her an attack from Phil Gramm for even raising the question. Her speech was intended to start a dialogue within the administration and Congress, but once again Gramm picked up the hammer and said, Thou shalt not speak kindly of CRA. People are going to have to raise this issue whether Gramm wants it raised or not. It’s an administrative nightmare if you don’t know what market you’re evaluating for CRA purposes. It’s a practical question that has to be dealt with promptly, Gramm notwithstanding.
Q: There have been accusations that resources for CRA have gone to wasteful bureaucracies and unneeded projects. Have you seen any indication of this?
A: Isn’t it amazing to hear one of the most heavily subsidized and bailout-prone industries squawking about that? CRA loans go to homeowners and small businesses in underserved areas. In some cases, community groups and other nonprofit organizations provide credit counseling and assist banks in identifying prospective borrowers. But it is absurd to talk about bureaucracies when community groups depend on volunteers and low-paid workers and operate out of low-rent offices. There isn’t money among the community groups to form a bureaucracy, it is for survival.
Q: There still will be a great deal of demand for small business loans. Do you see new business entities stepping into the breach to fulfill it?
A: Yes, that may be the case, especially if a lot of smaller banks close their doors or get bought up. The credit unions do have small business authority, up to 12%, even though Congress tried to curtail it.
Q: Is the economy highly leveraged right now? Do current levels of credit card debt indicate a bubble economy?
A: There have been books for the last 15 years predicting disaster, and it hasn’t happened. There are many reasons, but the most important one is that a lot of people on Wall Street believe that Uncle Sam is the ultimate guarantor, and they keep stretching the rubber band. But bankruptcies are at a record high; credit is at a record high. The marginal income increases of the last two years have settled things slightly, slowing the spiral a bit. But you have 24 years of trade deficits, even [Fed Chairman Alan] Greenspan says that is going to matter. You can run deficits a few years, but year after year after year?
We have two economies. We have the real economy, where things are produced, steel, autos, food, furniture, etc. Then we have the abstract, paper economy. More and more, it’s the abstract, paper economy that`s the tail wagging the dog. That economy is very speculative, very risky. It’s increasingly driven by abstract instruments like derivatives, and derivatives upon derivatives, and increasingly whirling around the world electronically, out of control.
The question is, what is this financial economy, at its most extreme boundaries, producing in terms of real service to people? Is it just a collaborative form of the lottery or a gambling casino?
On a given day, there might be a small increase or decrease in employment balanced by another indicator slightly above or below expectations, and the stock market goes crazy. These are extremely trivial factors. When the financial economy is not based on fundamental yardsticks involving its services to people, where an economy is supposed to be, or on productive capital needs instead of speculative capital needs, it turns to trivial yardsticks by which to measure its steam. The slightest intimation, the slightest grunt by Greenspan, and the market vibrates a percent.
That’s the most dangerous sign: that the yardsticks gyrating the market are becoming more and more trivial. And the fundamental yardsticks, such as a quarter of the children growing up in poverty, the bottom 80% of the workers losing ground, huge consumer debt, personal bankruptcies, massive trade deficits, those don’t seem to shake the market.
Q: Do you think this is getting through to Greenspan? Why is he ratcheting up rates?
A: The essence of Greenspan’s genius is procrastination. He knows the day of reckoning is coming. He said the exuberance thing a few years ago, and the people on Wall Street basically said to him, Alan, you’re our spokesman, stop doing this. Just cut it out. He’s like a horse, straining at the bit, because he sees the bubble getting bigger and bigger; the imprudent risk-taking expanding. But he also has his friends on Wall Street who look at him as their boy. He`s putting off the day of reckoning.
Q: Do you support the raising of interest rates?
A: It’s interesting. All these members of Congress who go on the record hating regulation seem to have one exception: the most powerful regulator of all, the Federal Reserve. They don’t want regulation of health, workplace safety, the environment, or the financial industry, but they are perfectly attuned to accepting the Federal Reserve. The Federal Reserve monetary policy should be one of pushing for margins on stock prices, and Greenspan hasn’t done it. We should examine what’s best for housing, what’s best for consumer buying. Instead, the Fed’s polices are geared to the stock market, the speculative, casino economy that seems to dominate the landscape.
