Barnard, Hon. Doug, Jr., a Representative in Congress from the State of Georgia, and chairman, Commerce, Consumer, and Monetary Affairs Goelzer, Daniel L., General Counsel, Securities and Exchange Commis- Gustini, Raymond J., partner, law firm of Leff & Stephenson Lehr, Dennis J., partner, Hogan & Hartson, Washington, D.C....... Submissions to Congressman Coleman's questions.. 498-531 Barnard, Hon. Doug, Jr., a Representative in Congress from the State of 4-24 Barnett, Peter, Acting Deputy General Counsel, Federal Home Loan 425-483 Baxter, William F., Assistant Attorney General, Antitrust Division, De- 300-322 Bradfield, Michael, General Counsel, Board of Governors of the Federal 352-385 Brooks, Thomas A., General Counsel, Federal Deposit Insurance Corpora- 327-347 Diamond, Joseph, member of the law firm of Skadden, Arps, Slate, 129-138 Goelzer, Daniel L., General Counsel, Securities and Exchange Commis- 270-293 Nevins, Louis H., partner, Thacher, Proffitt & Wood: Prepared statement Letters, statements, etc., submitted for the record by-Continued Gustini, Raymond J., partner, law firm of Leff & Stephenson: Prepared Page statement 144-158 104-113 Petersen, Neal L., partner, Manatt, Phelps, Rothenberg & Tunney: Prepared statement... Pitt, Harvey L., partner, law firm of Fried, Frank, Harris, Shriver & Zimmer, Robert C., partner, Zimmer & Carnavos: Prepared statement 65-83 162-242 36-48 CONFUSION IN THE LEGAL FRAMEWORK OF THE AMERICAN FINANCIAL SYSTEM AND SERVICE INDUSTRY TUESDAY, JULY 19, 1983 HOUSE OF REPRESENTATIVES, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, D.C. The subcommittee met, pursuant to notice, at 9:35 a.m., in room 2154, Rayburn House Office Building, Hon. Doug Barnard, Jr. (chairman of the subcommittee) presiding. Present: Representatives Doug Barnard, Jr., Ronald D. Coleman, John M. Spratt, Jr., Judd Gregg, and William F. Clinger, Jr. Also present: Representative Jack Brooks, full committee chair man. Staff present: Richard W. Peterson, counsel; Faye Ballard, clerk; and Jack Shaw, minority professional staff, Committee on Government Operations. OPENING STATEMENT OF CHAIRMAN BARNARD Mr. BARNARD. The subcommittee begins today a series of 3 days of hearings on one of the most difficult and pressing subjects now facing the Congress-the growing confusion in the legal framework of the American financial system and service industry. We live increasingly in a world of financial hybrids, outside the traditional divisions of banks, savings and loans, mutual savings banks, insurance companies, real estate concerns, brokerages, and so on. The instances of these hybrids are becoming legion: Prudential Insurance has bought a bank in Hapeville, Ga., thus mixing banking and insurance. Shearson and American Express have joined forces, combining securities and the wide array of services of a global charge card and travel operation. Dimension Financial Services envisions a multistate S&L and bank network. The FDIC has ruled that a State-chartered nonmember bank can affiliate with a securities firm. And, of course, there is Sears, Roebuck & Co., building a formidable financial services structure to include retailing, real estate, securities, insurance, export trading, and consumer lending. Yet, the existing legal framework has superficially continued to bar straightforward expansion of services and powers of the firms (1) under the umbrella of depository institutions regulation. There are more holes in this framework than we ever expected. Instead of a straightforward, orderly expansion of services, we see new suits every day as to what the basic powers are of different kinds of financial institutions under Federal and State law. Worse, many of the suits are over the meaning of statutes that can be on the books for decades but whose interpretations have been changed, with sometimes unexpected results, by such recent statutes as the Monetary Control Act of 1980 and the Garn-St Germain Act of 1982. Most of the problems have to do with new kinds of conglomerates. For instance, can insurance companies own commercial banks; can savings and loan service corporations own brokerage houses; can banks get around restrictions on interstate banking by inventive holding company structures; and so on? To meet this confusion and since the invitations to this hearing were issued, a spate of bills have been introduced, mostly by request, to meet this situation. Some, such as H.R. 3413, 3499, 3536, and S. 1532, have taken the course of one possible option-placing a moratorium on the takeovers and new activities which are cropping up at every juncture. The theory with these is that Congress needs time to consider the whole situation. On the other hand, there have also been lengthy bills introduced to provide for changes in existing law to accommodate all these new activities and ownership arrangements. H.R. 3537 and S. 1609, both introduced by request of the administration, are examples of this kind of legislation. The theory here is that Congress can, at least, get started to consider wide changes. Today, we are, inevitably interested in your views on this kind of legislation. However, these are not and cannot be legislative hearings since this subcommittee has no legislative jurisdiction. Rather, as the hearing invitations pointed out, we are interested in the forces, particularly the legal turns and twists, which have led to the state of affairs in the law as we have it today. Maybe one kind of legislation or another will pass. No one knows the answer to that now. What this subcommittee owes the Houses is an investigation of how we have gotten to the point where the Wall Street Journal runs nearly an article a week on the subject we are addressing in these hearings. A number of parties have commented on the fact we have not asked any trade associations or firms actually involved in these topics. I would like to note the reason is simply that the schedule of the House only permitted time to bring in the very knowledgeable attorneys I felt we had to receive testimony from first and the financial regulatory agencies and leading financial departments. After these oral hearings and during the rest of the summer, we hope to solicit written statements and answers to written interrogatories from a wide variety of interest groups for the record of these hearings. Finally, I want to say that while I have referred frequently to the "confusion" which surrounds American finance today, I also appreciate the fact that this kind of disorder creates the opportunity for creative and needed innovation. In the May 1983 American Economic Review, Edward Kane, professor of banking and mone tary economics at Ohio State University put this possibility well when he said: Changes in technology and in interest rate volatility change the profitability and risks of financial intermediation; regulation reduces the adaptive capacity of regulated institutions by narrowing the set of economic opportunities; whether changes in the financial environment are favorable or unfavorable, managers of less-regulated competitors of deposit institutions can on average adapt to these changes more quickly and more efficiently than managers of regulated commercial banks and thrift institutions. In turn, deposit institution managers show on average greater adaptive efficiency in finding ways to circumvent traditional restrictions on their pricing, location, and business activity than regulators show either in designing regulation or in closing loopholes. We are fortunate today and the rest of this week to have with us very distinguished and knowledgeable attorneys who will speak on the subject of these hearings today. Our first panel consists of Mr. Dennis J. Lehr and Mr. Robert C. Zimmer. Gentlemen, I would like to say to you-and to our next panelthat we are indeed indebted to you for taking the time to attempt to answer our interrogatories and to appear before us today. We know that your experience and your knowledge of the conditions that have come to be in the financial structure today is invaluable and will lead, I think, very much toward helping this House of Representatives develop legislation in this area. We appreciate your being here today. I ask unanimous consent for samples of the two kinds of invitations issued for these hearings and the standard interrogatories which accompanied these invitations and were the same for all witnesses for all 3 days to be inserted at this point. There being no objection, so ordered. 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