Leach touts modernization, cautions against GSE growth at IIB meeting

Northwestern Financial Review, Aug 5, 2000 by Bengtson, Tom

Financial modernization gives community bankers a distinctive advantage in the financial services marketplace, but they should be wary of growing government sponsored enterprises, U.S. Rep. James Leach told bankers gathered July 21-22 at Okoboji s Village East Resort for the annual convention of the Iowa Independent Bankers. Speaking at the annual congressional breakfast, Leach, the chairman of the House Banking Committee, and Iowa's 5th District U.S. Rep. Tom Latham, updated bankers on industry issues.

Through the Gramm-Leach-Bliley Act of 1999, Leach said Congress "developed a system in which everyone can compete. Community banks will have the advantage" over larger banks. Leach said that the strongest assets of the banking industry are technology and customer service, the former being a hallmark of larger institutions and the latter being a mainstay of community banks. "I think community banks can get on top of technology a lot easier than large banks can get on top of customer service," Leach said.

The Iowa congressman acknowledged a growing "liquidity dilemma" in banking. Part of the industry's response to the situation will be the emergence of a secondary market for small business loans. Leach predicted that a secondary market for such loans will grow over the next 10 years into a market the size of that currently serving the housing industry.

But Leach warned against unfettered reliance on government sponsored enterprises. "GSEs have advantages in the marketplace that can stifle competition," said Leach, referring to the agencies' implicit government guarantee that enables them to raise Wall Street money more economically than private firms. Leach complained that many GSEs use this advantage to raise money ultimately used for purposes outside their original charter. "Their money often is in arbitrage, having nothing to do with their mission," said Leach. "This is an utter financial sin."

Although he spoke favorably of Federal Home Loan Bank advances that will make it possible for community banks to compete with the Farm Credit System, Leach criticized the fact that the FHLBanks have billions of dollars in arbitrage. Farmer Mac also has billions of dollars tied up in arbitrage activities, Leach said. Fannie Mae and Freddie Mac have done a good job supporting the housing market in the United States, said Leach, but he asked: "How many of you could do a good job with the kind of advantage they have?" Leach said these agencies get a federal subsidy of $5 billion to $6 billion per year. That's the amount of the advantage they gain with their implicit government guarantee, Leach said.

"Of all the areas banks have to worry about, the biggest would be encroachment of GSEs."

A Look At Ag Issues

Latham, a member of the House Agriculture Committee, said the ag environment is improving in the United States after three years in trouble. "The number of farms is growing," he noted. Also, cattle markets have rebounded.

Farmers have suffered in recent years because production worldwide has been at record highs, largely due to good weather. Problems with the Asian economy also hurt the U.S. farmer.

Reiterating a theme he emphasized at last year's IIB convention, Latham said the United States' ag export policy is terrible. He noted the Clinton administration has more than $500 million available for promoting ag exports, but it hasn't been used. In addition, Latham noted that during Clinton's presidency, 61 countries have been added to the United State's embargo list. "Forty percent of the world's population is under some kind of trade sanction with the United States," said Latham, noting that these sanctions severely reduce export opportunities for U.S. ag producers. "Embargoes only punish the American farmer," said Latham, "not the countries we are trying to punish."

He said bankers can look for an infusion of cash into the farm economy over the next few months. Crop insurance payments will be made in September and regular payments in October.

Latham, who supported the Freedom to Farm Act, said the legislation never lived up to its potential because key components of the overall farm revitalization plan were never implemented. He said Freedom to Farm was supposed to include four components:

Provide farmers with flexibility in determining the crops they plant Provide farmers with tax relief Provide farmers with regulatory relief

Establish an aggressive export policy.

"Ultimately, only one leg of the plan - crop flexibility - was implemented," Latham said. "If we had implemented all four legs of the Freedom to Farm Act, we would have a much different ag picture today." Latham commented that the regulatory burden on farmers has grown since Freedom to Farm was passed in 1996. In order to revitalize the ag sector, he said the United States needs to lighten the regulatory load on farmers, approve "fast track" authority for the president and establish normal trade relations with China. He said limiting production in the United States will do nothing for prices since the world market is producing so much. He said, "South America has millions of acres waiting to come into production."