Q: How would you revise the regulatory bodies?
A: Instead of having six federal agencies, we need one federal financial regulatory agency. It needs to be much more open and much more accountable, with strong procedural due process for the little fellas and groups, whether they are businesses or consumers.
We need a consolidated regulatory agency with the sole function of regulating, leaving the FDIC as the insurance company and the Fed with monetary policy … most of the world’s major democracies separate bank regulation from monetary regulation to avoid the conflicts that can and do arise. For example, in the Long-Term Capital Management bailout, was it good banking policy for the Fed to push its member banks, which it regulates, to put nearly a billion dollars in an ailing hedge fund? Obviously not. But Greenspan regarded it as a good move from a monetary-economic-stabilization standpoint.
We also need to eliminate the overlapping inconsistent regulations that exist in the present disjointed regulatory system. Banks can, and do, bounce bank and forth between state and federal charters as part of the search for regulatory laxness, it’s unhealthy.
Q: The rationale in the past has been, in part, that a variety of regulators supply a form of checks and balances. That’s just not working?
A: It doesn’t hold any more. They’re basically turf fighting, not providing checks and balances. Look at the fight between Treasury, which wants some political accountability of the regulatory process, and the Fed, and the banks. They all want control.
If you’re determined to bring about a major overhaul of the nation’s financial system, you’d better modernize the regulatory system accordingly, or you’ll have a recipe for disaster and another round of taxpayer bailouts as a new generation of too big to fail institutions is created. Six years ago, Comptroller of the Currency Eugene Ludwig and the then-head of the General Accounting Office, Charles Bowsher, expressed public concern about the adequacy of our regulatory structures. If that was the case then, think how inadequate they would be now, trying to address common ownership of banks, insurance companies, securities firms, and, in some cases, nonfinancial corporations.
Q: How does the White House approach this?
A: Wait and see; be coy. They’re pretty good on CRA, but … all in all, there’s not enough leadership at the White House. Bank fees are now a $20 billion business. They charge you for everything but breathing at a bank. Charges are unilaterally imposed, and the rules are changed unilaterally. Now they’re imposing binding arbitration, so you can’t have class actions in a lawsuit. So more and more, the financial industry is being given the license to become its own private legislature, through the standard-form contract that cannot be altered by the consumer. If you quit one bank to go to another because you don’t like it, you get the same standard.
Q: How can a bank become a good corporate citizen?
A: Turn itself into a cooperative and have its customers own it.
Q: Failing that, what would be your next move?
A: Set an example in many ways. Aggressively try and meet the borrowing needs of businesses; put people other than the hoi poloi on the board. Stop engaging in conflicts of interest, such as taking hospital funds into the bank and then, if serving on the board of the hospital, staying silent if things are going bad at the hospital because the hospital can pull money out of your bank … Those kinds of conflicts of interest are rampant.
In the area of consumer protection, banks should make a real effort to inform consumers, rather than gouge them by turning bank charges into profit centers. Bank charges should only recover costs. There are bounced check impositions now that are $25 or $30, when far less than 10% is the actual cost to the bank, including spreading out the losses from the checks.
Q: What are your thoughts on bank directors?
A: Too many are just honorific roles, with back scratching between various businesses as rewards. It’s more important than ever for bank directors to be independent. They are the first line of defense for the taxpayer regarding deposit insurance and the safety and soundness of banks. What happened in the savings and loan scandal was that things got so incestuous that all of the oversight and fiduciary groups looked the other way.
Q: How do you define independent?
A: Independent judgment. Independent directors are usually defined as outside directors, but outside directors also can fall prey to the getting along by going along syndrome. One way to gain independence is to give disenfranchised constituencies voices on the board, such as minority groups or neighborhood labor organizations, which often put a lot of money into banks.
Q: Coming back to the consolidation of the financial services industry, do you think culture clash is liable to upset a lot of apple carts when a number of these firms start trying to meld together?
