10-30-1999

BANKING: Loan Star Phil

The atmosphere was partisan, even foul, on a recent October day in an ugly
room in the bowels of the Capitol. The body language of the House and
Senate negotiators stuffed into the cramped quarters suggested that they
were spoiling for a fight. They were trying to put their stamp on
legislation to sweep away Depression-era laws governing the financial
services industry--a measure Congress had been attempting to pass for 20
years.


Sen. Phil Gramm, R-Texas, the sharp-elbowed chairman of the Banking,
Housing, and Urban Affairs Committee, was at the center of the action.
Although this was his first year as a committee chairman, Gramm seemed
perfectly at ease.


He alternated between combativeness and folksiness, as the situation
warranted. At one point, he informed his colleagues in his distinctive
Southern drawl that he was "not going to break my pick" over an
issue he didn't think was worth his political capital. A few minutes
later, the 57-year-old former Texas A&M economist lectured a colleague
on why his proposal went against the legislation's deregulatory
goals.


Still later, Gramm challenged some House conferees by suggesting that they
didn't understand the implications of their own proposal involving one of
the most controversial issues at hand--how to modify the law requiring
banks to lend in poor communities.


Such comments infuriated Sen. Paul S. Sarbanes of Maryland, the senior
Democrat on the Banking Committee, who exploded in anger several times.
Blasting what he saw as Gramm's peremptory style, Sarbanes accused the
Texan of showing "ill grace," and excoriated him for running
roughshod over Democrats who wanted to speak.


Sarbanes wasn't alone. More than a few Democrats were peeved about being
left out of the closed-door negotiating sessions between the chairmen of
the three congressional committees with jurisdiction over the banking
reform legislation: Gramm; Rep. Jim Leach, R-Iowa, of the Banking and
Financial Services Committee; and Rep. Tom Bliley, R-Va., of the Commerce
Committee. "The three amigos," as some lobbyists jokingly called
them, produced the document on which the full 66-member conference
committee based its discussions as it sought to reconcile the House- and
Senate-passed bills.


All of this contentiousness made it especially remarkable when just over a
week later, in the wee hours of the morning of Oct. 22, negotiators struck
a deal that ended the longest-running lobbying marathon in Washington's
history. Perhaps even more surprising was that Phil Gramm was the key to
making it happen.


Gramm played a central role in the final negotiations with Clinton
Administration officials and a knot of Democratic Senators. And not only
did Gramm accomplish this feat during his first year as a committee
chairman, he also did it at a time when Congress is being pilloried for
its do-nothing tendencies. Sure, Congress eventually will approve the
annual must-pass appropriations bills, but efforts to reform Social
Security, revamp Medicare, and enact huge tax cuts have all fallen by the
wayside.


This is the story of how Phil Gramm, a strong-willed Southerner who
sometimes draws strength from wearing an antique Texas Rangers badge,
managed to defy the odds and lead the charge in crafting what will almost
certainly be the most significant piece of legislation to pass Congress
this year.


"You just can't name anybody else the MVP but Phil Gramm," said
Phil Anderson, vice president for federal relations at the American
Council of Life Insurance, although Anderson said that Leach was also a
pivotal player.


Ever since Gramm took the reins of the Banking Committee in January, panel
members have had to deal with a 180-degree turn in style. In a marked
departure from the conciliatory approach of his predecessor, Sen. Alfonse
M. D'Amato, R-N.Y., Gramm has relied on a combination of bluff,
belligerence, and bullheadedness, while adding to his repertoire in recent
months a quality that he has hitherto rarely displayed: a dollop of
pragmatism. The 15-year Senate veteran, while hewing to his core
principles, was willing to make some concessions to pull this deal
off.


Though he has long been categorized as an ideological warrior, Gramm is,
in fact, a smart, enigmatic, complicated figure. His blunt rhetoric and
stubborn posturing during the past year obscured a series of moves that
enhanced his leverage and positioned him to believe that this Congress
could finally succeed in winning passage of financial modernization
legislation where so many before had failed.


