Banking Law

There was an insightful article in the American Banker (paid subscription required) last week by Joe Adler that discussed the likely impact of Senator Bob Bennett's recent primary loss on the industrial banking industry. That impact is very likely to be anything but good.

The loss of ILCs' prime defender in Congress cast a shadow on their fight against extinction, and shuffled the line of Republicans who could end up leading the committee in the future.

Even if one of the two Republican newbies who finished ahead of Bennett wins the general election (a likely event in red-state Utah) and wants to serve on the Senate Banking Committee, they'll lack the seniority and clout that Bennett wielded in beating back attempts over the years to do away with the industrial bank charter. While the Dodd bill requires a three-year study about doing away with the ILC charter, the already-passed Hose bill eliminates the charter, and another six years of Bennett throwing monkey wrenches into the workings of legislative attempts to abolish the charter would have proven valuable to ILCs. As I noted last September, this is a fight for survival for industrial banks, and in a gunfight it helps to come armed with a .44 magnum like Bennett, rather than an air rifle of a freshman senator with no stroke.

As I also discussed last year, I have no particular financial incentive to back industrial banks; however, I see no reason the abolish the charter. These banks provide a valuable service in financing consumers and small businesses at a time when many "conventional" banks aren't stepping up to the plate to do so. Moreover, they haven't been shown to have participated in the sort of shenanigans that cratered the economy, which can't be said of other types of financial institution charters. The flop sweat that broke out on FDIC Chairman Bair's fevered brow over Wal-Mart has long been wiped away, and if Congress desires to close the charter to retail giants like Wal-Mart, there are ways to do that without gutting the entire business as it is now constituted.

As a side issue that is sure to annoy some segment of this blog's readership (which I try to do with every post), I think it is extremely unfortunate that a bona fide conservative like Bennett was apparently ousted by Tea Party tin foil hat wearers because he voted for TARP. I mean, give it a break! Only Kool-Aid drinking libertarians and extreme free market ideologues were insisting that taking the extraordinary measures that were recommended by Bush Administration officials in September 2008 was a breach of faith with conservative principles. One principle of conservatism that even the loonies should appreciate is that no economic or political principle requires sane human beings to march, lemming-like, straight off a cliff. Like Hitler's decision to invade Russia in June 1941, the decision of Congress to enact TARP seemed like a good idea at the time and, in fact, there's a strong case to be made that it prevented a complete economic melt-down. TARP was screwed up after the fact by Congress, two administrations, and opportunistic non-Tarp-taking banks that bashed TARP-takers as "bailout receivers" for purely short-sighted marketing reasons. Moreover, Bennett had plenty of company on his side of the aisle. To state today that Bennett should have known how badly TARP would be mangled would have been the same as saying that McCain should have known before he picked Palin as his running mate that she'd make Tina Fey into an American comedic icon. It's all revisionist history.

It's true that a large chunk of the politically active populace (and a good chunk of the rest of us, for that matter) are in a "throw the bums out" mood these days. Nevertheless, Utah Republicans may have thrown the baby of a good segment of their state's business base out with the bath water of an incumbent politician. As former Utah banking commissioner George Sutton put it, "Utah emerged as a significant banking center primarily because we had senators back in Washington who really understood these issues." According to Sutton, neither of the two Republicans "have that kind of background."

Let's see how all this works out for Utah as time passes. My preliminary guess is "not well."