Conning Congress-The Wild Card Story

...IF YOU‘RE NOT EARNING 854% ON 9% NOW...

...In October, Congress, responding to a massive lobbying campaign by the savings and loan industry, legislated the average man right out of the competitive money market...

...There just wasn’t time for hearings...

...Hustles like the 360-day year on loans generally mean pennies to the small borrower, but multiplied by the number of bank customers often mean millions for financial institutions...

...It’s also why we need a consumer lobby to speak for the neglected interests of the small savers and borrowers...

...But in appealing to Congress, the S&Ls argued instead that the wild cards would divert money from S&Ls to the big commercial banks who could better afford to pay the new high interest rates...

...And the ABA’s survey of banking’s 50 major markets also concluded that savings and loans weren’t skimping with the interest they paid on the wild cards eitherfigures cited in the advertisements ranged from 8 to 10 per cent...

...Instead, the savings and loans seem to have been doing most of the promoting of the consumer-sized certificates...

...Before they stacked the deck against wild cards, if you had $5,000 to invest-and assuming that interest rates averaged 9 per cent over the life of the certificate-you could earn more than $1,800 in interest (how much more would vary since there are over 100 different ways to compouhd interest) by just letting your money sit in a bank or savings and loan for four years...

...Troop made a simple pitch to Congress-wild cards were drawing funds out of S&Ls and into commercial banks and this, in turn, was drying up the mortgage market...

...But indications are that this outflow from the S&Ls did not go to the commercial banks...

...For the first time since the minimum denomination for U.S...

...Working through a network of state organizations, the League can, if necessary, generate thousands of letters to Congress in a day’s time...

...The wild cards meant that, for the first time since 1966, commercial banks could pay the same interest rates as savings and loans...

...9...

...October was the heaviest month for the purchase of wild cards as smart savers rushed to beat the November 1 cutoff...

...The wild-card experiment began in July, 1973, when the government took the ceiling off interest rates that banks and S&Ls could pay the $1,000 accounts...

...Market forces would be the only restraint on how high the interest would go...

...While it seems to take years for Congress to pass campaign-spending legislation, the anti-wild card bill zipped through the House and Senate in two days, passing both Houses by voice votes that left the small saver with no way of determining exactly who was responsible for yanking him out of the competitive money market...

...IF YOU LIKED 976, YOU’LL LOVE 9%% ON CERTIFICATES OF DEPOSIT...

...Despite its free enterprise rhetoric, the savings and loan industry looked on this kind of direct competition as an anathema...

...Congress traditionally has been sympathetic to the needs of the savings and loan industry, which provides 75 per cent of the nation’s home mortgage money...

...There are literally no organizations in Washington representing the rights of the small saver...

...Glen Troop is not the kind of man a politician can say “no” to during a mortgage crunch...

...Unlike banks, which can obtain capital in a variety of ways, the S&Ls must rely almost entirely on savings deposits...

...Instead, he works prodigiously behind the scenes, wining and dining appropriate staff and committee members, making friends, and keeping up contacts...

...Wright Patman...

...Maybe the inflation was eating into the family food budget, but at least you could earn your fair share in an interest-rate war as banks vied with savings and loans for your savings dollars . This was the big time...

...no more two-bit competition between the bank that offered 4% per cent and the savings and loan paying 5 per cent last summer...

...Why should you settle for 5percent interest on a savihgs passbook when everybody else is making a fast buck...

...Before the bubble burst, interest rates soared as high as 10 per cent...

...There you were, just an average guy with a few thousand dollars in your savings account, and suddenly the big banks wanted you...

...If savings and loans deposits dropped as a result, this would mean that less money would be available for mortgage loans...

...Its chief lobbyist on the wild card legislation was Glen Troop...

...According to the American Bankers Association (admittedly, a less than disinterested group), S&Ls placed threequarters of the razzledazzle advertising touting these new high interest rates...

...And if hearings had been held, or if anyone had bothered to give the S&Ls’ claims a serious examination, this fallacy would have been readily apparent...

...To attract these deposits, S&Ls have paid higher interest rates than commercial banks...

...but savings and loan associations as well, and they wanted you so badly they were willing to pay 8-percent, 9-percent, even 10-percent interest for, the privilege of keeping your money for four years...

...not a day could could be lost in pulling the S&Ls out of their latest crisis...

...Moreover, later figures totally demolish Troop’s argument...

...None of the other Washington consumer lobbies has shown any inclination in this direction either, since they apparently feel that the public cares more about flammable fabrics than about being chiseled by the savings and loans...

...No more sets of Melmac dinnerware for opening a passbook account...

...The legislative coup that destroyed the wild cards was pulled off by the industry’s lobby, the U. S. Savings and Loan League...

...Crucial to Troop’s argument was the contention that S&Ls couldn’t afford to pay the new wild card interest rates...

...LIMITED KEEP INFLATION AWAY FROM YOUR SAVINGS...

...Only the American Bankers Association has the kind of political power that could have saved the wild cards, but interest rate wars don’t sit well with them either...

...The ABA’s reluctance to get involved was not surprising...

...That $300 differential is about enough to treat yourself to a new color television set...

...Troop is not a “corridor man,” rarely seen pacing the halls of Congress during executive committee sessions or sitting in on committee hearings...

...It’s just for this reason that congressional liberals should be wary of simple cause and effect models advanced by glib banking lobbyists...

...Conning CongressThe Wild Card Story by Eliza Paul THE HIGHEST BANK INTEREST IN THE WEST...

