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Hefley one of few to vote no in 1999 on financial bill

Measure now seen as catalyst for today's crisis

By M.E. Sprengelmeyer, Rocky Mountain News (Contact)

Published October 11, 2008 at 12:05 a.m.
Updated October 11, 2008 at 12:34 a.m.

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A painful financial crisis was fresh on Congressman Joel Hefley's mind when he cast a renegade "no" vote in 1999.

Back then, near the tail end of President Clinton's second term, Congress was being asked to approve a sweeping "modernization" of the financial services sector, lifting Depression-era restrictions on the kinds of business that commercial banks could engage in.

The change was billed as good for consumers and good for business because it would allow big institutions to get even bigger, all the better to compete in an increasingly competitive international marketplace.

But Hefley, then the Republican congressman from Colorado Springs, was skittish, thinking back to congressional tinkering with regulations and real estate tax laws that set the stage for a disastrous collapse of the savings and loan industry in the early 1990s.

Disastrous outcome

That debacle, including the collapse of hundreds of S&Ls, left taxpayers on the hook for a $124 billion bailout. And, Hefley recalled, it caused some good business people, once pillars of his local community, to go broke, pack their things in U-Haul trailers and leave town Â? ruined.

So when it came time to vote on the Financial Services Modernization Act of 1999, Hefley was the only Colorado lawmaker Â? and one of only five Republicans in the House - to vote no.

"What I saw was a step toward doing this with other institutions, and we could have a disastrous outcome like we had with S&Ls," said Hefley, now retired from Colorado politics and raising horses on a ranch in Oklahoma.

Hefley wasn't alone. A handful of other lawmakers sounded an alarm, saying massive consolidation in the financial services industry could make some firms "too big to fail."

Nine years later, some are pointing to that 1999 legislation, combined with Congress' reluctance to crack down on questionable lending and investment practices in federally-chartered Fannie Mae and Freddie Mac, as setting the stage for a crisis that has the world economy reeling.

If so, Democrats and Republicans both share the blame, and now it will take a bipartisan autopsy of sorts to figure out what killed the old financial order.

"Hindsight can be 2 0/20. There may have been some things in (the 1999 legislation) that were positive in terms of economic stimulation," said Sean Conway, chief of staff to Sen. Wayne Allard, R-Loveland. "What's prudent is for us to go back and look at all of the legislation that we've enacted or engaged in and see the good, the bad and the ugly."

Allard, a retiring member of the Senate Banking Committee, played a major role in the writing of the Financial Services Modernization Act of 1999, also known as "Gramm-Leach- Bliley" for its lead sponsors.

Eliminates barriers

It was landmark legislation, backed by the Democratic White House and then-Treasury Secretary Robert Rubin Â? now a backer of Sen. Barack Obama Â? and championed by Sen. Phil Gramm of Texas Â? a Republican who has advised Sen. John McCain this year.

The centerpiece of the bill was eliminating so-called "Glass-Steagall" restrictions first enacted during the Great Depression to prevent commercial banks from getting involved in a riskier set of businesses.

As Allard explained during the pre-vote debate on a conference report he helped negotiate, "Gramm-Leach-Bliley eliminates the barriers between banks, insurance companies, security firms and other financial institutions. This will increase efficiency, reduce costs and increase innovation. American financial institutions will be better able to compete internationally under the new structures contained in the conference report."

He called it "good for consumers" and "good for business" at the same time, echoing backers from both sides of the partisan divide.

But a handful of critics sounded an alarm before the 1999 vote, warning that the bill would accelerate a trend toward "massive consolidation" in the financial sector, creating behemoth institutions that could bring down the entire economy if they failed.

"This is the wrong kind of modernization because it fails to put in place adequate regulatory safeguards for these new financial giants, the failure of which could jeopardize the entire economy," argued the late Sen. Paul Wellstone, a Minnesota Democrat who died in a plane crash just before the 2002 election. "It's the wrong kind of modernization because taxpayers could be stuck with the bill if these conglomerates become 'too big to fail.' "

Another critic, Sen. Byron Dorgan, D-S.D., warned that the bill raised "the likelihood of future massive taxpayer bailouts." He said the Glass-Steagall restrictions were put in place for a good reason after the run on banks during the Great Depression, in order to separate basic banking from risk.

