Businessweek Archives

Will Congress Skip Town Without Bailing Out The Bailouts?


Washington Outlook

WILL CONGRESS SKIP TOWN WITHOUT BAILING OUT THE BAILOUTS?

All through this year, Congress and the Bush Administration have agreed on one thing: Washington has to restore confidence in the nation's shaky financial institutions. But what began as a grand effort to reform Depression-era laws regulating banking has become a struggle to keep federal deposit-insurance funds solvent. And as lawmakers sink into end-of-session infighting, even that modest -- but essential -- goal could conceivably get lost in the scuffle. The Federal Deposit Insurance Corp. needs an infusion of money for both the ailing Bank Insurance Fund and the thrift cleanup. The savings and loan bailout can probably wait until Congress returns next year, but the BIF's condition is critical. New FDIC Chairman William Taylor warns that the fund's dwindling reserves could run out by yearend. The BIF might then find itself unable to pay off depositors if hit with an unanticipated bank failure. Odds are that Congress will come up with extra money, perhaps in the form of a temporary stop-gap. But lawmakers are so reluctant to vote for anything that looks like a bank bailout that they might skip town and pray that the BIF will make it into spring.

LOADED DOWN. The Administration and Hill leaders agreed months ago to lend the BIF $70 billion from the Treasury. But that deal is entangled in broader issues of banking reform. The Treasury wants to let banks branch nationwide and enter new markets, such as investment banking and insurance. But the House has already rejected two reform plans. Each time, the insurance and securities industries succeeded in attaching so many restrictions that bank lobbyists helped kill the measures. An exhausted House now will consider only a bill that refinances the BIF and tightens regulation on banks.

The Administration, however, just won't give up. While the idea of giving banks new powers is dead, the Treasury still believes that the Senate will let banks branch across state lines. "In terms of modernizing banking, that is probably the single greatest step we can take," says Robert R. Glauber, Treasury Under Secretary for finance. He hopes that in the rush to adjourn, the House will accept the provision.

That strategy could cost the Administration -- and the banks -- dearly. Bankers fear that a broad bill will pick up crippling provisions. They got a nasty scare on Nov. 13, when the Senate voted 74-19 to attach an amendment to the banking bill that caps interest rates on credit cards at 14%. While leaders appear to have squelched rate-cap fever in the House, "we feel like we're in the middle of a feeding frenzy," says Samuel J. Baptista, president of the Financial Services Council. "We couldn't get a more poisoned atmosphere if we tried." Worse, the Treasury's one last swing for the fences could jeopardize the BIF's funding by dragging out the debate. With adjournment set for Nov. 27, "we are at the zero hour," warns Representative John J. LaFalce (D-N. Y.).

The bank battle has left little time for another contentious issue: injecting $80 billion into the Resolution Trust Corp. (RTC), which is running out of money needed to shut down sick thrifts and dispose of their assets. On Nov. 19, the House Banking Committee narrowly voted to fund the S&L cleanup on a "pay as you go" basis, which would be cheaper in the near term -- but would force spending cuts to cover bailout costs. No one wants that, so "pay as you go" would effectively paralyze the RTC, adding to the eventual cost of the cleanup.

Conventional wisdom in Washington holds that Congress can't leave without at least ensuring that the BIF is funded. To do so would be a huge gamble, but the mood at the Capitol is so sour these days that nothing can be taken for granted.EDITED BY STEPHEN H. WILDSTROM; Mike McNamee


Coke's Big Fat Problem
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus