Date: 1984-07-26
Speaker: ST GERMAIN (democrat)
Chamber: H

Mr. Speaker. The bailout of Continental Llinois raises the greatest array of questions in the history of the Federal bank regulatory system. It is my intention to explore these questions in depth in hearings that will begin In the Banking. Finance and Urban Affairs Committee on September 18. Efforts to obtain documents and other background material is already well underway within the committee and will be intensified in the coming weeks. The rescue of Continental dwarfs the combined guarantees and outlays of the Federal Government in the Lockheed. Chrysler. and New York City bailouts which originated in this committee. More important is the fact (hat the Federal Government provided assistance to these entities only after the fullest debate. great gnashing of teeth. the imposition of tough conditions. and ultimately. a majority vote of the House and tihe Senate and the signature of the President of the United States. The American public. whether it agreed or not. was fully informed in open hearings before its moneys and credit. were committed. Its elected representatives had to stand up and be counted and have their decisions approved or rejected at the ballot box. In the Continental bailout three appointed Federal regulators went behind closed doors. met with the bankers and decided this was the planfait accompli. Ultimately these officials may establish the wisdom of their course. but the episode does point to the inordinate power of the bank regulatory system to commit moneys. create contingent liabilities for the Federal Treasury. and to reshape the banking industry without review or prior approval. It is a power unmatched by any other agency of Government. All the more reason why it is essential that this committee exercise its oversight responsibility to the fullest. In the clatter of the public relations efforts. there will be many inferences that the bailout is somehow freeor at best being paid for with "funny" money that really does not count. The regulators and the Reagan administration should not attempt to deceive the American public. The bailout commitments are not free. The PDICs reserves. from which part of the rescue money is drawn. has been paid. in effect. by the millions of bank customers nationwide. But. it. is not the $16 billion In reserves that gives FDIC and the bailout strength. it is the simple fact that the full faith and credit of the Federal Government stands behind the insurance funds and behind the FDIC actionsill considered or not. If there are enough Continentals. enough ad hoc bailouts. and FDICfueled nationalizations. then we can rest assured that Mr. Isaac or his successors will be standing here. hat in hand. asking for congressional appropriations to replenish the funds. The Federal Reserve has poured billions of dollars into Continental through the discount windowthe exact amount obscured under the veil of the agencys traditional secrecy. The Federal Reserves incomeand its great financial flexibility in such mattersis derived from public funds which the U.S. Treasury pays to it as interest on Government securities it has purchased for monetary policy purposes. The earnings on these securities. minus Federal Reserve expenses. are returned to the U.S. Treasury. So. when it embarks on adventures. subsidized lending to banks. and related bailout maneuvers. there is a reduction in the amount of earnings returned to the Treasurya net loss to the taxpayer. In the Continental bailout. the Federal Reserve has decided to convert its discount window from an overnight liJuly 2N. 1984 II17957 quidity mechanism to a longterm loan operation. This raises a whole series of new policy questions about the use of t he discount windowa massive Federa1 credit device that is unaudited. If the shifting of funds between the Federal Reserve and FDIC and private banks and the complex restructuring does not sufficiently obscure the cost. of the bailout. we can expect to hear much about the theory that eventually "most of the money" will be recovered. Thats comforting theory and one which we all hope will prove to be correct. There are many who advance this same theory In behalf of urban programs. housing and small business. The plea that Federal outlays and guarantees in these areas will eventually be repaid and. thus be "cos free" lius not seemed to loosen the heart strings or the purses of this administration. Perhaps a large bank will strike a different chord. The immediate question of costs and contingent liabilities for the taxpayers may pale against some of the longrange policy implications of the Continental bailout. The concept that the large shall not fail--inherent in this entire episodeis not. lost on the banking industry.Ilow this regulatory approach impacts on the thinking in the board rooms may have a lot to do with safety and soundness of the entire system. There are substantial question to be asked about the use of deposit insurance funds in the bailout and the shifting of funds between the Federal Reserve and the FDIC and the apparent distortion of the discount window. Overall. the Continental bailout throws a spotlight on the immense power of the Federal regulatory structure: The power to literally decide who lives and who dies in the banking industry. The power to commit billions of dollars without advance approval. The power to restructure local banking markets. The power. apparently. to actually nationalize an institution without specific statutory approval and to establish the criteria for running such an institution. again without prior consultation or specific approval from the Congress. Allthese questions need to be looked at when we launch our hearings in September. I want the committee to look at the regulatory history of Continentalwhen the regulatory agencies found troubles and what they did to force corrections. I want a thorough top to bottom examination of the bailout. its implications for the Industry and the economy. its costs. its legal ramifications. Some are citing the example of Franklin Nationala 1974 bailout effortas a precedent for the approach in the Continental case. But. let me remind everyone that Franklin had no precedent and that bailout proceeded. at best. on dubious statutory authority. Compounding an abuse of authority does not legitimize the action. In short. Mr. Speaker. we intend to dissect the Continental case fully. A multibillion dollar bailout surely requires complete congressional oversight effort. We will demand total cooperation from the regulators and the administration.e