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CONTENTS THURSDAY , JULY 7, 1988 Page Opening remarks ofSenator Proxmire .... Opening statement ofSenator Kennedy Complete prepared statement ofSenator Kennedy Opening statement ofSenator Kerry. ementofSenatorGarn Openingstat Complete prepared statement ofSenator Garn....... OpeningremarksofSenator Shelby r 1 e r2 N e O r o c W3 A 4 4 Complete prepared statement ofSenator Shelby . t ofSena torDixon.... ngstatemen Openi t ofSenatorChafee ngstatemen Openi g state mentofSenatorKarnes Openin 14 WITNESS JohnP. LaWare, nominatedto be a member of the Boardof Governors , FederalReserveSystem...... Viewson theris plan. k-basedcapital Difficult levels tolegis late ofrese rves Third World debt and thepolicy oftheFed It's notthesize ofthe bank,butitscompeten ce. tment ....... nityReinves Act....... Commu The Cokeformula .... Laborunionsin banks.. Continental stockholders tooka bath... Should offshore deposits beinsured ? Bankslending toforeign countries arealerted topitfalls weregiven No insuran cebut,notes Payingintere ston reserves The Baker Plan.... Merger mania. Suit against Shawmutregarding ATM's 9 9 11 16 17 18 19 20 22 23 25 27 28 30 32 33 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Biographical sketch ofthenominee.. 34 Letter from the FederalReserveGeneralCounseltothe Office ofGovernment nominee concerning Ethics questions Response of: towritten 52 68 73 Senat or D' Amato . Senato r Karnes.. (III) NOMINATION OF JOHN MEMBER , BOARD RESERVE P. LaWARE , TO BE A OF GOVERNORS , FEDERAL SYSTEM THURSDAY , JULY 7, 1988 U.S.SENATE, COMMITTEEON BANKING,HOUSING,AND URBAN AFFAIRS, ngton, DC. Washi tee met at 10:40a.m., in room SD-538, Dirksen The commit teOff Sena iceBuildi ng,Senato r William Proxmire(chairmanofthe g. committee)presidin Present : SenatorsProxmire , Dixon , Shelby , Graham, Garn, D'Amato ,Chafee ,and Karnes . OPENING REMARKS OF CHAIRMAN PROXMIRE The CHAIRMAN .The committeewillcome toorder . We aredelighted tohaveourtwodistinguished Senators from Massachusetts here tointroduce Mr. LaWare, who'sbeennominat ed as a Governorof the FederalReserveto serveuntiltheyear 2002. a longway away. Mr.LAWARE.Soundslike The CHAIRMAN . Well , I'll be outinthecemetery forabout5 of thoseyears .[Laughter .] Sena torCHAFEE.Running,notres ting .[Laugh ter.] The CHAIRMAN .It's good to seeyou. Senator SHELBY .Mr. Chairman ,ifyou wouldyield ,Iwouldhope youallbotharen't inthecemetery , because otherwise he wouldn't maketheterm .[Laughter .] The CHAIRMAN. Well, I'm sureMr. LaWare looksin fineshape andhe's a much younger man andthere's something about Massa chusetts thatmakes people live a longtime. I'mgoing toaskbefore wehavestatements fromthemembersof thecommittee ,because ofthepressure oftimeand because the > Senatorsfrom Massachusetts have alreadybeen overhere , I'm goingtoaskSenator Kennedyand Senator Kerrytomake what everstatement theywouldliketomake in connection withthe nominee . STATEMENT OF EDWARD M. KENNEDY ,U.S.SENATOR FROM THE STATE OF MASSACHUSETTS Senator KENNEDY . Thank you verymuch. Mr. Chairmanand membersofthecommittee ,I wanttosaythattoday Massachusetts claimsa special relationship withthe nomineebut we alsoknow (1) 2 that's sharedwithWisconsinbecauseMr. LaWare was born in Wis consin andspenthisearly yearsinthatState . I'mdelighted tohavetheopportunity topresent him tothecom mittee . Mr. LaWare has beena distinguished successful business man in the bankingindustry of Massachusetts involved in the ShawmutBankandbrought ittooneofthemostprestigious posi tions within thenational banking systemdealing withthenew challenges thatderegulation hasbrought . He'sbeenverysuccess ful. I thinkmany ofus in our Staterealize thatwithhissuccessful voteintheU.S.Senate we'regoingtolosea person who'sbeen enormously involved andactive withinthecommunityofBostonas wellastheCommonwealth . He hasdemonstrated areally unique involvement inboththegreatmedical institutions and educational institutions .Much morethanjust a letterhead inanypublication , he hasbeenvery ,verymuch involved and hasmade an extremely important contribution tomany ofthese institutions andthegain to the FederalReserve willbe the lossto those institutions . At a timewhenwe arefacing extraordinary challenges interms oftheinternational bankingsystem ,ThirdWorld debt , and other financial international challenges , I thinkthe FederalReserve Boardwill bewellserved byMr.LaWare . I havegreat confidence inhis judgment , although thatconfidence was really questioned when I found out thatMr. La Ware made a contribution of $500 to Ray Shameein Massachusetts , but my confidence was restored when I foundoutthatitwasn't when Mr. Shameewas running against me ,butmy colleague ,John Kerry .[Laughter .] sense ofse hisrecord hehashadan impeccable So throughout lection andgoodsuccess . Mr. Chairman , Iappreciate thechancetobe hereand present him and I'dlike tofile my complete statement . [Committee insert ofSenator Kennedy's statement follows :] PREPARED STATEMENT OF SENATOR KENNEDY Mr.Chairman ,members oftheBanking Committee ,Iam delighted tobeherethis morning withJohnLaWareandtounreservedly commendhim toyou.Innominat ingMr.LaWaretotheBoardofGovernors oftheFederal Reserve , thePresident hasmade a wisechoice .I should note ,Mr. Chairman , thatIhad intended toextol thevirtues ofthissonofMassachusetts , but,infact , he was bornand raised inCo lumbus ,WI.Iguess we will havetoshare himwithyou . JohncametoBoston over10years agoand during theensuing decade hasleft a large imprint onourcommunity . During histenure ,theShawmutCorp. hasgrown andprospered . Todayitisamongthelargest andsoundest bankholding companies intheNation andit played a major role infinancing theeconomic recovery ofMas sachusetts and theregion . Iam sure that his professional accomplishments arewell knowntothemembers ofthiscommittee and require no celebration fromme ,but I wouldlike totakea ismore than a wise and successful banker minuteofyourtimetonotethat who willmake a fineGovernorofthe FederalReserveBoard. Inaddition toleading Shawmutinto a newworld ofderegulated regional banking , he hasalsoledtheinstitution intoactive involvement withthecivil life ofBoston . Thatinvolvement hasgonewellbeyondtheusualname on a letterhead and from Children's Hospital toRoxbury Community College ,ourcity's life ismuch richer because ofJohnLaWare .Imustsaythat my oneregret concerning this nomination isthatsomany ofthemostimportant educational institutions andhospitals that gracemy home State will lose hiswisecounsel and energetic support . TheFederal Reserve Boardfaces daunting challenges aswe enter thelast decade ofthecentury . Deregulated and internationalized financial markets , seemingly in 3 tractable debtburdens intheThird World , andan evenworsening crisis inour thrift industry heada long list .As theBoardconfronts these andother questions in theyears ahead ,Iam surethat hiscolleagues will learn ,asIhave ,toturntoJohn forwisecounseland advice . Once againMr.Chairman I congratulate thePresident on thisnomination and commend JohnLaWaretoyou. Imustexcuse myself inorder tochair another hearing butifIcanbeofanyhelp asyouproceed Iam atyourdisposal .Thankyou. The CHAIRMAN .Senator Kerry ,it's yourturntodiscuss theman whocontributed $500toyouropponent .