The Front

Deregulating Finance

After a decade and a half of trying, the financial industry ushered through the U.S. Congress and secured President Clinton's signature on a far-reaching financial deregulation bill in November.

The Financial Services Modernization Act's centerpiece is the repeal of the revered Glass-Steagall Act, which bars the common ownership of banks on the one hand, and insurance companies and securities firms on the other.

The legislation has repeatedly failed to make it through Congress in years past because of a maze of intra-industry disputes, turf fights between different parts of the federal regulatory structure, and the concerted efforts of consumer and community development advocates.

Another failure seemed possible or likely this fall, especially as Senate Banking Chair Phil Gramm, R-Texas, refused to compromise on privacy and community development issues.

Another failure, however, was not acceptable to one company above all -- Citigroup. The product of the merger between Citibank and Travelers, Citigroup is operating in apparent violation of the bar on common ownership of banking, and insurance and securities, thanks to a loophole that provides for a two-year transition period.

Enter Robert Rubin. According to a report in the New York Times, Rubin helped broker the final compromise language on financial deregulation.

And while he was brokering a deal between Congress and the White House, he was also, according to the New York Times account, negotiating his own deal with Citigroup. A few days after the banking deal was finalized, Citigroup announced it was hiring Rubin as a de facto co-chair of the corporation.

The bill for which Rubin served as midwife will remake the finance industry. While the industry touts the benefits of one-stop financial service shopping -- Senator Phil Gramm, R-Texas, the chair of the Senate Banking Committee, reprised the standard refrain in saying, "The hallmark of the bill is that it will make an array of financial services available to every American consumer that will provide lower prices and one-stop shopping at financial supermarkets in every city and town in the country" -- consumer and community development groups strongly opposed the bill.

The bill will:

• Pave the way for a new round of record-shattering financial industry mergers, as banks, insurance companies and securities firms line up to take their marriage vows.
• Leave financial regulatory authority spread among a half dozen federal and 50 state agencies, all uncoordinated.
• Pose the risk of too-big-to-fail institutions that may someday drain the public treasury as taxpayers bail out imperiled financial giants in order to protect the stability of the nation's banking system.

  "The powers of the new entities forming the conglomerates place massive stress on the regulatory system, and create a universe of too-big-to-be-allowed-to-fail corporations which will be candidates for future taxpayer bailouts," warns consumer advocate Ralph Nader.

• Permit mutual insurance funds to switch domicile states -- thereby enabling them to locate in states where they can convert to for-profit, stockholder companies without fully reimbursing mutual policyholders (a conversion of tens of billions of dollars).

These structural issues were not highlighted in the debate over the bill, however. Consumer and community groups did succeed in making privacy and community reinvestment high-profile issues that slowed the bill's passage -- though they ultimately lost their major battles to protect consumer privacy rights and to defend existing law obligating banks to lend in low- and middle-income communities.

The deregulation bill will permit the new financial giants to share finance, health, consumer and other personal information among affiliates.

"We asked for privacy protections, because we know that while there are tremendous new opportunities for innovation, there is also a dark side to cyber-finance," says Representative Ed Markey, D-Massachusetts.

"And some institutions are clearly tempted by the dark side and are moving from being 'privacy keepers' to being 'information reapers.' And if a family doesn't want all the brokers and insurance agents to be able to rifle through their checks and their credit card exchanges, or have their bankers pour through their brokerage records or insurance medical examinations, they should be able to say no." Under the final bill, consumers cannot stop such information-sharing within a financial conglomerate.

An effort by Markey and Senator Richard Shelby, R-Alabama, to provide consumers with the option of blocking personal information-trading was defeated.

The deregulation bill will also significantly weaken the Community Reinvestment Act (CRA), a law that requires banks to make loans in minority and lower-income communities in which they do business. Under the bill, there will be no ongoing sanctions against holding company banks that fail to meet CRA standards, the number of CRA examinations will be reduced, and provisions of the bill will discourage community groups from challenging banks' CRA records.

"The diluted CRA exam time frame means less accountability and fewer loans for Native Americans, small farmers and other low- and moderate-income people in rural America," says Hubert Van Tol, a board member of the National Community Reinvestment Coalition, an association of 700 community groups.

In negotiating a final deal, Members of Congress "caved to virtually every demand put forth by the banking, securities and insurance corporations and gave the back of the hand to efforts to preserve the Community Reinvestment Act in this new go-go world of trillion dollar financial conglomerates," says Nader.

— Robert Weissman

Calling for Cell Phone Safe

David Reynard appeared on the Larry King Live show in 1993 to discuss a lawsuit he had filed against NEC, a cell phone operator, and other companies, alleging that his late wife's brain tumor was caused in part by her use of a cell phone.

Reynard's lawsuit was dismissed in 1995, but Reynard's appearance on the show created nationwide concern. At the time, there were 15 million Americans using cell phones.

The day after the Larry King Live show, the Cellular Telecommunications Industry Association (CTIA) went on the offensive. Industry executives said that there were thousands of studies that proved that wireless phones were safe. In fact, whether such studies existed is disputed.

But CTIA understood the basic reality of the situation, and so it decided to spend $27 million over the next six years on health studies.

The association hired George Carlo, a public health scientist, who had a good track record as an industry researcher.

In 1994, Carlo began conducting studies to determine whether cell phones pose a health risk to consumers. Four times a year, Carlo would trudge over from his Dupont Circle office in Washington, D.C. to the offices of CTIA to debrief the CEOs of the major telephone and electronics firms that make up the $40 billion a year mobile phone industry.

In 1995, Carlo found that digital phones were interfering with cardiac pacemakers.

"We then conducted about $2.5 million worth of research to quantify that problem, and as a result, I had somewhat of a falling out with the industry," Carlo says.

