Banking Reforms Stumble in Early Legislative Tests

Bank reform, which began the year as one of the Bush Administration’s top domestic priorities, is proving to be a much tougher sell in Congress than the White House had expected.

Despite months of debate and a last-minute personal lobbying campaign by Treasury Secretary Nicholas F. Brady, the Bush banking package has already suffered a series of sharp setbacks in a key House subcommittee during the first round of congressional review.

“The Administration has not won a single major fight yet,” said Rep. Frank Annunzio (D-Ill.), chairman of the House Banking, Finance and Urban Affairs subcommittee on financial institutions, which is now considering banking reform. “And I think we are just going to see more of the same.”

The Administration’s ambitious reform package calls for a sweeping restructuring of the American banking industry in an effort to deal with a banking crisis that has left the government’s deposit insurance fund, which protects the bank accounts of millions of Americans up to $100,000 per account, on the verge of insolvency.

Most notably, the Administration wants to eliminate all restrictions on interstate branch banking, to give banks new powers to sell stocks and insurance and to allow industrial corporations and Wall Street brokerage houses to buy banks--all in the name of giving banks a chance to become more profitable and grow their way out of their current troubles.

But in the Bush package’s opening rounds in the House, both Democrats and Republicans have shown little appetite for such dramatic change. Instead, Congress so far seems ready to stick with the status quo.

“They (the Administration) have taken some hits; there is no question about it,” said Ed Yingling, chief lobbyist for the American Bankers Assn.

Many bankers support the parts of the Administration’s plan that give them new powers and lift old restrictions. But they oppose many other aspects of the plan, including those considered earlier this week, and they successfully translated that opposition into action.

On Tuesday, for example, on the first vote taken by the subcommittee as it began debate on the reform package, an Administration effort to place some modest restrictions on deposit insurance coverage for bank customers was defeated.

Later, White House proposals to limit the ability of stockbrokers to sell federally insured bank certificates of deposit--a loophole in the law that has sharply increased the costs to the government from bank failures--were also beaten back after hundreds of stockbrokers from across the nation called subcommittee members to complain. More modest changes in the rules on so-called “broker-CDs” were passed instead.

The votes showed that “taxpayers don’t have the kind of representation in Congress that special interests do,” complained Assistant Treasury Secretary Jay Powell, who is charged with shepherding the Administration package through Congress.

On Thursday, the White House suffered yet another setback when the House panel approved a measure prohibiting federal bank regulators from paying off foreign deposits held in offshore branches of American banks when those banks collapse.

Foreign deposits are not officially covered by the Federal Deposit Insurance Corp.’s bank insurance fund, but regulators have often paid off holders of such deposits to avoid a flight of foreign funds from the U.S. banking system.

Administration officials unsuccessfully opposed that measure Thursday because they said that they want to let regulators continue to pay off those uninsured foreign deposits to make it easier to find buyers for large banks when they fail.

This week’s early defeats for the White House have come on some of the least controversial aspects of the Bush banking package. Lobbyists and congressional leaders say that has caused them to lower their expectations for the Administration’s more controversial efforts to be considered next week. Those provisions would give banks expanded business powers and allow them to merge with industrial corporations such as General Motors or Wall Street firms such as Merrill Lynch.

Senior Administration officials remain upbeat in public, however.

Some congressional leaders argue that the White House has been losing because it has not put much effort into persuading Congress of the need for its own reform package. Treasury Secretary Brady has been the only major Administration figure to meet with congressional leaders on banking reform, and many Democrats believe that other senior White House officials, including Chief of Staff John H. Sununu, have decided not to put much effort into banking legislation.

“Their lobbying has been very soft,” said Rep. Bruce F. Vento (D-Minn.), an influential Democrat on banking matters.

Administration officials respond, however, by saying that recent reports that senior White House staffers were undermining Brady’s banking package had galvanized President Bush and had persuaded him to come out more strongly behind banking reform in his public appearances.