[Laughter .] STATEMENT OF JOHN F.KERRY ,U.S.SENATOR FROM THE STATE OF MASSACHUSETTS Senator KERRY .Well ,obviously ,Mr.Chairman ,thatcontribution raises morequestions about my judgment inbeing herethanhis , > butnotwithstanding my obvious badjudgment Iam delighted tobe abletobehereandjoin my senior colleague inintroducing a good friend . I did think about the $500 and I came to the conclusion that since themaximum was $1,000 and he onlygave$500 ,he obviously wasjust doing it because he felt compelled tokeepthedemocratic process movingforwardand itwas mitigated by the other$500 thatdidn't gothere . [Laughter .] Mr. Chairman , I thinkthatmy senior colleague hasobviously in troduced thequalifications andtheextraordinary background that JohnLaWarebrings tothis jobprospectively . He really hasbeenoneofthemostimportant cogsintheMassa chusetts economic wheel ,ifyouwill .He'sbeenchairman oftheAs sociation Companies obviously ofBankHolding . He hasplayed a keyrole aschairman ofoneofourmostimportant banking institu tions . Butbeyondthat , he hasreally contributed significantly to theentire community ,not justin hiscontributions to theimpor tant debate which hasgoneonaswe havecomeinto increasingly difficult questions abouttheflowofcapital inthenew global mar ketplace ,aboutregulatory reforms andissues aboutthestructure offinancial institutions aswe move intothefuture , and I thinkhe willclearly be ableto address thosekindsofconcerns here , as membersofthecommittee havealready heardhim tointhepast . Butinaddition tothat ,I thinkthat he hasdeepunderstanding about thecompetitive needs ofthis country andthewaysinwhich Reserve Boardacts theFederal tobe botha protector aswell as a catalyst inthatprocess ofguaranteeing theeconomic security of thecountry and I'mquite confident thathisservice on thatboard , ifitisthefullservice intothe5 yearsofyourpresence inthecem etery , Mr.Chairman , will atleast guarantee thesecurity ofthat plot . TheCHAIRMAN.How reassu ring can youget ?(Laught er.] Senator KERRY .Thoughobviously noneofusbelieve thatthatis true ,Mr.Chairman .You will outlive allofusaschairman insome respect ,emeritus . Mr.Chairman , I really thinkthatJohn .LaWare isoneofthe mostcapable people who could benominated forthis jobandwhile concerns about Iknowthechair hasexpressed theoverlapping and thequestion of thenumber ofnomineesthe incumbent President mighthaveappointed versus whoever mightbe thefuture Presi 4 dent , I'mquite confident thatanyPresident oftheUnited States wouldhaveseenfittonominateMr. LaWare because ofhiscapac ity ,hisfairness , hisdecency , andhisverydeepunderstanding of theissues thatwe face . And I'mdelighted tobe heretojoininintroducing him. TheCHAIRMAN .Thankyouverymuch,Senator Kerry . I'mgoing toyield toother membersofthecommittee andthenI willswearMr. LaWare in.SenatorGarn. OPENING STATEMENT OF SENATOR GARN Senator GARN.Thank you,Mr. Chairman . John , I'dlike towelcome youbacktotheBankingCommittee . Thisisnot yourfirst appearance before thecommittee .I congratu late youon yournomination tobe a Member oftheBoardofGover norsoftheFederal Reserve System . I believe the President has made an excellent choice . You have handson experience in theday-to-day operations ofa commercial bank and you willbe a greatasset to a great Federal Reserve Board of Governors. John LaWare, inmy opinion , willbringtotheBoardan impres siverecord of hands -on experience . Altogether , he has over35 yearsofexperience incommercial banking withtwoofthemostre spected commercial banksinthecountry . As I've already suggest ed, Mr.LaWareisno stranger toWashington .Many ofthemem bersofthiscommittee gotto know him when he served as chair man oftheAssociation ofBank Holding Companies in 1986and 1987. In thatrole ,Mr.LaWarewas a thoughtful and persuasive voice advocating expanded products andservices forfinancial serv companies holding ices . As everyone hereknows, I joinMr. LaWare ina conviction that suchan expansion ofproduct andservice offerings will leadtosig nificant benefits forconsumersof financial services and alsowill leadtoa strengthening ofthecompetitiveness ofAmerican finan cialinstitutions and the Americanfinancial markets. Mr.LaWare,Ihopethatoneofthefirst experiences youhaveas a Member oftheBoardofGovernors willbe to seethePresident sign thekindofprogressive financial restructuring bill thatyou've workedsolongandhardtobringtofruition -andI'mparticularly referring totheProxmire bill . We'rehappytohaveyoubefore thecommittee today . [Thecomplete prepared statement ofSenator Garnfollows : PREPARED STATEMENT OF SENATOR GARN Todaywe hearfromeachofourpast three BankBoardChairmen .Yesterday's witnesses fromthethrift industry pointed fingers atjust about everyone inspread ingtheblamefortheFSLIC problem - except themselves —buttheyreserved their special venomfor thepolicies ofeachofyou.Now isyourchance torespond . How muchof theproblem was caused by BankBoardpolicies ? Whatisthesituation now?IstheBankBoardregulatory system up tothetask ofhandling theproblems before itinboththeshort termandthelong term?These arequestions youshould address . Itisalso yourchance totell uswhereyouthink Congress should gofromhere , bothintheshorttermand thelongterm . Iwillbe particularly interested tohear yourviews ontheestablishment ofa bipartisan commission tomake recommenda tions abouttheproblem inthenext6 months . 5 The CHAIRMAN .Senator Shelby. OPENING REMARKS OF SENATOR SHELBY Senator SHELBY . Mr.Chairman , I havea written statement for the recordthatI'dliketo submitforthe recordand ask unanimous consent to do that. The CHAIRMAN. Withoutobjection , itwillbe printedin full , alongwithSenator Dixon's prepared statement . [Committee insert ofSenator Shelby's and Senator Dixon's pre paredstatements follow :) STATEMENT OF SENATOR RICHARD SHELBY Mr.Chairman ,I'd first like tocommendyouforholding this hearing today .Iam gladthatthis committee hasthis opportunity tomeetMr. LaWare and discuss some ofthe issues thathe wouldaddress inhiscapacity ofa Federal Reserve Governor . Mr.LaWarewouldbring totheFederal Reserve 34years ofbanking experience . He worked hiswayup the ladder,starting ina banktraining program ,andending asachairman andCEO.During histenure , itisfair toassume thatMr.LaWare hasdeveloped a great wealth ofexpertise . Traditionally ,Mr.Chairman , Ibelieve weappoint economists totheFederal Re serve Board .I havenothing against economists ,indeedIhavea greatrespect for their particular sortofesoteric wisdom , butI believe thatFederal bankingregula tion could nothelpbutbenefit fromtheexperience ofa successful ,lifelong banker . Onceagain ,I appreciate yourscheduling this hearing .I lookforward tohearing from Mr.LaWare . STATEMENT OF SENATOR ALAN DIXON Mr.Chairman ,Iam pleased tobeherethis morningastheBanking Committee meets to consider the nominationof John LaWare to be a Member ofthe Board of Governors oftheFederal Reserve System .I lookforward tohearing theviewsofthe nominee onthe manydifficult economic issues currently facing theUnited States andourbanking system . This is a timeofmajor change for ourfinancial services industry .Ourfinancial markets havefundamentally changed ,andourlawsandourregulatory systems