Bush Threatens to Veto Bank Reform Bill : Banking: The Administration says the version proposed in the House is worse than no reform at all.

The legislative struggle over bank reform turned bitter Tuesday as the Administration threatened a veto if Congress approves the version of the bill adopted by Democratic-dominated House committees.

After months of championing a major expansion of bank business powers, the Bush Administration and major segments of the industry insist that the complex measure headed to the House floor later this week would be worse than having no bank reform legislation.

“Child abuse” and “sleeping with the enemy” are charges heard in criminal cases or bitter divorce disputes, but these phrases now erupt from angry partisans in the increasingly volatile fight.

The measure going to the House floor “will weaken the banking system, impede the economic recovery and increase taxpayer exposure to deposit insurance fund losses,” the White House said Tuesday. Unless it is significantly changed, “the President’s senior advisers would recommend a veto,” according to the Administration statement.

The American Bankers Assn. is running full-page newspaper ads attacking the legislation.

And the Democrats are blasting back. “Now on the eve of its graduation, we see the American Bankers Assn. and the Treasury Department disowning the child and attempting to throw it out into the cold,” said House Banking Committee Chairman Henry B. Gonzalez (D-Tex.). He accused the bankers and the White House of child abuse and attempted infanticide in dealing with the legislation they originally proposed. All parties agree on just one fact: Congress must pass and the President must sign a banking bill this year because the insurance fund that guarantees deposits up to $100,000 will run out of money before year’s end.

The bill would give the Federal Deposit Insurance Corp. $70 billion in new borrowing authority to bolster the insurance fund. Everyone also agrees that the basic legislation will include new powers allowing federal regulators to move faster to seize a bank in financial trouble.

Beyond this common ground, all other issues are deeply disputed. “It’s a very volatile situation--going into this fight, nobody has any clear feeling for the outcome,” said Ed Yingling, government affairs director for the ABA.

The Administration’s original package would have permitted banks to move across state lines and to enter the insurance and securities businesses previously denied to them. Commercial and industrial firms would have been permitted to buy banks, breaking down the traditional walls between banking and commerce.

The compromise bill emerging from several House committees allowed interstate banking, but placed strict limits on expanding banks’ activities in the securities and insurance businesses. The bankers say the “fire walls” created in the bill to insulate a bank from its insurance and securities subsidiaries are so onerous as to make the granting of new powers unusable.

“It’s actually a step backward in the insurance area,” making it harder for the few banks already involved in insurance to market their products, said Fritz Elmendorf, a spokesman for the Consumer Bankers Assn., a group of large institutions. The package in the House “is very disappointing,” he said.

On the Senate side, the Banking Committee adopted an amendment that would require banks to offer a basic account allowing consumers to write a maximum of 10 checks a month at a low fee, and to cash government assistance checks for people without accounts. This would help the 16 million low-income families without bank accounts who, according to Consumers Union, are often forced to pay as much as 10% of a check’s value at store-front check cashing services and are often crime victims because they carry large amounts of cash.

This issue has fractured the banking industry, with the small community banks forming an unusual alliance with the American Assn. of Retired Persons to back the basic banking service. “We broke with the rest of the banking industry and helped put a majority of votes behind this in the Senate Banking Committee,” said Ken Guenther, executive director of the Independent Bankers Assn. of America.

In return, the AARP backed the community bankers in killing an Administration proposal to limit an individual’s deposit insurance protection to $100,000 at each financial institution. Through joint accounts, and custodial accounts for children, families can protect sums far above $100,000. “We want to maintain the existing system--this protects our deposit base,” Guenther said.

Other segments of the banking industry denounced Guenther’s group for its deal with the AARP. “We’ve been bitterly and viciously attacked,” Guenther said. “They accused us of displaying ‘frontal nudity,’ of ‘sleeping with the enemy,’ of ‘dancing with wolves.’ ”

This sets the stage for two parallel struggles. In the Senate, the big banks and the Administration will be fighting to strip the bill of the basic banking provisions endorsed by the AARP and smaller banks. On the House floor, the bankers and the Administration will be trying to tear down the so-called fire walls created by House committees.