TAX TREATMENT DIFFERENCES

Senator CHAFEE. The Secretary yesterday was worried about the difference in the tax treatment that the banks would receive if you, in the revenue bond business

Mr. GUNDERSON. There has been a lot of rhetoric about that. We have not seen any numbers or figures on that. We just do not feel that that is significant at all. You are talking maybe 2 or 3 days when you are carrying some of these items. We do not view that as a big deal at all. It is just a type of stumbling block, and I suspect his investment background was surfacing a little there. It has been around for a long time.

Senator CHAFEE. You are getting a lot of shots in at Mr. Regan's investment background, which I do not think it is quite appropriate here. I notice that you took a slam at him on page 15, "apparently does not want to support bank"

Mr. GUNDERSON. We did not.

Senator CHAFEE [continuing]. "To compete with Merrill Lynch." Mr. GUNDERSON. ABA did not. That is not in our testimony. Senator CHAFEE. Mr. McCormick is guilty.

Mr. MCCORMICK. We'll take credit for it. [Laughter.]

Senator CHAFEE. As far as I'm concerned, that is not the high point of your testimony.

Thank you very much, Mr. Chairman.

The CHAIRMAN. Gentlemen, let's make an assumption here: That because of this internecine warfare that is typical and probably will not change while I am here, while we fight among ourselves, and assume that no legislation is produced, no new thrift powers, no additional powers for banks. And we end up with Ferdy St Germain's idea, that we produce the bare bones regulators' bills so that the sick ones can be merged with the other less sick ones. To see if we can solve the problem that way by putting Band-Aids on it. Then I would like to know how you propose to compete with Merrill Lynch, with Sears, American Express, all of them. They have no geographical restrictions, they operate anywhere they want-I still think that is the heart of the problem.

And again, despite your testimony, that is why I introduced this legislation. To try and get a level playing field as close as possible. I realize that is very difficult to do-between the depository institutions and the non. This whole hearing has been diverted, once again, into the fight between the thrifts and the commercial banks, instead of looking at what I consider your real competitive problems.

Now, is it possible to get some answers? Assuming all of this conflict kills any attempt to do anything and we just go with the bare bones legislation: Where are you going to be versus the money market funds and all of these new innovations that are now at over $150 billion a year and growing rapidly, more rapidly than you can possibly get money into your institutions.

Mr. JENKINS. Mr. Chairman, please understand the only point we are making here is that we accept all of that, and it says so in our complete testimony. Under committee guidelines we are not allowed to read all of it. And you are right, we probably should have hit the positive more prominently in our brief oral statement.

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But in this case we got rather excited about the negative aspect, which is the powers to the thrifts, because it would to hurt a lot of people. We do not think it is wise of us to approve a matter before Congress that will help a great deal but hurt somebody. And we would rather cut out the hurt. The Pratt proposal would be unfair to banks and could hurt savings and loans.

You asked what would happen if we did not get powers competitive with nondepository businesses. These fellows are eating our lunch, they have got their eye on our dinner.

If we cannot do things we want to do to compete with a mutual fund, the question really is not whether some banker wants to start a mutual fund or not, it is whether he has the privilege to start the mutual fund. Right now he does not have it. We want privileges to act. Not all banks need to do it, but we need to have the privilege.

Many of the provisions in S. 1720 would do a great deal toward helping depository institutions combat the efforts of the people who say they want to be the biggest financial services sector in the United States. Sears says they think banks will eventually become unfettered, and Sears wants to be miles down the road before that happens.

Mr. MCCORMICK. If I may respond, Senator. First of all, I would like to say I would like to emphasize that probably 80 percent of the sections and subjects presented in these titles, the American Bankers Association, Independent Bankers Association of America, are in agreement. So you do not have near the disagreements that you would have had in the past on a lot of this legislation.

There is a substantial movement on the part of both the associations in that area, but I would also want to say that this term deregulation is confusing-when one person talks about deregulation, he's talking about one thing; and when another talks about it, he is talking about another.