mustrecognize thatchange .Further ,withtheUnitedStates facing record trade and budget deficits ,the conduct ofmonetary policy is probably also moredifficult now thanithaseverbeeninthepast .Thisisa time , therefore ,ofrealchallenge forthe Congress andfortheFederal Reserve Board .Itisabsolutely imperative tohave Governors thatcanmeetthese challenges . SHELBY ,wanttowelcomeyou tothe Senator . Mr. LaWare,I,too ,the experience withyourlongbanking committee .I am impressed , butmorethan background fact thatyouhavea goodeducational , and I believe youspentinbanking years that , the30-something ,as BoardandI believe Reserve thatwouldadda lottotheFederal ,thatyouwill Kerrybothhavesaid Kennedyand Senator Senator . bringsome otherdimensionsthere I lookforward tothehearing and lookforward tosupporting you . Mr. LAWARE.Thank you,Senato r. The CHAIR MAN . Senator Chafee. OPENING STATEMENT OF SENATOR CHAFEE Senator CHAFEE .Thankyou,Mr.Chairman . I, too, want to welcome Mr. LaWare here. He has a connection withourState since hisbankhasa banking subsidiary inRhode Island .So we're experienced withMr.LaWareandhavegreat re spect and admiration forhim. 6 He hasthis vastexperience ashasbeenmentioned .He served as a Member oftheFederal ReserveAdvisory Boardand alsoofthe Board of Directors of the Boston Fed. So he doesn'tcome to this without knowinga gooddealabouttheFederal Reserve . I thinkit's splendid thattheFederal Governmenthasbeenable toentice a person ofMr.LaWare's abilities into theFederal Gov ernment . That's what we want. And I thinkwe'refacingtremen douschallenges inthewholebanking system ,particularly withthe competition fromabroad . And Mr.LaWare ,as thechairman and chief executive officer ofa majorregional bank, canmake a tre mendous contribution . It seemstome inthis yearwe oughttoselect somebody from Massachusetts togo intoFederal service and I thinkMr. LaWare is theman.And also ,Ithink oneisenough .[Laughter .] Ialso looked over thelist ofMr.LaWare's political contributions and, Mr. Chairman , I canassureyou thathe'sbeenconsistently a Democratic contributor , whichI'mnotsurewhat itshows . He did givesome dollars toMargaretHeckler , soitshowsthateverycon tribution he'smadehasnotbeentoa winner , butdespite thefact thathe's hada predilection fortheother side ,I think he'll makea wonderfulMember of the FederalReserveand we'revery, very gladyou're taking iton. Mr. Chairman, I hope thiscommitteecan move rightforward todayand gethim confirmed assoonaspossible . The CHAIRMAN . Senator D'Amato . OPENING REMARKS OF SENATOR D'AMATO Senator D'AMATO . Mr.Chairman ,I havea numberofquestions I'dliketosubmitfortherecord and askthattheybe responded to inwriting . The CHAIRMAN.Withoutobjection ,soordered . Senator D'AMATO.Thank you, Mr. Chairman . TheCHAIRMAN .Mr.LaWare ,will youraise yourright hand? [Whereupon ,thewitness was dulysworn.] TheCHAIRMAN .Mr.LaWare ,I'mentering into therecord atthis point a copyofa July6 letter fromthe Federal Reserve general counsel tothe Director oftheOffice ofGovernmentEthics concern ingyour nomination . Thatletter refers tovarious commitments youmadetodispose of yourstockand torecuse yourself fromvoting orparticipating in certainmatters. Willyou committo thiscommittee to observe alloftheagree ments referred tointhegeneral counsel's letter ofJuly 6? ,I will . Mr.LAWARE.Yes,sir The CHAIRMAN.Thank you. Mr.LaWare ,on February 23ofthis yearyounegotiated a rather lucrative golden parachute agreement withtheShawmutNational Corp. Underthatagreement youwill receive 5 years ' salary plus increases ,whether ornotyouremployment termination wasinvol untary . One oftheprovisions ofthatagreement required theShawmut National Corp.toreimburse you forany excess parachute pay mentsundersection 280(g)oftheInternal RevenueCode. 7 As you know,that's theexcise tax.Inotherwords ,ifyou haveto payanexcise taxon it ,whichtheCongress decided should bedone in goldenparachute cases , it wouldn't adversely affect you, it wouldadversely affect yourformercompany.. As you know,the Congress tookaction inthetaxlawtoreduce theexcessive golden parachute payments . Youragreement seems tobean attempt togetaround thatpublic policy . How much ofyourgolden parachute payments will besubject to an excisetax under the Tax Code ? . inmy head,Senator havethatfigure Mr.LAWARE.Idon't The CHAIRMAN . Iunderstand thatyourpayisabout$500,000 a yearandsothegolden parachute at5years wouldbe$2.5million , andasI understand it ,the lawprovides that3 years isthemaxi mum thatwouldnotbe subject to thetax. Therefore , itwouldbe about$1 million thatwouldnotbe taxedby you butwouldbe taxed totheShawmutCorp. soyouwouldbesavedapproximately $200,000 . How canyoujustify this attempt tododgetheprovisions ofthe Tax Code ? Mr. LAWARE.Well,I'mnotquitesureI thinkit's dodging it ,sir . Thecontract wasnegotiated onthis basis as partoftheir merger of officers thetwoorganizations . The foursenior ofthecompanyhad essentially thesamekinds ofcontracts .Because ofmy age—my ad vancedage, being10 or 11 yearsolder than theotherthreemem bersofthesenior management group- Iwasgiven theprivilege of leaving atanytimebutstill having thatstream ofincomesecure toage 65. Thefeeling wasthatifthere wasa violation oftheintent ofthe lawwithrespect toexcess parachute payments andifthis was re garded asa parachute ,thenthecompanywouldundertake togross up theamount paidto me tocoverthattax. So thetaxisgetting paidregardless .So I'mnotsurethatthere's a taxdodgeinvolved since the Federal Government isgetting the sameamount of money theywould have received otherwise . The CHAIRMAN. Well , the Federal Governmentis , but the idea , asI understand it ,wasto discourage excessive payments whichdi rectors andofficers ina sensevotedthemselves attheexpense of thecorporation and ofthestockholders . As you may know, theSenatevotedon a goldenparachute amendmentoffered by thedistinguished SenatorfromColorado , SenatorArmstrong , who'sa member ofthiscommittee , and that was a measurethatwouldhave prohibited goldenparachutes flatly . Itpassed theSenate 98 to1 a short timeago.My staff re . mindsme itwouldhaveprohibited theexcess paymentsunless ap proved by thestockholders . Was yoursettlement approved bythestockholders ? Mr.LAWARE. Specifically , itwasnotvoted on by thesharehold ers ,buttheshareholders ,in approving themerger , hadapproved theprinciple ofhaving thesenior officers covered byemployment contracts whichyou wouldcall , or you wouldclassify , as a para shareholder approval chute .So that ,inprinciple ,without regard to thespecific amounts andspecific terms ,isintherecord . The CHAIRMAN.The specific amountsofcourse isthewholecrux ofit .Obviously , ifthereisa provision fora relatively modestset 8 tlement foran executive leaving a corporation , that's onething . But3 years wasthedefinition ofwhatmightbeconsidered by Con gress tobe inexcess and yourswas 5,and obviously a $2.5million settlement isgolden inan important sense . Mr. LAWARE. Yes. I thinkthatthe directors who approved unanimously thestructure and thespecifics ofthosecontracts felt thattheywereacting fortheshareholders and on thesharehold ers 'authority asgranted intheapproval ofthemerger . The CHAIRMAN.Mr. LaWare,letme now getinto something else . I'mconcerned ,andI'msureyoumay well be concerned ,withthe enormous debt in thiscountryand the huge increasein debt in recent years .The Federal debtiswhat we'vebeenconcerned with andareresponsible forintheCongress .It's enormous ,$2.5 trillion . Business debt , as I understand it , ismuch bigger thanthatand household debtisover$3 trillion andbusiness debt ,ifyouinclude notonlycorporate debt butfarmdebt ,unincorporated debt ,includ ingproprietorships and individual partnerships and soforth , is over$ 4 trillion , according towhat Igot fromtheFederal Reserve justa fewdaysago. Thisaddsup toabout$10trillion indebt .As youknow, it's in creased enormously inrecent years .One reason why it's increased itseemstome isthattheregulator ofdebt ,whichisreally interest payments ,has been somewhatencouraging to peopleto getinto debtanddiscouraging people tosavemoney. The household debt has increased ata timewhensavings have dropped lower thanthey've beenhistorically throughout mostof ourhistory anditseemstome on thatbasis , ifwe're going todo something direct and explicit aboutencouraging saving and dis couraging debt ,oneway wouldbetofollow monetary policies that would tend to increase interest rates . I realize thathas otherim portant ramifications ,butwhat's yourreaction tothat notion ? Mr. LAWARE. Householddebt ,to the extentthatitconstitutes mortgage debtorcredit carddebtorinstallment debtisgenerally atpretty highlevels ofinterest rates now.And inspite ofthefact thatoursavings rates — that is ,rates ofinterest onsavings kinds of instruments haverisen since deregulation in1982 ,people still have a propensity toborrowforhousehold purposes andtheydidsoeven when rates wereat20 or 21 percent .Credit cardswereusedexten sively . I'mnotsurethatraising rates isnecessarily goingtodiscourage people ,households andtheconsumers inparticular , fromborrow ing .Ithink we haveseensomeleveling offinourconsumer spend ingandtosomeextent thegrowthinsomeconsumer debtisa result ,I'mpersuaded , ofthe1986taxrevision whichremoved the deductibility ofinterest onnormal installment debt . Theworrisome consequence ofthatisthat a lotofborrowing has shifted intoequity borrowing against people's homes, and while thatinitself isnotan evil thing ,it's a question ofhow it's adminis tered . Iftheamountsof debtaretoo highin relationship to the valueofthehome oriftheyaredifficult forborrowers toservice given any kindofa downturn intheeconomy ,thenI thinkthat could bea baddevelopment .Butwe don't seeany signs ofthatat thisstageofthegame. 9 TheCHAIRMAN .Mr.LaWare ,my timeisup. I'mnotgoing toask you toanswerthisorwe'dgo on and on,but Imightpoint outthat Ithink everybody agrees thatborrowing tobuyhomesisenormous lysensitive tointerest rates .Ifyouraise interest rates ,youjust see a verysharppromptfalloff inhousingstarts because ofthesensi tivity ofitandbecause people lookatthemonthly payments they have to make . The same thingistrue , toa lesser extent , but it's still trueof autoloans .So theenormousamountofborrowing goesintobuying homesand buying cars wouldbeobviously directly affected bythe level ofinterest rates .My timeisup.I'll be back. Senator Garn . Senator GARN.Thank you,Mr.Chairman . Mr. LaWare, before I askany questions , didyou desire tomake an opening statement ? Mr.LAWARE. Well ,I haveaboutsixlines herethatI wouldlike to read STATEMENT OF JOHN P.LaWARE ,NOMINATED TO BE A MEMBER OF THE BOARD OF GOVERNORS ,FEDERAL RESERVE SYSTEM Mr. LAWARE.Mr. Chairmanand otherdistinguished membersof thiscommittee , I am highlyhonoredto havebeen nominatedby the Presidentto the Board of Governorsof the FederalReserve System. I wanttothankyou,Mr.Chairman ,andthecommittee forhear ingme today andthankSenators Kennedy , Kerry , andChafee for their verygenerous remarks aswell as yours ,Senator Garn. I am a banker ,notan economist .I am a pragmatist ,notan ideo logue . I believe thatmy 35yearsofexperience in banking will enableme to make a significant contribution to the work of the Boardintheyears to come. I'll behappytoansweranyquestions . The CHAIRMAN .SenatorGarn, I want to thank you very much fordoingthat .I should have donethatandIapol to you, sir ogize . Itwas a fineopeningstateme nt. Mr.LAWARE. I suspect youlike itbecause itwasbrief ,Senator . [Laughter .] Senator GARN.Thatreminds me ofa story thatI mightaswell tell you.When Iwaschairman ofthecommittee ,theformer Chair man oftheFederal ReserveBoard,PaulVolcker ,came intotesti fy. I askedhim one day ifhe wouldplease summarizehisstate ment when he wasmakinghissemiannual report ,andhe did .Six monthslater when he cameback ,I askedhim ifhe wouldplease readtheentire statement sothatitwouldtakelesstime . [Laugh ter .] Mr.LaWare ,whatareyourviewson therisk -based capital plan thathasbeenproposed by thebank regulators ? VIEWS ON THE RISK -BASED CAPITAL PLAN Mr.LAWARE.I think it's a greatstepintheright direction .I thinkthatviewissharedinprinciple by mostleaders inthebank ingbusiness .Therehasbeensomeconcern that someofthemeas urementsaretoorestrictive ,butI thinkthaton balance it's a very fair approach .Thebanksinsomeofourcompeting countries ,nota 10 blyJapan , havehadtomake sacrifices intermsoftheway they countcapital thathaveprobably beenmoresevere thanthoseim posedon U.S.banks .I thinkwe'vestruck a verygoodbalance ,and I thinkittends tolevel theplaying field . I'msurethattheU.S. bankswill be ina more evenly and competitive environment . SenatorGARN. What aboutitseffect on safety and soundness regulation ? Mr. LAWARE. Well, I thinkitshouldhelpsafety and soundness because itisrisk -related intermsoftheamountofcapital required to carrycertain kindsof assets , and therefore itwillencourage banks to be more careful abouthow theyallocate theirfunds . Whiletheneteffect isnottobring abouta significant increase in basiccapital in the system , itwilltendto bringup some of the banksthataretheskinniest intermsofcapital overa period of timetoa level wheretheywereseveral yearsago. SenatorGARN. So you wouldfeelthaton a netbasisit's a net plusbothforsafety andsoundness anda netpluson competitive ness? Mr. LAWA RE .Yes, sir . Senator GARN. In thepastyou havebeena championforthe fi nancial services holding companyapproach torestructuring thefi nancial services industry . In thatlight , what isyourview on S. 1886 ,which istheProxmire orSenate -passed banking bill ? Mr. LAWARE.I thinkit's an enormousstepintheright direction . I support itgenerally andspecifically .I'mdelighted that thebanks will now havethe congressionally approved ability toparticipate in a big thesecurities markets andcertainly thatguarantees a step for wardin enabling U.S.bankstobe more competitive withtheir brethren around the worldwho already haveaccess tothesecuri tiesmarkets. I'm verydisap GARN.Well , I mightsayatthispoint Senator pointedthat afterallthe work the chairman and otherson this onthe sooverwhelmingly andpassed putinonthatbill committee monthsago,thattheHouseofRepresentatives several floor Senate theyare . And I'madvised toactonanything notseenfit hasstill is Julyand we'reprobably , but this talking aboutdoingittoday foryou, a message isn't 30.So this going toendup by September , fortheHouseofRepresentatives . Thisisa message Mr.LaWare beentreading . They've abouttimetheydidsomething thatit's toaddress beenhereand unwilling waterforthe14yearsthatI've changes . So I marketplace services ofthefinancial therealities todayand getittothe wouldhope theywouldtakesome action sothatthechairmanand I cango to con floor assoonas possible work out a billthatwill ference withthe House and hopefully become law thisyear. listening . Mr.LAWARE.I hopethey're Senator GARN. Whileproblems remainwiththebudget deficit and thetrade deficit , theU.S.economyinrecent years hasbeen theenvyoftheworld .Oureconomy isinthelongest peacetime ex pansion inthepostwar era .We havecreated 12million new jobs overthelast 5 years ,while Western European economies havenot on balance created any new jobs . 