In an interview with National Journal on Oct. 25, following the conference
agreement, Gramm said that the trick was showing the Clinton
Administration that he meant business.


"The Administration had never really negotiated with Republicans in
Congress. They just basically had run over us on a lot of these other
issues," Gramm said. "We spent most of the time convincing them
that that wasn't going to happen here. A lot of these talks were more on
convincing them that I wasn't going to relent, than it was on making
progress."


An Unlikely Deal-Maker


How is it that Gramm emerged as the driving force behind this legislation?
After all, this is the same Phil Gramm who irks colleagues with his cocky,
go-for-the-jugular style.


Turn the clock back to February, to the midst of the Senate's agonizing
debate over impeachment. A group of Senators were unhappy that their only
choice was an up-or-down vote on convicting President Clinton and thereby
removing him from office. They sought a middle ground--such as censure--to
express their outrage over Clinton's conduct.


When Sen. Dianne Feinstein, D-Calif., went on NBC's Meet the Press to
describe her position, Gramm didn't just disagree with her. He ridiculed
her effort with one of his patented put-downs. "The problem is,"
Gramm said on the Feb. 7 program, "this covering-your-fanny approach
has constitutional costs."


Feinstein, clearly furious, shot back: "Most respectfully, Phil
Gramm, I have never said what your motivations are. The motivations for
this censure are not political," she said. "It is not something
to `cover one's posterior.'...Now, you may disagree with me, but I don't
question your motivations. Please don't question ours."


The provocation was vintage Gramm, and precisely why so many people
thought that he was the last person who should be entrusted with
fashioning legislation that the financial community so desperately
wanted.


But others who have worked closely with Gramm say that the caricature of
him as a zealot is off the mark. "Phil Gramm has the courage and
intellect to take his views into the ring, and he'll strip to the waist
and go in there with anybody," Sen. Bob Kerrey, D-Neb., a maverick in
his own right, told National Journal. "He's not always correct, but
he knows how to move the ball down the field. I admire it."


Indeed, Gramm over the years has had several significant legislative
achievements, including the 1986 Gramm-Rudman law that sought to impose
fiscal discipline on Congress, and the 1981 Gramm-Latta budget resolution,
the vehicle for moving Ronald Reagan's budget cuts through the
Democratic-controlled House. Gramm still regards the 1981 measure as his
"biggest" legislative accomplishment, though he said that
winning this new banking bill is "big," too.


When Gramm took over the Banking Committee earlier this year, lobbyists
for the securities, banking, and insurance industries had already ended
their protracted war over the banking legislation. They were united in a
desire to see it enacted, and some worried that Gramm was the wrong man
for the job--that he would embark on an ideological crusade that would
destroy the fragile compromise that all sides had struck to move the
sweeping measure along.


The lobbyists' resolve was reflected in the big bucks their industries
were willing to shower on Congress. During the first eight months of 1999,
according to the Center for Responsive Politics, industry interests
contributed more than $30 million in "soft," unregulated money,
political action committee donations, and individual contributions to
members of Congress.


Despite their deep pockets, however, the industries still had cause for
concern. It was Gramm, after all, who had virtually single-handedly killed
the banking reform legislation last year, because of his disdain for the
1977 Community Reinvestment Act, which requires banks to provide loans in
all areas where they do business, including low-income
neighborhoods.


Gramm sees the CRA as social engineering and wrongheaded meddling in the
marketplace. It is, he said on the Senate floor in 1998, "a vehicle
for fraud and extortion." He has long opposed any expansion of the
law. And he has insisted that community groups that receive funds from
banks for use in low-income neighborhoods disclose the amount of that
assistance and how it is spent--a requirement that the groups see as
burdensome and mean-spirited. But the White House was just as passionate
in its support of the CRA as Gramm was in his opposition--producing a
conflict that appeared for many months to be irresolvable.