We can compete if we deregulate the asset side of our balance sheets. We can compete if you will let us provide competitive services and competitive products.

Now, there is some disagreement in regard to how fast we should do that. It is only because we are in a Catch-22. We have got a whole bunch of institutions trapped in the liability side with lowyielding on the asset side with low-yielding assets. It is going to take a little time to work our way through that, and that is the reason why we think that a phaseout makes sense.

DEREGULATION NEEDED

But the deregulation that the banking industry needs and we are all on agreement on is to deregulate our ability to offer assets and liabilities so we can compete in the marketplace. Now that does not necessarily have anything to do with the structure laws of our country. The fact that we have got the thing organized so that we have thousands of providers of financial services, thousands of different locations primarily concerned about the local economies, it is just not involved.

And I do not see any evidence that the banking industry, as an industry, is severely injured because of the structure laws we have in this country. We are injured because of the interest rates laws

and a lot of the other laws that get in our way in providing services for consumers. We agree those need to be deregulated. We do not believe the other is applicable.

The CHAIRMAN. Mr. Jenkins, in your response to my question, you got back to the point that I really expected you to be making today, of where the real competition is. I think all of you know, particularly Lee-we have talked together enough the last year or so he knows exactly where my feelings are. I have been out on a limb, sitting in this chair and making speeches all over this country about how grossly unfair it was for these nondepository institutions to be in the banking business and they come in and sit at that table and say they are not. They are.

The president of Sears is absolutely right, get a big head start. Why I was so disappointed in your testimony was because rather than emphasizing your real problem-if I did not have any background in it, I would be of the impression that the commercial banks of this country were scared to death of a crippled thrift institutions industry. Scared to death that giving them some additional powers was going to be something you could not handle in competition. Hardly a word about the Sears and the Merr... Lynches, and so on. That is the impression I would have had from listening to your testimony cold, without knowing about it.

The point is if there is not within the depository institution some consensus on these matters, you are not going to have a legislation. I cannot make that point strongly enough, and a i why I was so disappointed in your testimony again. If you essay tory institutions, thrifts, credit unions, cannot come to son IS sensus, there is nothing we can do up here. You w... legislation. None of this will pass. You cannot pass pieces of this puzzle. We cannot give you all of the auto want to compete and tell the thrifts "Sorry. You must com struggle, you will get nothing."

I do not necessarily agree with all of the powers of I want you to understand that. But from a practica point, you will not have a bill, and Sears is going of you all. That is the problem that you gentleme we cannot. If you fight among yourselves, I prote be no legislation, not because I don't want itrealities of life. Anybody who has been aro years it took to finally produce H.R. 4986 know third term, if I am still here and if the peop might come to some conclusion. That has ESE 6, 7 years at a time.

Mr. GUNDERSON. I would hope you v sermon to the thrifts. I believe that w down the road moving toward deregu we are frustrated every time we see thrifts throw up a roadblock that pr tive savings instrument.

We recognize that there is a neer We want to move ahead with them into the thrifts, and they say 1. move ahead.

The CHAIRMAN. You know I call it as I see it, regardless of whom I'm talking to.

Mr. GUNDERSON. How well I do, Mr. Chairman.

The CHAIRMAN. You are aware that I suggested a faster phaseout of H.R. 4986, I've never understood regulation Q. I've never understood why the thrifts were so married to it. They would give away their wives, their childen, their mothers to keep that quarter of a percent differential and let the whole world go to hell. How did they function before there was a regulation Q? They know my views very well on that subject.

What I am striving for is somehow to bring you people together, to come up with something that does the job. I do not want to preside over this committee 5 or 6 years down the road and have the few of you still left struggling to compete with retailers who are involved in the banking business without regulation.

