Businessweek Archives

The Secrets Of Rubbergate


Finance

THE SECRETS OF RUBBERGATE

It's early December, 1990--orientation day for the House of Representatives. Like a bunch of awestruck college freshmen, three dozen newly elected members are milling around the coffee and danish table in the Cannon House Office Building. They are about to begin a series of seminars explaining how to run a congressional office and tap into the House's intricate system of allowances for everything from staff to stationery. In their orientation packets, they find a long list of perks--and instructions on how to obtain a book of checks for drawing funds from their own non-interest-bearing accounts at the House Bank.

Unbeknownst to the newcomers, Jack Russ, then sergeant at arms, assigned them accounts even if they didn't ask for the privilege. Some members, recalling the situation today, admit they were puzzled. "The first question most of us had was why anyone would want to put money in a non-interest-bearing account," says one House member. The answer was never written down, but Hill veterans knew the secret: The bank provided free overdraft protection worth up to $2,000 a year and, indirectly, interest-free loans up to a members' net monthly salary, or about $7,000. This more than compensated for the lack of interest on deposits.

ONE DOWN . . . Now, in the consuming firestorm of "Rubbergate," the bank's secret is out. Revelations that 355 current and former House members, including three members of President Bush's Cabinet, wrote bad checks have been splashed across the nation's front pages. In an event that chilled lawmakers to the bone, incumbent Democrat Charles A. Hayes was defeated in the Mar. 17 Illinois primary, largely because of his overdrafts.

While the benefits to lawmakers are clear, what still remains shrouded in mystery is how the 155-year-old bank actually operated. It had some of the trappings of a commercial banking institution--accepting deposits, offering checking accounts, and, indirectly through the overdrafts, making loans. But Congress has long insulated itself from the laws it imposes on others, from civil rights to workplace safety, and the House Bank was similarly exempt from the state and federal regulations that govern more traditional banks. It did not have to pay attention to rules requiring charters, capital reserves, examinations, and fees for deposit insurance.

What's more, an analysis of some of the arcane procedures at the bank suggests that despite denials by lawmakers, taxpayers' money was used to support the bank's operations. Every year, taxpayers footed the bill for the salaries and other administrative costs of running the bank, to the tune of at least $1 million. Furthermore, taxpayers may have helped finance House members' overdrafts. These were so pervasive that the staff included one person whose sole job was to ask members to cover their bad checks. When members overdrew their accounts by more than their next month's net salary, as was often the case, "technically and legally, they were dipping into public money," says Representative Fred Grandy (R-Iowa), one of six House members who investigated the bank scandal.

NO OVERSIGHT. Just how large the taxpayer subsidy was will be difficult to determine. In many ways, the bank, which the House closed in December, was a comical mom-and-pop operation. Its noncomputerized record-keeping system amounted to scraps of paper in a shoebox. Bank employees had no written procedures for handling checks.

This slapdash arrangement enabled Russ, who has resigned over the scandal, to handle vast sums of money with virtually no oversight. On the first of each month, he wrote checks for about $1.5 million, drawn on an account at Treasury established to pay members' salaries. In fiscal 1991, Congress appropriated $63 million to fund this account. The $1.5 million was moved to a second Treasury account, against which monthly payroll checks were drawn. As Treasury's fiscal agent, Russ had exclusive use of both accounts.

Russ also sent a messenger each day to Riggs National Bank of Washington, D.C., where he had a third account. From this account, the messenger picked up a fresh supply of greenbacks so he could cash checks for members with accounts, and also for congressional staffers and the press, who had check-cashing privileges but not accounts at the institution. Like a real bank, the House Bank used the Federal Reserve System's check-clearance system. Usually only banks that maintain reserve accounts at the Fed are permitted to use this system. Checks that a member made out to, say, a local dry cleaner traveled from the dry cleaner's local bank to the Baltimore branch of the Federal Reserve Bank of Richmond.

The Baltimore Fed bundled up the House Bank's checks daily, and a courier drove to Washington and presented them each morning to the House Bank. Then, in the late afternoon, the courier returned to the House Bank and picked up a check, drawn on the monthly payroll account at Treasury for the amount of the checks the House Bank honored.