If the Glass-Steagall restrictions were eliminated, Dorgan argued before the vote in November 1999, "we will in 10 years' time look back and say: 'We should not have done that because we forgot the lessons of the past.'"

The arguments didn't sway many Democrats or Republicans, including Coloradans.

The bill passed 90-8 in the Senate, supported by Colorado Republican Sens. Ben Nighthorse Campbell and Allard. It passed 362-57 in the House, backed by Democratic Reps. Diana DeGette and Mark Udall, and Republican Reps. Bob Schaffer and Tom Tancredo. Hefley was the only Coloradan opposed. Then-Rep. Scott McInnis did not vote.

Udall and Schaffer now are running to replace the retiring Allard in the Senate.

'Propelling economy'

When President Clinton signed the bill into law on Nov. 12, 1999, he said it "will help the American financial services system play a leading role in propelling our economy into the 21st century, continuing the longest peacetime economic expansion in our history."

That legacy has been hotly debated in recent weeks, when Dorgan has repeatedly reminded his colleagues of his warnings about eliminating Glass- Steagall restrictions.

Allard, who was traveling overseas this week, has said it's premature to blame the 1999 legislation for the current financial meltdown.

"Well, it was a way of modernizing our banking system to the current needs of the consumer. I think it was probably still a good decision," he said last month in an appearance on the Fox Business News network.

Although he helped eliminate the old Glass-Steagall restrictions, Allard still has worked to impose different limits on the types of businesses that banks can enter. He championed bipartisan legislation to prevent banks from getting into the real estate business.

Early critic

On the Senate Banking Committee, Allard was an early critic of Fannie Mae and Freddie Mac for practices he believed encouraged unqualified borrowers to take on heavy debts they could never repay.

Due to resistance from Democratic allies of the federally chartered lenders, "We did not do the reform that we should have done early on," Allard said.

Allard, in the Fox Business News interview, called for hearings to determine the root of the crisis. But he put most of the blame on "careless" companies.

"From time to time, I think many of the investment companies, they get careless in the market," Allard said. "And it's always easy to blame something else other than your own board of directors or CEO that are making bad decisions in investments."

Others, including Udall, point a finger at the Bush administration and the Securities and Exchange Commission for relaxing loan-to-capital ratios for investment banks, and not providing tougher oversight.

"Maybe we need to return to some of the Glass-Steagall principles, but in the end it wasn't one law that got us to this point," Udall said.

Financial Services Modernization Act

Although analysts say multiple factors led to the current financial crisis, some blame passage of S. 900, the Financial Services Modernization Act of 1999.

WHAT WAS IT? Also known as Gramm-Leach-Bliley, the bill enacted sweeping reforms of the U.S. financial services industry in hopes of making it more competitive in an evolving international marketplace. It was billed as being good for consumers and good for business.

One key provision was to remove so-called "Glass-Steagall" restrictions enacted during the Great Depression to prevent commercial banks and bank holding companies from entering riskier types of businesses.

WHAT PEOPLE SAID THEN

* "This is the wrong kind of modernization because it fails to put in place adequate regulatory safeguards for these new financial giants, the failure of which could jeopardize the entire economy. It's the wrong kind of modernization because taxpayers could be stuck with the bill if these conglomerates become 'too big to fail.' "

Sen. Paul Wellstone, D-Minn.

WHAT PEOPLE ARE SAYING NOW

* "Restore the firewalls that existed in Glass-Steagall in some form. We are going to propose a massive rescue fund of hundreds and hundreds of billions of dollars and not fix that situation? That is unthinkable to me, absolutely unthinkable. It makes no sense."

Sen. Byron Dorgan, D-N.D. one of only eight senators who voted against the 1999 bill

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