A review of Gramm's approach on banking reform throughout the year is
revealing, in that it shows how he put himself in a position to eventually
win on his key objectives. In an interview, he said those objectives
centered on blocking any expansion of the CRA, imposing disclosure
requirements on community groups, and giving the Federal Reserve Board a
central role in overseeing the financial behemoths that would emerge from
this legislation.


Early on, Gramm was determined to push through the Senate a banking bill
that would give him maximum bargaining room in conference with the House.
But to get there, he faced a challenge from an unexpected quarter: Sen.
Richard C. Shelby of Alabama, one of his oldest friends in the Senate and
the second-most senior Republican on the Banking Committee, parted company
with him on two big issues.


Shelby sided with the Clinton Treasury Department on the issue of
regulating the new corporate conglomerates. Shelby favored allowing banks
to conduct certain transactions within so-called operating subsidiaries,
rather than in affiliates outside the bank, as Gramm preferred. And Shelby
also supported sweeping privacy protections for consumers who don't want
the new financial giants to disseminate their personal information to
telemarketers and others without permission.


When the bill hit the Senate floor in early May, Gramm waged war to defeat
Shelby's operating subsidiary (or "op sub") proposal. Gramm even
took the unusual step of threatening on the floor to withdraw the
legislation if he lost. "He uttered the death threat against his own
legislation," said David J. Pratt, a veteran insurance lobbyist and
senior vice president with the Columbus Group, an Arlington, Va.-based
consulting firm. "With my heart in my throat, I listened as he said,
`I will kill this bill if I lose this amendment.' "


Sen. Charles E. Schumer, D-N.Y., a Banking Committee member, became angry
when Gramm leaned on New York executives to lobby him on the issue.
Schumer ended up voting for Gramm's position, but the Texan's moves showed
his willingness to push every lever at his disposal. "He tried to get
all the New York CEOs to call me to vote with him, and I said, `You have
nerve to ask them,' " Schumer said in an interview.


Gramm got plenty of arm-twisting help from Senate Majority Leader Trent
Lott, R-Miss., and when the Texan secured the Senate defeat of Shelby's op
sub amendment, on a 53-46 vote on May 6, he was ecstatic. Later that day,
the Senate passed the underlying banking reform legislation--which also
omitted the consumer privacy provisions that Shelby favored--on an almost
straight party-line vote.


Setting the Stage


After the House approved its banking reform bill on July 1, 343-86,
Gramm's task was figuring out which Senators to appoint to the conference
committee to maximize his leverage.


His problem was complicated: If he took only the most senior members of
the Banking Committee, as is customary, he might lose some key votes
because of Shelby's defection and Democrats' opposition. As a result,
Gramm took the unorthodox step of putting all 20 members of his committee
on the conference.


Gramm knew that he had a good shot at attracting several freshman
Democratic Senators to his side, including Schumer, who had defeated
D'Amato and had Wall Street constituents who very much wanted the
legislation enacted; Timothy P. Johnson of South Dakota, home base of some
major banking operations that favored the legislation; and John Edwards of
North Carolina, where Charlotte has emerged as the financial capital of
the South. Also, veteran Democratic Sen. Christopher J. Dodd of
Connecticut, the insurance center of the country, would probably support
the legislation.


But Gramm also recognized that his sometimes-strained relationship with
Sarbanes might deter Democrats from supporting him. "There are a lot
of Democrats on that committee that would like to work with me,"
Gramm said in an interview, "but they have had the problem in that
they didn't want to go around Sarbanes."


Gramm, meanwhile, was so determined to fashion legislation to his liking
that he would think nothing of calling lobbyists at home, day or night, to
go over the details of the measure.


"For a while, my wife thought [Gramm] was stalking me, because he
would be calling me at home, in the morning and at night," said
Robert A. Rusbuldt, executive vice president with the Independent
Insurance Agents of America, with a chuckle. "When he decides to make
something his issue, look out. Members get out of his way."