The House Bank used a different procedure to deal with nonpayroll deposits into members' accounts. These deposits were collected by a House bank cashier and, at the end of each day, delivered to the Riggs account. The commercial bank would transfer the dollar value into the sergeant at arms's account at Riggs. Then, Riggs would relay the checks to the commercial banks on which they were drawn or place them into the Federal Reserve System for collection. Riggs would do the same for checks cashed at the House Bank but drawn on other bankaccounts.

COZY SETUP. To reimburse Riggs for this service and for the maintenance of the sergeant at arms's account, Treasury paid the bank a fee. Neither Riggs nor Treasury officials would reveal the amount, claiming that Riggs competitively bid for the account and that the information is proprietary. A senior government official insists that whatever Riggs was paid was more than compensated for by interest payments that accrue to the Treasury from the $1 million average daily balance in the monthly payroll account. The cost to the House Bank or House members for the check-cashing service: zilch.

It sounds as if this cozy arrangement, aside from administrative expenses, never cost the taxpayers a penny. However, BUSINESS WEEK has learned that that might not be the case, largely because of the extent of the overdrafts. House members wrote hundreds of checks each month in anticipation of paychecks that were deposited at the beginning of the next month--technically a kiting arrangement. These checks would have bounced had they been written at a commercial bank, but the House Bank simply covered the checks until the payroll arrived. Indeed, 19 current members wrote checks in excess of their net monthly pay 391 times over the 39-month period scrutinized by the House Ethics Committee. That's close to $900,000 of overdrafts.

The House leadership has said that the bank could cover these checks without dipping into the Treasury because members who did not empty their accounts each month were, in effect, making an interest-free loan to their overdrawn colleagues. But there may be another explanation of how the rubber checks were covered.

It involved the two accounts at Treasury, the annual appropriations account and the monthly payroll account. Treasury officials say it's possible that Russ was covering shortages in the payroll account by borrowing from the appropriations account. "If he were to cover a shortfall, we wouldn't know it," says a senior Treasury official. He says Treasury handles a billion checks a year, "so it would be almost impossible to link one check" with an attempt by Russ to cover a shortage. Riggs officials say they would have no way of knowing which account Russ was using, since they only knew what was in the account at Riggs. Russ declined comment.

According to the Treasury, the payroll account always showed a balance of at least $1 million. But as long as the total amount of the House Bank's overdrafts never exceeded the money in the appropriations account, the payroll account would never show a negative balance. If Russ used the appropriation account to cover shortfalls, however, members may have been, in effect, borrowing from the Treasury to cover overdrafts.

TIP OF THE ICEBERG? Officials at Treasury and Riggs say they know only pieces of the full picture. Representative Grandy suggests that further investigation is needed. A preliminary criminal inquiry is already under way at the office of U.S. Attorney Jay B. Stephens. According to a source familiar with the investigation, the inquiry is looking at "everything," including whether lawmakers violated tax laws, possibly by failing to report interest-free loans as income. Investigators are also probing whether members illegally used House Bank funds in congressional campaigns or violated mail or wire-fraud statutes or a District of Columbia law against intentional overdrafts.

Watergate II? Hardly. But because the revelations do indicate a certain devil-may-care mindset on Capitol Hill, voters are treating the scandal as big news--and are thrashing members caught in its web faster than you can say: "zero balance."HOW THE HOUSE BANK WORKED

1 House members' paychecks placed in an account at Treasury to which House Bank

had access. Riggs Bank was a conduit for other House Bank deposits

2 Members wrote checks to third parties such as dry cleaners, which were

processed by the Federal Reserve's national check-clearing system and returned

to the House Bank

3 The House Bank wrote checks on the Treasury account in amounts equal to the

third-party checks it was called upon to pay. Riggs processed members' other

checks free of charge

4 Checks written on insufficient funds were not bounced. Treasury funds, as

well as deposits of other members, may have been used to cover overdrafts

ILLUSTRATIONS BY RAY VELLA/BW

Paula Dwyer, with Mike McNamee, in Washington


Monsanto vs. GMO Haters
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