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LOUIS DUBOSE What Mr. Patman Knew IM CERTAIN MANY of you remember the late Congressman Wright Patman, whose congressional district overlapped my state legislative district in Northeast Texas. For decades, Mr. Patman successfully led the fight in Congress to prohibit the concentration of capital and deposits by a few large financial conglomerates. What did he know that we seem to have forgotten? He knew that when big financial institutions make mistakes they are big mistakes that hurt an inordinately large portion of the populace. He knew financial concentration in the hands of the few did not blend well with a dispersed, democratic, free-enterprise-oriented society. He knew that big banks would never understand and meet the needs of small business, small borrowers, and farmers. Mr. Patman knew that financial concentration gives an inordinate amount of power to a small group of people who too easily could wield it over the majority of citizens. He knew that financial concentration distances the institutions’ decision makers from depositors and borrowers. Mr. Patman believed that a shift to concentrated capital would make financial institutions unresponsive to local needs and would encourage shortsighted yield whoring by conglomerate banks for short-term profits at the expense of community needs. Financial concentration could even lead to a power base where those who are supposed to be regulated, drive the regulatory process. Mr. Patman also knew that when we allow financial concentration and a liberalization of bank laws we tempt those who hold the money to breach their fiduciary responsibility and to forget that it is the depositor’s money they use to make their profits. Indeed, many of the problems Texas has and is encountering, especially as these problems relate to working capital and capital available for long-term credit, were caused by financial concentration through the formation and enhancement of bank holding companies and the liberalization of U.S. banking laws conditions Mr. Patman opposed for so many years. The record speaks for itself. Liberalized banking laws, federal regulatory oversight and abuses, and subsequent rules, significantly contributed to the problems we face, and further regulatory attempts to solve the problem by fostering even greater financial concentration have made the problem worse. In 1982, Congress passed the Garn-St. Germain Depository Institutions Act. Among the many things it provided for was Rep. Pete Patterson unsecured inter-system funds transfers which allowed holding companies to subvert a staid but solid system of capital-rich member banks provided for by state law. This allowed ailing parts of a system to drain deposits from stronger banks in a system. Congress allowed financial institutions to participate in certain investments and transactions which amounted to inside investment. By allowing this, the government actually encouraged unscrupulous managers and owners by, allowing institutions to use deposits for speculation and to manipulate appraisals so owners could realize dividends against the paper profits. Regulators not only transferred or granted charters to these managers and owners \(many who had little financial the investments and dividends during the regulatory process. Subsequently, the FDIC, other regulators, and the IRS encouraged large out-ofstate holding companies to take over and reform failing banks. In so doing, they provided financial inducements in the form of direct capital outlays, tax breaks, provisions for government-paid legal services, and the formation of guaranteed pools for the stated purpose of allowing large takeover banks to dump bad or non-performing assets. However, many of the new big holding companies in the state have used these pools or “bad banks” as a means of dumping any loans they don’t want or do not care to service, with the blessing of regulators. Such actions in light of ordinary commerce would be considered antitrust violations, unfair competition, and border on a state-controlled economy. Through such actions, takeover holding companies are virtually guaranteed a profit. Well-managed and surviving banks do not have the same privileges… What we find now, under this newly emerging system of dominance by large holding companies with encouragement and protection by the FDIC and other regulators, are banks unresponsive to small-business needs and the needs of the community. The big banks do not make enough small-business loans. FDIC rulings are near-dictatorial because of the FDIC’s direct financial integration into the system. Borrowers have had lines of credit cut or their credit records erroneously impugned because big banks dumped their loans into bad banks or special asset pools merely to free up de posits or to take advantage of federal government and tax incentives. Independent banks and borrowers have no place to seek objective appeal or regulatory actions or the actions of big banks because of the commingling of financial interest and regulatory authority. state representative from District 2. This material is an excerpt from his written testimony presented to the House Banking Committee meeting in Austin. 4 JUNE 29, 1990