A: Yes, and it already has. Some of these big mergers have not succeeded. Something bad has happened either to the acquired firm, or to the shareholders of the acquiring firm … As long as these companies can escape the market sanction, they have tapped the taxpayers to be their silent partners. And of course, the taxpayer slush fund can extend the day of reckoning for these speculators for quite a while, but not forever. For example, at the request of Sen. D’Amato, we submitted a provision for H.R. 10 that would have obligated the federal government not to bail out many of these failing conglomerates. Even though he invited the drafting of it, he wouldn’t introduce it, Sen. Sarbanes wouldn’t introduce it, nobody would introduce it. In other words, here’s H.R. 10, which is designed to modernize the financial system, and to eliminate the barriers and the restraints and the hurdles of the regulatory process, and to let the market rule. And they wouldn’t put an additional provision in the bill that says, We’re going to guarantee that the market is going to rule, that the federal government isn’t going to bail you out. Doesn’t that foreshadow the basic message of H.R. 10, which is conglomeritize to the hilt, and if you get in trouble, Uncle Sam will be there to bail you out?
Q: If the market sanction was more evidently in place, would a lot of these mergers come to a screeching halt?
A: Yes, because there’d be internal restraint. Some people are of the impression that these companies and executives don’t have the bailout in mind long before they need it. Sure they do. They know if they keep stretching the rubber band, Uncle Sam will bail them out. Long before the need for a bailout occurs, the imprudent risks are undertaken, and undertaken, and undertaken … The best message to Wall Street is you believe in capitalism? Yes? Well, you better believe it`s sink or swim, because Uncle Sam is not going to be around as your lifeguard. And then they`ll object. So are they really capitalists? No, they`re corporate socialists who are erecting an ever more deeply rooted corporate state.
Q: What do you think of the expansion of government-sponsored enterprises like the home loan bank system?
A: If you`re going to have GSEs you`ve got to have accountability for their purpose: to fulfill market needs that aren`t being addressed otherwise by conventional businesses reluctant to go into the markets or develop secondary markets. Right now these GSEs are getting all the privileges, but they`re not fulfilling their mission. They are undercapitalized, their executives are overpaid, and their stock performs like a growth stock, while we still have great capital needs in the housing arena and in poor areas. At a time when Fannie Mae and Freddie Mac have record profits, we have the greatest need ever for affordable housing.
Q: Is it inevitable that GSEs will squeeze out private competitors that might fulfill such needs?
A: They certainly are in a position to cross-subsidize their new ventures with their GSE status, which carries a lot of privileges, such as exemption from state taxation, a draw on the Treasury, not having to go through a lot of SEC stock registrations, and on and on. There is a legitimate question about unfair competition in these new areas.
Q: How would you adjust the balance?
A: I’d give them a choice. If you’re going to be GSEs, you have to meet the affordable housing market much more aggressively than you have. There are significant indications that they are redlining in some areas needing affordable housing. If they do not meet those needs, privatize them completely, so they are on their own. No more state tax exemption, no more implicit government guarantee, no more anything.
Q: What would you like to see banks do?
A: The way to make the banking community more accountable is to require banks, in exchange for all their federal subsidies and all the bailout rights they seem to have, to put an insert in their statements every month inviting customers to join statewide financial consumer associations and private consumer groups chartered by the state. If you filled out the form and sent it in with $10 or $15 dues, you would vote for the council of directors to hire consumer champions, whether they be attorneys, economists, accountants or organizers, to represent Elm Street America. If that had been done years ago, we never would have had an S&L problem. It would have been caught early at the corner of Main and Elm all over the country, because there would have been a watchdog on business on behalf of consumers, accountable to consumers and paid for by consumers. Based on our experience with residential utility groups in Illinois and Wisconsin, maybe seven or eight million people would respond to such an insert. That would be real reform. That’s the way to go. You have to have an intelligent citizenry focused on financial matters in a critical mass for any of these issues, from Elm Street to the globe, to be democratically accountable, to get the best use out of capital for the benefit of all people of all incomes. |BD|
After the interview on proposed financial services legislation he accepted my offer to check out my car, a Corvair convertible from the era that started it all with his book Unsafe At Any Speed, a title I plan to put on a bumper sticker. Impressed by the Corvair`s gleam, when I ambushed him with my camera he posed in the car, with the caveat that he be able to throw in a downward thumb, which may indicate he didn’t fully endorse the concept. He also kept his feet planted firmly on concrete, as if TV censors of the fifties were making sure he didn’t get too intimate with GM. Maybe next time he`ll take a ride.