This has naturally led to investor misapprehension, so much so that the Washington Post was misled into reporting that the Central National Bank of Silver Spring was operating a "money market fund."* Furthermore, institutions which offer retail repos have ignored the regulators' demands that the absence of federal insurance be clearly shown in bold type. Thus, although there has been some monitoring by the federal banking agencies, the repeated use of prohibited practices in advertisements is startling evidence of their ineffectiveness. And the purported goal of the regulators --to enable the public to distinguish between the characteristics of an insured certificate of deposit and an uninsured retail repo has not been successful. Bank promotional literature blithely states that the agreements are secured by the "U.S. Government" or "U.S. Government agency securities." Finally, while the bank regulators require the issuing institution to describe its retail repo agreement as one to repurchase for a "fixed amount,"* the offering materials and advertisements have often promised a return expressed in terms of interest rates, based on either daily or weekly computations.

While banks may be selling retail repos to shore up their financial condition, the fact is that retail repo activity

*

Washington Post, May 29, 1981, p. D.3. This article is attached hereto as Exhibit B.

has apparently exacerbated the financial problems of issuing banks. The banks' assumption of such liabilities has caused concern that the capital/risk asset ratio of banks is reaching dangerous levels. This has already necessitated closer monitoring by the banking agencies. Some banks that have started marketing retail repos have experienced an increase in their liabilities to an extent which calls into question the adequacy of their capital structure. As a consequence, regulatory responses, ranging from admonitory letters and special examinations to threatened court hearings, have been required.

Similar to the banks' experience with repos, we believe that the features of S. 1720 which would permit banks to enter other aspects of the securities business would not have a stabilizing effect on the banking industry, but would result in the further deterioration of the financial condition of many

institutions.

Significantly, the full disclosure requirements of the federal securities laws do not apply to retail repos because they are, technically, securities issued by a bank. The failure of the banks and the savings and loan associations to abide by even those minimal requirements established by the bank regulators, however, as well as the inability or unwillingness of the regulators to enforce their own rules, demonstrates the extent of the banks' willingness to induce

investors to place their money into speculative instruments in the absence of adequate disclosure regarding the nature of the investments.

Indeed, banks have affirmatively misrepresented

the nature of such investments and the risks associated with

the purchase of a retail repo.

The misinformation with which banks promote the instruments they offer, however, has not been limited to retail repos. Aided by costly tax concessions granted by the Congress, and a full-scale media campaign, depository institutions recently sold more than $15 billion worth of all-savers certificates during just one week. As a recent Wall Street Journal article pointed out, however, "[w]hile the media blitz helped boost sales. . . many of the ads are filled with a jumble of tax information and misinformation."* For example, many of these certificates have been promoted on the basis of the higher 1981 tax rates, even though no certificate can mature until 1982. Many advertisements are also contradictory: while one bank has proclaimed that a couple earning $20,000 is in the 32% marginal tax bracket and would have to earn 17.85% on a taxable investment to equal the all-savers yield, another institution claims the same couple would be in the 25% bracket and would have to earn 16.18%.**

As the banks' recent experience with retail repos and allsavers certificates shows, when banks acquire a salesman's interest in the promotion of securities, the problems addressed

**

Wall Street Journal, October 12, 1981, at 52.

Id.

by the Glass-Steagall Act are resurrected and brought into play. In particular, the banks' rush to retail repos shows the need to maintain the traditional prohibitions against these securities-related activities, or to subject fully those activities to the strict body of SEC regulation designed to protect the interests of investors.

The New York City Fiscal Crisis

One of the principal provisions in the bill under consideration would permit banks to expand their municipal

It may be particularly appro

bond underwriting activities. priate, therefore, for the Committee to consider the extent to which the public interest can suffer when the various financial interests represented by a bank come into conflict as a result of a bank's securities activities.

The conduct of the major New York banks in connection with the New York City (the "City") financial crisis of 1975, a financial disaster the effects of which are still being felt, provides such an example. While the underwriters of City debt securities included securities firms and banks,* the banks which were primarily involved were ultimately found by the SEC to have divested themselves of City securities (held in their own accounts and in their fiduciary accounts), at the expense

Banks are permitted under the Glass-Steagall Act to underwrite and deal in general obligation government securities offerings.

of individual investors of modest means.

These banks were some

of the nation's largest, including Chase Manhattan Bank, First National City Bank, Morgan Guaranty Trust Company of New York, Manufacturers Hanover Trust Company, and Bankers Trust Com

pany.*

securities.

From October 1974 to April 1975, the City offered and sold through its underwriters about $4 billion of short-term debt In connection with the sale of these securities to the public, representations were made emphasizing the financial strength of the City and its capacity to meet both its principal and interest obligations on a timely basis.

Throughout this period, however, the underwriters had detailed knowledge of the City's financial crisis and its related problems: the growing gap between the City's revenues and expenditures; the use of short-term borrowing which had to be rolled over continuously to cover the gap; the widening of the gap during the 1974-1975 fiscal year; and the rapid growth of the City's short-term debt. The underwriters became increasingly aware during this period that the City would soon be unable to continue to finance its ever-increasing deficit, and that the representations being made to investors about the City's financial condition were false.

Securities & Exchange Commission, Staff Report, Transactions in Securities of the City of New York, Chapter 4; Report on the Role of the Underwriters 31.