July 11, 2002
The Honorable Alan Greenspan The Honorable John D. Hawke, Jr. Dear Chairman Greenspan and Mr. Hawke: I write to you on a matter of serious concern with implications for the protection of consumers and the stability of the financial markets: the widespread use of so called "pay to play" practices by universal banks. In the wake of the passage of the Gramm-Leach-Bliley Act, it is difficult to read the financial press without running across troubling references to this subject. See, e.g., enclosed articles "Showdown on Wall Street: Banks Are Getting Business At the Expense of Elite Firms," New York Times, Friday, June 15, 2001, C1; "Banks’ Lending Clout Stings Securities Firms," Wall Street Journal, Friday, June 15, 2001, C1; "Banks’ Risky Reversal: As Industry Focuses on More Profitable Securities Business, ‘Tying’ Loans to Other Transactions Becomes a Hot Topic," The Washington Post, Sunday, November 18, 2001, H1; and "Finance Chiefs Say Lenders Are Tying Business to Credit," Wall Street Journal, Monday, March 4, 2002, C16. I have attached as Appendix B a selection of quotes from a variety of publications which describe how commercial banks are winning securities underwriting and financial advisory business by offering underpriced credit facilities as a loss leader to their corporate clients. It is clear from these articles that the practice of tying is increasingly widespread, and indeed that it has become a central feature of the strategy of a number of large "universal" banks. As you know, Section 106 of the Bank Holding Company Act Amendments of 1970 provides that a bank shall not extend credit, or vary the consideration for credit extension, to a borrower on the condition that the borrower obtain some other service from the bank or an affiliate of the bank (subject to certain exemptions for traditional commercial banking services). Also, Section 23B of the Federal Reserve Act prohibits an insured bank from extending credit to a company if a bank would not extend the credit but for investment banking services provided to that company by an affiliate. During routine examinations, both Federal Reserve and OCC examiners are expected to evaluate a banking organization’s compliance with the tying provisions. During the Congressional debate on Glass-Steagall repeal, I raised serious concerns about creating fertile ground for tying abuses and the potential adverse impact on consumers and the financial system as a whole. I was told repeatedly that my concerns were unfounded because sections 106 and 23B would restrain illegal tying and that these laws would be vigorously enforced by the federal banking regulators. I see little evidence that these assurances have any merit. While I appreciate that you may not have received direct complaints from corporate borrowers, I am sure you are aware of the increasing concentration amongst corporate lending institutions, as well as the highly publicized examples of certain banks dropping from credit facilities when they were not granted sufficient investment banking business in exchange. Corporations, even large corporations, are understandably reluctant to publicly register a complaint for fear that they would lose access to credit. However, a survey of 3,562 corporate treasurers, financial officers and vice presidents by the Association of Financial Professionals found that almost half believed that, if they didn’t award their banks with lucrative, fee-based business, they would be offered no short-term credit. I am concerned about the implications of these practices on the health of the financial markets and on the availability of credit to U.S. corporations, and I request your responses by the close of business on Wednesday, July 31, 2002, to a number of questions that I am enclosing as Appendix A to this letter. Thank you for your cooperation with this inquiry and your consideration of my views and concerns. Sincerely,
Enclosures (pdf file) cc: The Honorable W.J. (Billy) Tauzin, Chairman The Honorable Michael G. Oxley, Chairman The Honorable John J. LaFalce, Ranking
Member The Honorable David M. Walker, Comptroller
General
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