Similarly, when Securities and Exchange Commission Chairman Arthur Levitt
told Gramm a few weeks ago that he had reservations about supporting the
bill because of provisions dealing with the agency's role in protecting
investors, Gramm swung into action. He "asked where I was, and I
said, `In my office,' " recalled Levitt. "He said, `I'll be
right over.' That hasn't happened to me before." The two men, who
have known each other for years, wound up spending hours together--an
experience that Levitt called "rather remarkable."


The conference committee first formally convened on Aug. 3, and then
recessed for the August break. The meetings started up again in
mid-September, and by Sept. 30 Gramm had prevailed, with the help of House
GOP leaders, in getting Leach to accept his idea to expedite the process
by having Congress's "three amigos" first negotiate privately,
apart from the unwieldy 66-member conference.


The conventional wisdom was that under such a scenario, Leach, the
official chairman of the conference committee, might get rolled, because
Gramm and Bliley were allied against him on key issues. A few days before
consenting to Gramm's request, Leach had made clear his preference for
keeping the conference negotiations bipartisan and in the sunshine. Still,
Leach--who because of term-limits rules must give up the Banking Committee
chairmanship he has held since 1995 at the end of next year--greatly
wanted to finally have a deal on the legislation. He caved to Gramm during
their discussions, confident that the conferees would end up closer to his
position.


Bliley, meanwhile, was somewhat disengaged from the process. During the
past month, he has been heavily involved in moving patients' rights
legislation through the House, and Superfund reform and electricity
deregulation legislation through his committee. Besides, the banking
reform issue on which his committee had jurisdiction--the insurance
provisions--had been settled relatively early on.


It may have been a Machiavellian moment when Gramm argued that it would be
more productive to have the three committee chairmen go behind closed
doors and hash out a proposal. After all, it was largely Gramm's own
decision to put all of his committee's members in the conference--and his
successful argument to get four House Republican conferees added--that had
made the process unwieldy in the first place. More than one lobbyist
suggested that Gramm's endgame always was to have the three chairmen craft
the document from which the conference negotiations would proceed. He
won.


Pragmatism Trumps Ideology


In the seven days leading up to the Oct. 22 announcement of the conference
deal, the mood appeared more suited to a boxing match than to refining
abstruse principles of banking law.


To be sure, the period began on a high note: On Oct. 14, one of Gramm's
central concerns--the op sub issue--got taken off the table when Federal
Reserve Board Chairman Alan Greenspan and Treasury Secretary Lawrence H.
Summers agreed, through a complicated compromise, to share oversight
authority.


Gramm said in an interview that he talked to Greenspan "three or four
times a day, every day this was going on. We worked closely." Gramm
also noted that the three committee chairmen had agreed to put the Federal
Reserve Board's position in the document that they negotiated. "That
put pressure on the Treasury to compromise," he said.


Then, after earlier turning back efforts to include consumer privacy
provisions in the Senate measure, and after arguing that the issue would
be best handled in separate legislation, Gramm compromised to allow some
consumer protections in the final banking legislation. "I always
intended to take the privacy stuff--that was a negotiating strategy on my
part," Gramm said in an interview. "I was trying to open another
front in the negotiations, so that we wouldn't just be talking about CRA.
Privacy was it. It also gave me something to give away."


The Texan also gave in on a provision, passed over his objections in the
Senate, that forbids new and existing thrifts to affiliate with commercial
firms. The prohibition goes against his free-market predilections, but
again, he said, there was no way for him to prevent it. "The votes
were never there for it," Gramm explained. "It lost 2-to-1 on
the floor of the Senate. I knew from the beginning that that was going to
be in the bill. There wasn't any surprise there."


After those issues were settled, the fate of the banking bill hinged on
whether Gramm and the Administration could cut a deal on the CRA. For the
Administration and for the congressional Democrats who were trying to
broker the deal, the bottom line was the same: The scope of the 1977 law
could not be rolled back. The Rev. Jesse Jackson even made a personal
appearance at one conference committee session to state his case for the
CRA.