11 Whatrole doyousee formonetary policy inmaintaining sucha healthy economic growth aswe continue toworkonthebudget and tradedeficits ? Mr. LAWARE.Well,I thin k monetary pol icycanattemp t topro vid e stabil ityin value ofthe curre ncy,a lowrateofinf latio n,and both oftho seeleme nts Ithin k are veryimportan t increati ngan environ ment in which the growth in the economy can continue withou t recessi on.And I thinkthat isessen tialaswe begintowork do wn these other deficits . The dangerat the moment wouldseem to me tobe to prevent theeconomy fromoverheating andwhenwe're running at80or83 percent ofcapacity , we'vegottomake surethatwestayon the ball. Senator GARN. The GeneralAccounting Office recently released a study suggesting thattheFederal Reserve does notrequire suffi cient reserves against potential losses fromThirdWorlddebt . Do you agreewiththe GAO's study? DIFFICULT TO LEGISLATE LEVELS OF RESERVES Mr. LAWARE. No ,I don't ,because I thinkthatit's verydifficult tolegislate levels ofreserves on netdebts . We havereserve levels typically amongthebankswho areheavy lenders tothelesser de veloped countries ranging anywherefrom25 to30 percent up to75 percent . I thinkthatisless reflective ofvaluation oftheloans than individual itisofthestrategies ofthose bankmanagements .The people whoarereserving the25to30percent level Ithink arestra tegizing that they're going tohold onto that debtandthateventu ally itwillbe substantially paidoff . They're in forthelongpull . Thebanksthathavereserved atthe60or75 percent level essen tially aregetting their reserves up tothepoint wherevirtually all ofthose loans areinthemarketable category without taking any further hit toearnings .Those banks I would submit areprobably managing those portfolios down, getting themoutthrough swaps , or what have you. So it's verydifficult toarbitrarily setlevels ofreserves on anyof those debts because inthelongrun-andI do mean longrun- I think they're going tobepaidoff infull . Senator GARN.Thank you, Mr. LaWare. The CHAIRMAN .SenatorChafee. Senator CHAFEE.Thankyou,Mr.Chairman . Mr.LaWare ,you've touched a bitontheinternational competi tivesituation ofU.S.banks .In 1970 , whichisonly18yearsago,of the10 biggest banks in theworldI believe 9 were American . In 1988 ,9 outofthetop10aren't Americanand 1 ofthe10is .And as I understand it,thenextranking U.S.bankis24th .We don't have a stack right behind just below the10margin . Now my question istwofold . One, whatdifference doesitmake asfarasU.S. jobs ,theU.S.economy ,ifwe don't havebanksinthe question top10? That's the first . Mr. LAWARE . I don'tthink it makes much difference . I have neverfelt thattherelative worth or strength or position of banks intermsofbottomline on their balance sheetwas therealanswer . It's howwell managed they areandhowprofitable they arethat I 12 thinkreally istheperformance measurement of banks , and I wouldsubmit thatU.S.banksarecompetitive intermsofprofit ability andcertainly competitive inmanagement withanybanking system in the world. SenatorCHAFEE . So we shouldn't getdistressed ifthe highest U.S.bankwerethe25thbiggest intheworld .Isthatright ? Mr. LAWARE .I don'tthinkthat's a matterofconcern . Now I'm a little bitofa maverick on thatbecause many ofmy colleagues are veryconcerned aboutthebalance sheet size .I'mmoreconcerned withtheprofit and loss statement . Senator CHAFEE .Allright .Let's say 9 ofthe10biggest banksare Japanese or8 ofthe10- let's say5 ofthebiggest 10. Doesthat give themtheopportunity tocomeoverhereandcompete toa greater extent thaniftheyweren't asstrong astheyare? andeggtypeofprop kindofachicken Mr.LAWARE.Well, that's growth isbecause theyhavebeen someoftheir osition .Ithink that stakes havesubstantial .As youknow,theyall hereandcompeting either boughtbanksorestablished now, having on thewestcoast . They arevery that are doingquitewell branches orsubsidiaries managed . andtheyareverywell competitive among agreement capital -based risk thatthis One ofthethings to you're going since I thinkisthat willaccomplish the12nations baseforallthese the same kind of capital essentially require of thepricing in the rationalization , thatwillbe reflected banks helptomakeourbanksmore banksand will forthese mechanism capitalized , thinly banksthatwereoriginally because competitive andstill getgood price atlowermargins ,could nominally atleast . returnson theirstatedcapital Now since thecapital will beallthesame,thesamekindofpric ingpressures aregoingtobe thereforforeign banksas arethere forU.S.banks. Senator CHAFEE .Mr.Chairman ,I've gotanother question .What are allthesebellsfor? TheCHAIRMAN .There's going tobea voteina fewminutes . Senator CHAFEE.Well, Mr. LaWare,I havekindofa gutfeeling thatwhen you seeU.S.banksfall fromthe9 outof the10biggest to1 outofthe10biggest ,itmakesme nervous andjust like Ilike toseeGeneralMotorsora U.S.automobile manufacturer thelarg estintheworld,itmeans we'reselling carsinAustralia and Eng landandWestGermanyandFranceandallover.And I canonly assumethatwhen ourbanksareknockedoutofthetopspotthat somebody else isgetting thebusiness somewhere . But you don't share that concern. Mr.LAWARE. Well , no,I'm notsaying thattheyaren't getting thebusiness ;butI'msaying thatgivencompetitive equality and thesame opportunities , Americanbankscanbe competitive . And if thatmeansgrowing insize ,theywill growinsize . I think thatthe chairman's bill will be a goodstepin theright direction togive U.S.banksa morecompetitive position , notonlyindomestic mar ketsbutinworldmarkets .Maybe some ofthosepositions willshift backagainaswe getthatmore competitive stance . Senator CHAFEE . Well ,Icertainly hopeso.I share yourenthusi asm forthechairman's bill and shareSenator Garn'sconcern that nothing ishappening ornothing hashappened intheHouseon it . 13 Thank you,Mr.Chairman . The CHAIRMAN.Thank you.II promised Senator GarnIwouldrec ognizehim fora unanimous consentrequest. SenatorGARN . SenatorKarnes was here and had to leave . I'd liketoask unanimousconsent thathisstatement be placed inthe record .Inaddition ,there aresomequestions thathe wouldlike to haveMr.LaWare respond toinwriting . The CHAIRMAN.Withoutobjection ,soordered . [Committeeinsert ofSenator Karnes 'statement . ] 88-455 - 88 - 2 - - 14 Dave Kames JULY 7 , 1988 STATEMENT IN SUPPORT OF THE NOMINATION OF JOHN P. LA WARE TO BE A MEMBER OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. Chairman , I am pleased to be here today to join in supportingPresidentReagan'snominationof John P. Ware to be a member of the Board of Governorsof the FederalReserve system. John La Ware has had a distinguished career in the operationalaspectsof commercialbanking, and he would bring a wealth of experienceand talent to the FederalReserveBoard. He has been Chairman of the Board of Directors of the Shaumut NationalCorporationsince 1978. Shaumut is one of the 25 largestbankholdingcompanies in theUnitedStatesand is the product of a mergerwith the HartfordNationalCorporation . Prior to joiningShaumut, Mr. La Ware was with the chemical Bank in New York for a period of 25 years where he worked his way throughthe organizationto the positionas a seniorofficerof the institution . 