Friendly Fire At The Fed

Soon after President Clinton took office, the White House began a torrid--and highly public--courtship of Federal Reserve Board Chairman Alan Greenspan. Clinton aides wooed the Fed chief in hopes he would bless their plan to cut the federal budget deficit. Greenspan, perhaps lobbying for reappointment in 1996, responded, calling the plan "credible," and even served as an Administration prop when he sat next to First Lady Hillary Rodham Clinton at the State of the Union Address in February. Since then, White House and Fed economic policies have been in synch, creating an unusually long honeymoon.

Now it looks as if the relationship has hit its first rough patch. Strangely enough, the trouble isn't over interest rates, the usual source of friction between the White House and the Fed. In fact, despite a building economic expansion, Greenspan has kept interest rates low. Instead, the central bank finds itself on the defensive over its role as a key banking regulator.

Some of the wiliest politicos in the Administration have decided to go after the Fed. Attorney General Janet Reno, the star of the Clinton Cabinet, has taken the Fed to task for failing to aid her high-priority campaign to ferret out lending discrimination. And Treasury Secretary Lloyd M. Bentsen on Nov. 23 proposed streamlining banking regulation, which would strip the Fed of much of its oversight of banks. Bentsen's plan, which requires congressional approval, could in turn provide House Banking Committee Chairman Henry B. Gonzalez (D-Tex.), a Texas populist and a longtime Fed critic, with a platform for Fed reforms aimed at lifting the veil from the central bank's secretive deliberations.

These attacks on what has been an invincible institution will sorely test Greenspan's political savvy. Under Paul A. Volcker, the Fed seemed invulnerable. But Greenspan, a number-cruncher by trade, may lack Volcker's political prowess and passion for preserving the Fed's regulatory role. "It appears the Clinton Administration has gotten a read on Greenspan and realized he's an easy guy to push around," says Bert Ely, an Alexandria (Va.) banking consultant. "People are testing the Fed and finding it doesn't stand up very well."

Reno, for instance, was diplomatic enough in her appearance at a Nov. 4 Senate Banking Committee hearing. She conceded that the Justice Dept. may be partly at fault for the government's poor enforcement of laws to prevent lending bias. But she made it clear that the Fed, the Federal Deposit Insurance Corp., and the Office of Thrift Supervision had not helped Justice's probe of bank-lending discrimination. And she singled out the most important of the three uncooperative regulators, declaring that the fight against bias cannot be won "without the full participation and assistance of the Federal Reserve Board."

TURF MOVE. Consider a merger the Fed approved in March between bank holding companies based in Memphis and Little Rock. Only four months earlier, the Comptroller of the Currency, whose efforts Reno praised, had spurned a similar merger between the companies' bank subsidiaries because of the Little Rock bank's poor record on low-income loans, according to Miami bank consultant Kenneth H. Thomas.

At the Nov. 4 hearing, Fed Governor Lawrence B. Lindsey defended the central bank's record, saying the Fed is "working carefully" with Justice. But outsiders believe only intense Administration pressure is forcing the Fed to focus on the issue. On Nov. 15, for instance, the Fed denied Shawmut National Corp.'s request to buy a smaller New Hampshire bank and based its decision on Shawmut's spotty record for lending to the poor--a move activists, bankers, and even senior Treasury officials saw as a political sop. "It was a throwaway decision, an attempt by Greenspan and the other governors to deflect criticism," says Deepak Bhargava, legislative director for the community group ACORN.

For Greenspan, the fight over bank regulatory authority may be far more important. By creating a new Federal Banking Commission, Bentsen hopes to eliminate duplicate examinations and cut the costs to banks of regulation. The Fed has long said, though, that it needs to regulate banks to gather essential information needed to maintain control over the nation's monetary policy and financial payment system. The legislation accommodates those concerns. And Administration officials suggest that the Fed is using monetary arguments to disguise its real motive: preserving its turf.

Other regulators likely will present a united front in support of the Treasury plan. That's partly because in behind-the-scenes regulatory powwows, some agencies are chafing at the Fed's domineering approach. They gripe that Fed officials run roughshod over their colleagues in coordinating banking policy.

"HOSTILE MOVE." Many banks, however, are likely to line up on Greenspan's side. Privately many concede they like having several agencies to play off against one another. Chicago-based Continental Bank Corp., for instance, which currently is federally chartered and reports to the Comptroller, recently moved to become a state-chartered bank regulated by the Fed. The bank says the switch would save $1 million a year in examination fees. But one regulatory source believes the bank wants out partly because the Comptroller last year nixed a move to shift capital to a new financial derivatives unit.

Regulatory streamlining may not be the only feature Greenspan will resist. Banking experts expect Gonzalez to tack on to the bill requirements that the Fed release detailed information about its monetary-policy deliberations and disclose it sooner. Currently, the central bank releases cryptic summaries of these meetings only after another session has taken place--a delay of more than a month. Greenspan is bending slightly on this issue, too. He recently agreed to release edited transcripts of Fed meetings held more than five years ago. Gonzalez termed that "wholly inadequate."

The Administration contends that it has strong bipartisan backing for its proposal in both the House and Senate. But Greenspan may feel compelled to fight such an affront to the Fed's authority. Some Administration officials worry that the White House assault on the Fed will poison their relationship. The Treasury proposal "is a very hostile move," frets one Clinton official. "This will be a big fight neither side needs."

The reason? If the recovery keeps on picking up steam, the Fed may be more inclined to raise short-term interest rates, which it hasn't changed in more than a year. Administration officials would prefer that Greenspan not feel spurned. But the honeymoon between the White House and the Fed couldn't have lasted forever.

      The White House has courted Fed Chief Alan Greenspan, but other Democrats are 
      taking him on: 
      LLOYD BENTSEN    The Treasury Secretary has proposed legislation that would 
      consolidate most banking regulation into an independent "superagency" called 
      the Federal Banking Commission, which would restrict the Fed's power to 
      regulate banks.
      HENRY B. GONZALEZ The House Banking Committee chairman argues that the Fed 
      should be more accountable. He blasts the Fed for its secrecy and its mostly 
      white and male makeup. Treasury's legislation would give Gonzalez a vehicle for 
      some of his reforms.
      JANET RENO        The Attorney General has launched a probe of the banking 
      industry for abuses of fair-lending laws. She also has complained to Congress 
      that the Fed hasn't cooperated fully with her campaign to penalize banks with 
      poor minority lending records. 
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