On Oct. 20, Gramm and Clinton Administration officials, led by Summers and
National Economic Council chief Gene Sperling, spent seven hours debating,
without resolution, the nuances of proposed changes to the CRA. In the
early afternoon of Oct. 21, when Gramm held a press briefing at which he
pledged to move a banking measure forward in conference, despite the
threat of a veto, it looked as if banking reform would, once again, fail
to become law.


"I hope the President will sign a bill. I believe he should sign the
bill, and I believe he will sign the bill. If he doesn't sign the bill, we
will have a new President in 15 months and I know who that President
is," Gramm said at the press conference, referring to Texas GOP Gov.
George W. Bush. "It will be a very different bill."


In the interview on Oct. 25, Gramm elaborated on his strategy at that
critical moment. "Quite frankly, I concluded Wednesday [Oct. 20],
that the Administration had taken a hostage--by threatening to veto the
bill--that they weren't willing to shoot," he said. "One of the
early lessons that people learned when they joined the old Texas Rangers
was, Don't take a hostage you're not willing to shoot."


It was classic Gramm--blustery and tough--and always mindful of how to
position himself to exert the most pressure. No one could dismiss his
threat to walk away from the legislation, even though if he did, it would
mean passing up the chance to score a huge achievement early in his tenure
as Banking chairman.


Around 7 p.m. on Oct. 21, Gramm put his CRA proposal before Senate
conferees, and it lost. But Dodd, Schumer, and Edwards led the battle to
keep negotiations going late into the night. At various points, as either
Gramm or Rep. John J. LaFalce of New York, the senior Democrat on the
Banking Committee, got steamed, each was persuaded to stick around. More
than once, Gramm also threatened to pull the plug on the talks.


"We just kept saying: `Let's keep working. Sit down. Don't stomp out
of the room,' " Edwards recalled in an interview, although he
conceded that there were "blow-ups."


Gramm actually agreed with the strategy. "One of the critical
decisions to produce the bill was to go ahead that night, and despite four
or five different pleas by different individuals, we never relented on the
basic principle that the bill was going to be done that night or it wasn't
going to get done, because when people get tired, they start saying
yes."


Still, Edwards and the other Democrats had decided not to budge on the
CRA. "We went into this negotiation with a bedrock principle, which
was that no bank with an unsatisfactory CRA rating would be allowed to
expand services under this bill," Edwards said. "That was the
floor below which we could never go. For four hours in that room, we
didn't have an agreement on that--Gramm was a very long way from
that."


Edwards had spoken with Clinton around 5 p.m. to discuss the bottom-line
CRA principle. "I said if we were able to work this out, is that the
kind of thing--knowing that you would have to look at the details--is that
the kind of thing that you could support? And he indicated he could,"
Edwards said.


Eventually, a deal was struck. Gramm was jubilant that it contained
stronger CRA disclosure requirements for community groups than had been
passed in the Senate. The Texan also was pleased that the measure had
civil and criminal penalties.


Schumer, when asked whether he was surprised that the lengthy negotiations
finally produced a deal, replied: "Am I surprised? You bet. I have
been through this for about 16 years. And it's almost like a curse--it has
a way of unraveling." Schumer had been a member of the House Banking
Committee for over a decade before being elected to the Senate.


"I like Phil," Schumer added. "You can work brain-to-brain
with him. He is a very fierce arguer. But he ultimately let his
responsibilities as chairman override his individual ideological concerns
about CRA."


At the end, Leach returned to the conference committee room at 1:40 a.m.
on Oct. 22 to formalize what the key negotiators had agreed upon behind
closed doors. As a handful of critics among the conferees grumbled, he
said he would take only parliamentary inquiries. Finally, Leach gaveled
the session over. The deal was done. The language of the
Gramm-Leach-Bliley bill would be refined for the conferees' signatures
before advancing to the House and Senate floors for final passage.


The Texan, finally, could enjoy the moment.


Kirk Victor

National Journal