15 Page 2 He was awardeda Bachelorof Arts degree from Harvard Universityin 1950 and a Master of Arts degree from the Universityof Pennsylvaniain 1951. residents of Massachusetts John and his wife are and have two children . Mr. Chairman , I have had the opportunityto meet with Mr. La Ware and he has impressed me . He currently serves as a director of the Federal Reserve Bank of Boston , and he has served as a directorand the chairmanof the Associationof Bank Holding Companies . His philosophy favors principles of financial ion and relianceon the marketplace to drive the outcome deregulat of important issues . In short, I believe that , with 35 years of hands-on experiencein commercialbanking, John La Ware is just the type of person who will serve his countrywell in this appointment . I thereforebelievethat the Committeeshould reportthis nominationwith a recommendation of approvaland I trust that the Senate will act swiftlyto confirmthe President'snominationof Mr. La Ware to be a memberof theBoardof Governors of the federal Reser ve Sys tem . Thank you Mr. Chairman . I ask that my formal written statement be entered in the record. 16 The CHAIRMAN .SenatorGraham . Senator GRAHAM.Thank you,Mr.Chairman . Mr.LaWare , I'mverypleased tohavethis opportunity totalk withyou.WhileI wasa resident ofyourcity ,I was a small client ofyourbankand I appreciate theexcellent service thatwe re ceived. I am interested intheissue ofThirdWorld debtand thepolicy of theFederal Reserve Boardrelative tothat .We'vediscussed briefly thequestion ofrisk -based capital andtheeffort being made among themajorindustrial nations 'central bankstoregularize thatproc ess . There's concernthatthe adoption ofthe risk -basedcapital will makeitmoredifficult togetthenew start capital into countries in LatinAmerica and elsewherein the world and willnecessitate a revisitation ofourpolicy relative toThirdWorlddebt .I wonderif you couldcomment . TheCHAIRMAN .Mr.LaWare,before you respond ,I'mgoing togo tothefloor tovoteandI'mgoing toaskSenator Grahamtopreside fora few minutes . He'll have toleave , too ,shortly , but thatway we'll savea little timeinthehearing . . Areyou yourquestion Mr.LAWARE.I'mnotsurethatI follow against ofthereserves ofthedisallowance saying thatbecause that debtas partofprimarycapital country developed lesser SenatorGRAHAM . The thesisisthatin orderforthesecountries tohaveanychance ofpaying their existing debtthatthey've gotto reenergize their economies . To do thattheyhaveto havesome freshcapital , thattherisk -basedcapital systemisgoingtomake it more difficult for them to attract the new capital which their economies require . That's theessential thesis . Do youagreewith that ?Ifnot ,whynot?And ifso,whataretheimplications ? Mr. LAWARE. I'mnot surethatIdo agreewithit .I thinkthat there is somemisinterpretation thatthereserve requirement wouldbea disincentive for makinganyadditional advances . On theother hand,I thinkthere isa strong understanding in thebanking system - andI'mtalking now aboutthemajorbanks who havemajorcommitments inLatinAmerica particularly —that those economies aregoing toneedcapital inflows ,that there hasto beaa restoration ofinterbank deposits into those countries ,andthat thatcan takeplace y ifther e isa perc onthattheyhavethe onl epti ngroomneces athi bre sarytorevita lize s. their economie example ,themostrecent I thinkthatthekindofrestructuring an environment , tendstocreate ofwhichwe'veseenin Brazil in moneygoing . There's fresh room wherethey do havebreathing debt .Atthe theexisting be usedtoservice andmostofthatwill constant forthis someofthepressure , theyarelifting sametime room. togivethem somebreathing restructuring Ithink moreofthat kindofapproach tothesolution withregard toMexicoandArgentina canbea veryconstructive thing . We've comea longway inthelast 4 or5 yearsindealing withthis prob lem.The amountoftheseloansinrelationship tothecapital ofthe banksthatareinvolved hasgonedown fromabout190percent to less than100percent ofthecapital . That's still toohigh , butwe areworking it down andwe aregetting someintelligent ,long -term 17 restructuring . I thinkinthefinal analysis that's what'sneededin ordertogivethemsomebreathing room. SenatorGRAHAM. Mr. LaWare, I apologize , but we have a vote underway . We will recess atthispoint and reconvene assoonas possible . Mr. LAWARE . Fine. [Recess .] ,youwrotean op The CHAIRMAN. Mr.LaWare, on June 22,1986 ed pieceforthe New York Times.You made a goodcaseforour , butyou thebill of course itpreceded ,although bill inthatpiece in Glass -Steagall thatwouldrepeal madea goodcaseforthebill . inunderwriting bankstocompete andpermit effect ITSNOT THE SIZEOF THE BANK ,BUT ITSCOMPETENCE And IwasgladtohearyouranswertoSenator Chafee's question on thesize ofbanksandhow it's notthesize , it's thecompetence , and ourbanksarebigenoughtodo thejob . As a matteroffact ,as I understand it ,theeconomyofscale stops witha relatively small bank and we don'thave to have aa colossal size . ButIwant toask youaboutthat lette rbecausein that lette ryou make a statement which concernsthisSenator and I think would concerntheCongr essconsi ly. You saywithresp derab ecttothe at er groupsthathave beencrit titude ofconsum ical ing ofbank , you say: Regrettably ,consumer groups seeintheemergency atmosphere an excellent op portunity toadvance their agenda .Theyareurging Congress totighten further the regulatory noosethatformore thanhalfa century has constrained theability of banks tocompete .Specifically ,they are pushing for a test that interstate acquisi tions would notdilute local competition ,forpublic disclosure oftheacquiring bank's community reinvestment record , andfordisclosure ofthegeographic placement of loans by theacquired bank. Now partofthatwas certainly asfarasthecommunityreinvest ment recordisconcerned— Iwas the authorofthatI believe and it went throughthiscommitteeand itwent throughtheCongress withconsiderable enthusiasm and itseemsto me thatthelogic behind thatCommunityReinvestment Actmakesallthesense in theworld. What we're simply saying isthatifa bank islocated ina par ticular communityand takesdeposits in thatcommunity , that thereatleast oughttobe some kindofa record ofthatfactmade public ,made available tothepublic ,andthattheFederal Reserve Board ,theregulators , should takeintoconsideration whether or notthebank reinvested inthecommunityfromwhichthedeposits came . As you know, we'vehad a problem overtheyearswithred lining .We'vehad hearings before this committee thisyearwhich haveindicated significant redlining . We'vehad great leadership frombanksinPhiladelphia and elsewhere which have saidthey will makea loan toanyethnic groupinanyarea ,black ,white ,his panic ,whateveritis , depending on thecredit record oftheborrow erand thesoundness ofthestructure inwhichtheyaremaking the loan. They've donethatandthey've donethatprofitably andthey've found there's beenno significant loss inthatkindofan operation . 