"They didn't like that finding." The industry cut off Carlo's funding.

But through a process of negotiation, Carlo got back in. The industry would again fund his studies, but only if he agreed not to research the questions of defibrillators and digital phones, and of cell phones and automobile safety, and he could no longer work on a very extensive program to standardize the methodology for testing whether or not cell phones met industry-defined standards.

He subsequently found that the risk of acoustic neuroma, a benign tumor of the auditory nerve that is well in range of the radiation coming from a phone's antennae, was 50 percent higher in people who reported using cell phones for six years or more. Moreover, that relationship between the amount of cell phone use and this tumor appeared to follow a dose-response curve.

He found that the risk of rare neuro epithelial tumors on the outside of the brain was more than doubled, a statistically significant increase, in cell phone users as compared to people who did not use cell phones.

He found that there appeared to be some correlation between brain tumors occurring on the right side of the head and use of the phone on the right side of the head.

And he found that laboratory studies looking at the ability of radiation from a phone's antenna to cause functional genetic damage were definitely positive, and were following a dose-response curve.

Carlo says that he has repeatedly recommended that the industry take a pro-active, public health approach on the issue, and inform consumers of his findings. He says that he uses a cell phone, but only with a headset.

"Alarmingly, indications are that some segments of the industry have ignored the scientific findings suggesting potential health effects, have repeatedly and falsely claimed that wireless phones are safe for all consumers, including children, and have created an illusion of responsible follow up by calling for and supporting more research," Carlo wrote in a letter to top industry CEOs in October. "The most important measures of consumer protection are missing: complete and honest factual information to allow informed judgment by consumers about assumption of risk, the direct tracking and monitoring of what happens to consumers who use wireless phones, and the monitoring of changes in the technology that could impact health."

In a letter responding to Carlo, CTIA President Thomas Wheeler wrote, "You failed to mention that you stated to the CTIA Board that while [your study] results were noteworthy, they did not pose a public health threat."

"We are certain that you have never provided CTIA with the studies" definitively showing harmful health effects, Wheeler wrote. "We don't believe that you withheld them on purpose, just that the research reports are not yet completed."

"From the outset of the Wireless Technology Research program [Carlo's work] the modus operandi was to review the findings with the U.S. Food and Drug Administration and be guided accordingly," Wheeler added.

But Carlo is troubled by a recent agreement between Elizabeth Jacobson, the person in charge of cell phone regulation at the Food and Drug Administration, and Wheeler. Under the agreement, CTIA will fund the FDA to do additional safety studies.

Carlo says that in 1994, Jacobson refused such a cooperative research agreement, because she didn't think she could both collaborate with the industry and regulate it. (Jacobson, through a spokesperson, denies taking this position.)

"This arrangement is wrong, plain and simple," Carlo says. "The FDA's behavior is appalling to me. The FDA seems to be more than willing to jump in bed with the industry. It is a blatantly arrogant attempt to join in a relationship that is a conflict of interest on its face. The reason it has not been criticized is that people don't know about it. Consumers are being left out to dry."

The FDA's Russell Owen says that the FDA has not regulated cell phones because "we don't have sufficient evidence to determine that there might be adverse health effects from cell phones."

— Russell Mokhiber

The Lawrence Summers Memorial Award

The September 1999 Lawrence Summers Memorial Award* goes to the World Trade Organization (WTO), for its “10 Benefits of the WTO Trading System” paper.

Here is how the “10 Benefits” paper begins:

“From the money in our pockets and the goods and services that we use, to a more peaceful world — the WTO and the trading system offer a range of benefits, some well-known, others not so obvious.”

“The world is complex. This text highlights some of the benefits of the WTO’s "multilateral" trading system, but it doesn’t claim that everything is perfect — otherwise there would be no need for further negotiations and for the rules to be revised. ...”

“There are many over-riding reasons why we’re better off with the system than we would be without it. Here are 10 of them.”

The ten benefits:

1. The system helps promote peace
2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government

Award-winning excerpts:

On peace:

“The system helps to keep the peace. ... This sounds like an exaggerated claim, and it would be wrong to make too much of it. Nevertheless, the system does contribute to international peace. ...”

“Crudely put, sales people are usually reluctant to fight their customers — usually. In other words, if trade flows smoothly and both sides enjoy a healthy commercial relationship, political conflict is less likely.”

“What’s more, smoothly-flowing trade also helps people all over the world become better off. People who are more prosperous and contented are also less likely to fight. ...”

“Even when a country has difficulty making adjustments, the alternative of protectionism would simply make matters worse.”

“The system shields governments from narrow interests.”

“The GATT-WTO system which evolved in the second half of the 20th Century helps governments take a more balanced view of trade policy. Governments are better-placed to defend themselves against lobbying from narrow interest groups by focusing on trade-offs that are made in the interests of everyone in the economy.”

“Under WTO rules, once a commitment has been made to liberalize a sector of trade, it is difficult to reverse. The rules also discourage a range of unwise policies. For businesses, that means greater certainty and clarity about trading conditions. For governments it can often mean good discipline. ...”

Quite often, governments use the WTO as a welcome external constraint on their policies: "we can’t do this because it would violate the WTO agreements."

* In a 1991 internal memorandum, then-World Bank economist and current Deputy Secretary of Treasury Lawrence Summers argued for the transfer of waste and dirty industries from industrialized to developing countries. "Just between you and me, shouldn't the World Bank be encouraging more migration of the dirty industries to the LDCs (lesser developed countries)?" Summers wrote. "I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that. ... I've always thought that underpopulated countries in Africa are vastly under polluted; their air quality is vastly inefficiently low [sic] compared to Los Angeles or Mexico City." Summers later said the memo was meant to be ironic.