I do not know how many times I have tried to make the point of what the intent of this entire legislation is, not a bailout of the thrifts. It was somehow to try and even up the playing field for the depository institutions against the new boys on the street. I do not condemn them for being innovative under the circumstances. That has been the American system. They are very bright to take advantage of a situation. But it is not fair to leave you all tied up. Mr. JENKINS. Our problem today I think is you are the first person who has asked about this. This hearing is the first event that we have had relative to Mr. Pratt's proposal. But this matter came up, and nobody came to us and said "What do you think?" or "How else would you do it? Do you think we can get some middle ground, or what?"

The CHAIRMAN. And nobody asked the thrifts what they thought of municipal revenue bonds either. Everybody was treated equitably.

If we asked all of you what you thought, I would not have gotten around to introducing a bill of any kind to start the formal discussions, I guarantee you of that.

Gentlemen, excuse me. Senator Hayakawa is here and would like to make a statement. And my time is up in any event.

Sam, we are happy to have you here. We would be pleased to hear your statement at this time.

STATEMENT OF SENATOR HAYAKAWA

Senator HAYAKAWA. Thank you very much, Mr. Chairman.

I am here to testify in favor of section 302 of the Senate bill 1720. This section would allow banks, savings and loans, and credit unions to offer their customers collective fund service-most importantly, money market mutual funds.

Now, these institutions, including mutual savings banks and bank holding companies, would be authorized to sponsor investment companies and sell their shares. Such investment companies would be organized and registered in compliance with the Învestment Company Act of 1940 and their shares registered under the Securities Act of 1933.

The Comptroller of the Currency with respect to banks, the Federal Home Loan Bank Board with respect to savings and loan associations, and the National Credit Union Administration Board

with respect to credit unions would, in consultation with the Financial Institutions Examination Council, set regulations governing the qualifications and practices of the officers and employees who sell shares of the fund.

The Securities and Exchange Commission would govern advertising and fees. The Comptroller of the Currency, the Federal Reserve Board, the Federal Depository Insurance Corporation, Federal Home Loan Bank Board, and the National Credit Union Administration Board would enforce the regulations for those institutions under their jurisdiction.

For those institutions that are not otherwise federally regulated, the Securities and Exchange Commission would enforce the regulations adopted by the appropriate agency.

Mr. Chairman, when we drafted the original legislation, we discussed many different ways of governing these activities. I believe this to be the best and the most efficient. The Federal financial regulatory agencies have the expertise and are the best equipped to deal with the institutions involved, and provide the best protection for their investors. Also, by retaining the regulatory and enforcement power of the funds at the Federal level, we can be assured of relatively uniform regulation. Mr. Chairman, these funds came into existence and they have prospered, because there is a need in the market for them.

PEOPLE CANNOT AFFORD THE COST OF SAVING

Most people would like to save, but have been unable to afford the cost. If they were to place their money in the normal passbook savings account, they would lose at least 4 percent every year, because of inflation. Certificates of deposit offered by depository institutions usually require a minimum investment of $10,000, a sum beyond the reach of many.

And bank money market certificates, which do have a low minimum investment, are far less liquid and have lower yields. Money market funds, however, can be opened with as little as $100, placing them well within the reach of almost everyone who wishes to save. They are also relatively liquid, and offer a higher yield than most bank investments.

Money market funds have given savers a much-needed alternative. The popularity of these funds is well known, Mr. Chairman, with current assets estimated at $165 billion. And unless Congress legislates them out of existence, they will continue to grow. The only problem is that as the assets in these funds grow, assets in our existing financial systems are being depleted. The reason this is occurring is that Government will not allow the depository institutions to compete in a free market. So as we continue to restrict our financial institutions from offering these funds, the money normally used for business and home loans is disappearing. The provisions of Section 302 will allow depository institutions to offer a broader range of services with which to meet the needs of their depositors. Those banks, savings and loans, and credit unions whose size does not warrant the establishment of a fund are authorized to serve their customers by selling shares of another institution's fund, or any other already established fund.