18 Infact ,its beenprofitable toproceed thatway. Butsomehowwe havea record ofregulators being veryweakinenforcing theCom munityReinvestment Act .It's like a professor who gives everybody intheclass an A eveniftheydon't come toclass and it's beena situation wheretheonlyrealenforcement ofCRA isby thecom munities themselves when theyhaveactivist people comeinand insist on getting therecords and thenpublicizing therecords . COMMUNITY REINVESTMENT ACT Thatwas truein Chicagoand itwas truein some otherplaces . So I'mconcerned withyouas a regulator andbecause youhave perhaps moreexperience thananybody else ontheFederal Reserve Boardasa governor theywill look toyouforadvice andforleader ship- I'mconcerned thatthe Community Reinvestment Act and otherconsumer protection legislation , likethe Truth -in -Lending Actand soforth ,may notbeinwarm,friendly handswithyouas the leaderon the board. Mr.LAWARE.I think perhaps you're misinterpreting whatI said inthatquotation .Ihavenoquarrel atall withtheCommunity Re investmentAct nor with itsenforcement . TheCHAIRMAN .Well ,letme just say ,we havea quarrel withthe enforcement . We thinkit's beenveryweak and veryinadequate and notatallvigorous . Mr. LAWARE.I mean withtheprinciple ofenforcement . The CHAIRMAN.OK . Mr. LAWARE. We havean excellent recordin my institution in CRA andI think thatyouwill find thattheFederal Reserve's ap proval ofapplications hasbeenquite forceful inobtaining satisfac tion forcommunity groups who haveobjected toa particular appli cation on thebasis thatthebanksinvolved havenotbeen living up tothespirit oftheCommunity Reinvestment Act. Thereisno stipulation thattheyhavetoactually turnonedown, butIthink that themoral pressure that hasbeen exerted insever alinstances has resulted in veryconstructive application ofthe CommunityReinvestment Act. I couldn't agree withyoumorethata bankthatoperates inany community hasa responsibility inthat community toall thepeople inthecommunity andwe havea verygoodrecord inthatrespect in Boston. What Iwasobjecting tointhepiece intheNew YorkTimeswas the proposal thattherebe some sortofscoreattached totheper formanceofindividual institutions . The CHAIRMAN.What'swrongwiththat? Mr. LAWARE. And then putthatup inpublic .Well,inthefirst place , it's a verysubjective kindof a judgmentas to whether there's beencompliance . TheCHAIRMAN . Well ,letme give youanexample . Supposing the regulators find thata bankhastakenits deposits overwhelmingly fromthecommunity , 80 percent ,and onlyreinvested 40 percent or 20percent inthe community .Why shouldn't thepublic knowthat ? Mr. LAWARE. Well , what'sthe standard against which that's being measured ?Letme just digress for just a second .TheFederal funds market 19 TheCHAIRMAN . Well ,ifyoucanjustify it,fine . I'mnotsaying that 40percent or 20percent may bejustifiable ,butjustify it .Why notletthepublic know whatyourarguments arefordoingthat ? Mr.LAWARE. Yes,buttheproposal wasthatyouhavea score of some kind. The CHAIRMAN.Well,that's what thescore wouldbe basedon,as I understand it. Mr.LAWARE. Ifyou've gota score ,an absolute measurement of somekind ,andyou're going toapply thattoevery community ,how thencanyoujustify it? You say,well ,you geta C -minusbecause you're only40percent reinvested in thecommunity andyetthat maybejustifiable inthat community ,buthowdoyoudefend your self against theC-minuswhichisbeinghanded outtoyou. The CHAIRMAN . Well , I wouldn't necessarily arguefortheC minus , butI wouldargue fordisclosing theproportion that goes backinto thecommunity compared tothedeposits thatcomefrom thecommunity . Again ,itmay be wiseforthecommunity inthe longrun tohave a bankhavea relatively lowscore ,butthenthey shoulddefendthatand there's no reasonwhy thepublic shouldn't know it . Mr. LAWARE. I don'thave any problemwiththat , Senator , but whatI do havea problem withwas somesort ofa rigid scoring system thatcan't be applied toanything that's subjected to The CHAIRMAN . Well ,Ithinkrigidity inthesense thatyougive thefacts , you letpeople know (a)whatthedeposits are;and (b) wherethatmoney hasgone. Mr.LAWARE.Idon't haveanyproblem withthat . The CHAIRMAN . Thenyouhavean interesting sentence inyour statement .You say: Thesameholds truefordisclosing a geographic placement ofloans .Fora bankto reveal thissortofinformation islike Coke revealing itsformula . Such a require mentwould discourage manybanks fromengaging inrescue operations . THE COKE FORMULA Just2 daysagotheWallStreet Journaldiscussed theCoke for mulaandsaid thatCokeisn't namedCokebyanyaccident ,thatit contains cocoabeans , thesame thingthatcocaine comesfrom, and someofthereasons why people geta habit fromdrinking Coke , whichI know you and Idon't drink , isbecause theygetthesame thingthattheygetiftheysnorted coke- cocaine I mean. Mr. LAWARE.Ihope you're notmakingany analogies tothe bankingbusiness .We don'tsnort .[Laughter .] The CHAIRMAN.Well,yourstatement was thatitshouldn't be re vealed . Itseemsto me itwas goodto reveal — I can'tunderstand why theCoca-Colaformulaisso precious , why itshouldn't be re vealed tothepublic . At thesametime , I can't understand whythe geographic placement ofloans shouldbesacred . You say ,“The same holds true for disclosing the geographic placement ofloans . It's likerevealing theCoke formula . Why shouldn't itbe desirable forthe public to know ? What's wrong witha bank beingrequired tosay,“We invest so much in thecommunity and somuch goestoCentral America andsomuch goestoCalifornia ,toWisconsin ,to Columbus ," whatever ? 20 Mr.LAWARE.Iguess thatmay bean industry attitude . We think thatwe givepretty full disclosure ofwhatwe do. Our 10(k)sand ourannual reports probably givemoredisclosure thanalmost any other industry . And it's probably a sortof defensive reaction towardtheencroachment ofevenmore disclosure without anybody really caring .Who careswhere a bank has itsloans? The CHAIRMAN.Well,I'll tell you. Mr. LAWARE.To say , well ,we have$50 million ofloansinArizo na,and we have$100million ofloansin Wisconsin , and we have $5 billion ofloansinMassachusetts- itsmoney The CHAIRMAN. I wouldcareifa bank wereputting about .I'dbe concerned now intoTexasorintoSouthAmerica right that. Mr.LAWARE.Well ,itisn't somuch putting itinthere now.It's trying togetitout. The CHAIRMAN . Well ,that's right . ButI don't know why disclo sure , which of courseisthe essence of Truth-in-Lendingand so much else thatwe'vebeenabletoprogress withoverthelast 20 years ,shouldn't be useful fortheconsumerand forthebank.They cancompetemore effectively ifpeople know. Mr. LAWARE. In principle , I have no problemwithdisclosure if there's somegoodreason for disclosing andifthepublic ortheCon gress initswisdomdecides thatkindofdisclosure isappropriate , I'msurethebanking industry wouldcooperate . LABOR UNIONS IN BANKS The CHAIRMAN .Mr.LaWare,Shawmutisnotrepresented byany labor unions .During thelast decade twounions wereorganized but