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Strange Odyssey for Bank Reform, Thrift Rescue Package

October 20, 1995

WASHINGTON (AP) _ House Banking Chairman Jim Leach, in a bid to rescue his troubled bank reform bill, on Friday scrambled to quell growing opposition from the banking industry.

Leach, R-Iowa, proposed a radical change to an unrelated thrift deposit insurance fund bailout bill that pleased the banking industry. The change meant banks would no longer have to pay much of a $790 million annual payments on bonds related to the S&L bailout.

Instead, Leach proposed to shift the payments to three giants of the home mortgage business _ Fannie Mae, Freddie Mac and the Federal Home Loan Bank System. The plan generated fierce opposition from the mortgage companies, as well as the Treasury Department.

``This appears to be a desperation gambit, a blatant attempt to buy off the banks,″ a senior Treasury Department official said in an interview.

The senior Treasury official, who spoke on condition his name not be used, was angered that Leach would reopen the thrift fund rescue plan when the administration thought the issue had been settled.

Leach defended the move during a speech in Cedar Falls, Iowa.

``No approach is fair to all parties,″ Leach said. ``But this new approach avoids a government bail-out and calls for a modest sacrifice for the housing″ lenders.

Fannie Mae and Freddie Mac are government sponsored enterprises that buy mortgages from thrifts and banks and resell them to Wall Street investors. The companies enjoy an inexpensive source of funding and exemption from state income taxes.

The sudden developments serve to further muddy the already complex prospects for a bank reform package this year. Leach’s bill was supposed to move to the House Rules Committee this week, but was delayed because of other conflicts.

The far-reaching proposal would let banks and Wall Street firms combine by repealing the 60-year-old Glass Steagall Act. The bill also would cut red tape for banks by revising several consumer protection laws such as the Truth in Savings Act.

While banks would greatly benefit from these provisions, the American Bankers Association formally opposed the Leach package Friday because it would place a five-year moratorium on regulators’ ability to expand bank insurance powers.

Gaining new securities powers in exchange for insurance restrictions ``is not an acceptable trade off for banks,″ said Sam Leaman, banking analyst for HSBC Washington Analysis, an investment firm. Leaman added that banks could win those expanded powers not from Congress but from a case currently pending before the U.S. Supreme Court.

The focus of the day’s activities was on Leach’s controversial change to a bill that would rescue the ailing Savings Deposit Insurance Fund, or SAIF, which insures thrift deposits up to $100,000.

The House and Senate banking committees last month passed bills to have banks make a majority of the $790 million annual payments on so-called Financing Corporation bonds, issued as part of the S&L bailout. Thrifts, for their part, would pay a one-time hit of about $6 billion to rescue the SAIF.

The American Bankers Association cited the Financing Corporation bond payments as a key factor in their opposition the Leach bank proposal.

After release of the ABA’s letter, Leach proposed that Fannie Mae, Freddie Mac and the Federal Home Loan Bank System make about $460 million of the Financing Corporation payments in the 1996 fiscal year, with the rest coming from interest on the Federal Deposit Insurance Fund. Any additional shortfall would come from assessments on banks.

The mortgage companies would pay more in 1997, about $640 million.

The prospect of shouldering much of the $9 billion Financing Corporation payments angered the giant mortgage lenders.

``It’s a home ownership tax,″ said Fannie Mae spokesman David Jeffers.

Mitchell Delk, vice president for government relations for Freddie Mac, agreed.

``We’re disappointed that Chairman Leach is suggesting a tax on middle income home ownership to break his logjam over his banking bill,″ Delk said. ``We don’t think the two are related.″

House Banking Committee staff argued Fannie Mae and Freddie Mac are part of the housing system and have grown rapidly in recent years at thrifts’ expense.