...Troop implied that this money had gone from the S&Ls to those commercial banks that were paying higher interest on the wild cards...

...YOUR SAVINGS, CLIP THIS COUPON...

...the battling financial institutions were offering you a chance at the kind of interest big investors are used to, and your chance took the form of “wild cards,” special fouryear certificates of deposit available in sizes you could afford...

...But with the 7%-percent ceiling, you would earn a bit more than $1,500 over the same period of time...

...You lost your chance to see “Hollywood Squares” in living color because your friendly savings and loan, aided by sympathetic congressional liberals, wanted you to be able to buy a new home...

...Yet in the mid-sixties, commercial banks began raising their rates to attract the small saver...

...In effect, Troop was asking the small saver to help subsidize his local S&L, whose net profit was probably more than $400,000, by accepting lower interest rates...

...Instead, regulatory legislation is generally the result of a gentlemen’s agreement between industry groups, moderated by sympathetic co ngr e ssional banking committee members . The moral of the story should be clear...

...To protect the savings and loans, interest rate ceilings were set in 1966 which allowed the S&Ls to pay higher rates...

...The S&L which most families go to for their’mortgages suckered a confused Congress into believing that the wild cards were siphoning money away from their mortgage funds and forcing them to turn potential home-buyers away...

...So, the ABA staff ducked the issue entirely by being conveniently out of town when the wild card legislation was bulldozed through Congress...

...It should have been apparent that wild cards had about as much impact on the mortgage market as they did on soybean futures...

...but when it does, legislators are only too happy to oblige...

...In a last-ditch effort to save wild cards, Arthur Burns dispatched one of his fellow members on “the Fed” to try to convince Ralph Nader to enter the fray on the side of the small depositor...

...Nader declined because he was tied up with other causes and currently had no one on his staff working on financial matters...

...The bill was largely the work of two of Capitol Hill’s most conspicuous crusaders for the rights of the little man, Senator Hubert Humphrey and Rep...

...It was an appealing argument explaining an arcane financial process in terms that a congressman could easily understand -and politically appreciate...

...When the smoke cleared, Humphrey and Patman’s reputations were spotless, the small saver couldn’t earn as much for his money, and the average man was still having trouble getting a mortgage...

...The fear of further evaporating the already tight mortgage market was enough to convince Congress to pluck the wild cards out of the deck without bothering to hold hearings or consult the savers who might be affected...

...Patman could have stopped the legislation in committee, but instead, under pressure from the House leadership and his own committee, introduced the bill himself...

...Of course, there is no way of telling what a saver does with his money when he makes a withdrawal from his local savings and loan...

...The League doesn’t ask much of Congress...

...Not just banks, Eliza Paul is a former financial reporter with the Reuter Washington bureau...

...Even this slightly simplified version of the wild card should have convinced most readers that bankjng is a terribly abstruse field...

...Treasury bills was raised tenfold (from $1,000 to $10,000) in 1970, you could earn top market rates for your savings, just like the fat cats who put their money in “jumbo” certificates of deposit and Treasury bills...

...Moreover, the evidence suggests that the big banks weren’t outhustling the S&Ls in going after wild card savers...

...And next fall, congressional incumbents will point to this bill and claim they have done something to ease the housing crunch...

...But a kind of hysteria sets in on Capitol Hill when constituents begin to complain that they can’t get mortgage credit and when letters and phone calls start pouring in from the presidents of local savings and loans...

...The interest rate ceilings are geared to protect banks and savings and loans from the perils of competition and the two groups don’t slug it out very often over issues...

...The only evidence that Troop presented to prove that wild cards were hurting the S&Ls and thereby affecting the housing market was a decline in savings and loan deposits during the months of July and August...

...Yes, you...

...The blow dealt the wild cards should not be confused with the way the average depositor gets “nickelanddimed to death” at his local bank...

...Savers who bought one of the wild-card certificates during the four-month honeymoon period were unaffected by the new limit...

...There was one problem-it just wasn’t true...

...Yet, during this month more money flowed into the savings and loans rather than out of them...

...While the ABA’s leadership officially supported the consumer certificates of deposit, smaller banks, which make up the bulk of the organization, were griping as loudly as the S&Ls about how they couldn’t afford to pay the new higher interest rates...

...But wild cards were different and the amount that this hasty congressional move cost the average saver could be substantial...

...They haven’t...

...EARN 8.4% INTEREST...

...It was too good to believe...

...Nader Fiddles, While Arthur Burns Yet facile arguments like Troop’s can be quite effective when no countervailing pressure is mobilized against them...

...Yet writing home mortgages is far from an unprofitable business-in 1972 the total net income of the nation’s 4,100 federally insured S&Ls was a hefty $1.7 billion...

...But maybe this kind of reform just isn’t in the cards...

...Humphrey is the old-time liberal’s liberal, and Patman, chairman of the House Banking and Currency Committee, has spent most of his long years in Congress battling the big banks...

...Effective November 1, a 7%-percent ceiling was clamped on the wild cards...

...In all likelihood, this money was invested in $10,000 Treasury notes or used to pay personal bills...

...The Anti Wild-Card Troops Worried by the tight mortgage market, Humphrey eagerly bought the S&Ls’ story and introduced the bill which was the springboard for the anti-wild card legislation...

...The League, operating with a small Washington staff, is a blanket organization including almost all of the nation’s 5,200 savings and loan associations...