laterdisbanded. Why doyoubelieve thatlabor unions haven't succeeded atShaw mut ? goodcompensation ,we havea pretty ,frankly Mr.LAWARE.Well and wagesare , oursalaries workingconditions , excellent program . Unionshave a great inthe marketplace more than competitive off thattheywouldbebetter ouremployees difficulty inconvincing ina union. Witnessthe factthatone ofthe unionsthatwas formed . toaskfordissolution themembersvoted subsequently The CHAIRMAN. In Boston , isituncommon fora bank tohavea unionrepresent theemployees ? Mr.LAWARE.Yes,it's veryuncommon. TheCHAIRMAN .I think that's probably true .Ithink it's unfortu natebecause my experience asan employer and previously as a unionmember werethatifyouhavea unionshopyoucanhire anybodyyou want and theunioncan negotiate ona more or less equalbasis withtheemployer forwagesand working conditions and I thinkit's a healthy situation . But I understand ifyou havea situation wherenoneof yourcompetitors haveit ,it's expecting a lottosetthepaceinthatparticular area. Letme askyou this .On May 8,1987 ,Shawmut paid$295,000 in civil penalties in connection withinfractions ofantimoney launder inglawbetween1980and 1985. Shawmut was credited withvolun teering itsguilt and withinstituting corrective measures . 21 Can youtell me thehistory ofShawmut's infractions andthose corrective actions? Mr. LAWARE.Yes,sir .In 1980 ,thecashdisclosure orcashtrans action reporting requirements werechanged . Wherepreviously a bankcouldexemptcertain customers fromtherequirements of thatreporting mechanism totheTreasury Department ,thenew re quirement was thatyou couldhavenamesof customers on the exemptlist onlyafter theyhadbeenspecifically approved by the Comptroller's office . We picked up thechanges thathadbeenpublished ,butwe failed apparently toflag themsufficiently sothatourbranches left cus tomerson theexemptlist and failed to report subsequent cash transactions really without anyintent toviolate thelawbutsimply because theyhadnot picked up thechanges . The CHAIRMAN . How longdidittakeyoutomake thatcorrec tion? Mr.LAWARE. Well ,we didnotpickitup and theexaminations didnotpickitup andwhenoneofoursister institutions inBoston was getting a lotofunfavorable publicity forfailure tofile these reports , we instituted our own investigation ofour own bank and discovered these nameson theexemptlist thathad notbeenau thorizedto be there. So we went immediately totheComptroller and totheTreasury andreported thefact thatwe weredelinquent andhadnotbeenin compliance , and we made allthosepastdue filings and brought the record up todate . We weretheninvestigated by theU.S.attorney inBostontosee iftherewereany criminal involvement . They foundthattherewas none .Sowe paidthestatutory fine forthefailure tofile those ap plications .But itwas a civil fine , nota criminal fine . The CHAIRMAN. Now a recentarticle in the WashingtonPost stated : ,a 36.8percent in last year to$ 368.2 billion America's foreign debtclimbed total astheworld's solidified its position States ,astheUnited over the1986total crease debtor nation . largest Now ina press briefing on thismattertheCommerceUnderSec retary ,Robert Ortner ,theadministration's spokesman ,argued that these figures should notbea causeforconcern .He said : Foreigners arevoluntarily participating inoureconomy because they finditat tractive .I thinkthisisa much fairer description thanAmericaasa debtor nation . So letme askyou,doesAmerica's increasing debtor status cause you concern and,ifso, why ? Mr. LAWARE. Yes, I don'tlike the trend .I wouldliketo seea somewhatmore favorable one. Unfortunately , the numbersthat we're dealing withherearenota terribly accurate appraisal of what the situationis. If you remember , the greatburstof Americaninvestment abroad ,whichisoursideofthatbalance sheet , was made any wherefrom30 to40years agoright after thewar andduring the 1950's and 1960's .Thoseitemsarecarried inthis report atbook value , whichistheoriginal investment valueatthetimethosein vestments were made . 22 On theotherside , theinvestment intheUnitedStates , much of whichhastakenplace inthelast 5 to10years ,isalsocarried at bookvalue ,butthose values arehigher . TheCHAIRMAN .Letme interrupt . That's a veryinteresting com parison , butwerethesedebtsreally 40-yeardebts ?That's unusual . Mr. LAWARE. Well,itisn't debt .It'sinvestment . We call itdebt , butit's foreign investment inthis country .It's notthatwe arenec essarily borrowing fromabroad . The CHAIRMAN .You mean the investmentthatwe made abroad that yousayis40years oldor30or40years old ,thata great pro portion ofithasneverbeenturned over , there's never been any transactions that wouldbring itup sothatitdoesn't reflect infla tion ,itdoesn't reflect- Mr.LAWARE.It's never beenmarkedtomarket ,ifyouwill ,Mr. Chairman . Ifyoumarkedittomarket , itwouldbesubstantially higher . The CHAIRMAN . I'dlike toseean analysis ofthat . Maybethe Federal Reserve hassomething .That's a veryinteresting qualifica tionin our net debt. Mr.LAWARE.Itdoesn't change theworrisome nature ofthecur renttrend ,butI think itmay changethatbalance numberinthe analysis final . I am inclined tothinkthattheinvestment in thiscountryisa relatively healthy thingifitdoesn't getso large — thatis , thebal ancedoesn't getsolargethatwe wouldhavedifficulty servicing it . The CHAIRMAN .Well, I agree with that . It's theonesidedness thatisofconcern .The mobility ofcapital isfine . Mr. LAWARE.Beinga debtor nation - after all ,we werea debtor nation up until thebeginning ofWorldWar I anditwasthatfor eigninvestment thatbuilt our railroads and mostofourindustry . TheCHAIRMAN . Well , that's right ,butwe certainly don't have thatkindofa situation now oranything like whatitwaswhenwe werebuilding ourindustry inthe19thcentury . TheFederal Deposit Insurance Corporation isrequired toinsure deposits up to a valueof$100,000 in theeventofa failure ofan insured institution . In practice , alldeposits , including thoseover andabove$100,000 havebeeninsured .Therehaven't beenanyreal losses indepositors . Isthis policy ofinsuring alldeposits a wiseone? Can youdiscuss theramifications oflimiting theguarantee tothe$100,000 limit ? Shouldwe make theguarantee explicit toalldepositors ? Mr.LAWARE.Well,many ofuswereopposed toraising thede positcoverage from$ 40,000 to $ 100,000 which was done several years ago,feeling thatyou canneverreverse thatkindofa trend . Therefore ,thehigher theceilings were ,themorewe werebuilding expectations thattherewas somesortofa safety netthatwas goingtocoveralldepositors . CONTINENTAL STOCKHOLDERS TOOK A BATH Unfortunately , therealities ofsome oftheselarge troubled bank operations andContinental isperhaps thebest example - arethat you couldnotstabilize thesituation and stoptherun because it's largely acorporate runbydepositors who heldmorethan$100,000 . 23 You couldn't stabilize thesituation without ineffect implying or stating a guarantee forallthedepositors . And that , ofcourse , brings up theethical question ofwhether bigbanksaretoobigto fail andwhetherthatisn't unfair tothesmallbanksthatinfact areallowedtofail ? I wouldsubmit to you thatin thecaseofthesmallbanks , it's tragic because itisa disruption in thatcommunity when a bank fails , butforthemostpart the depositors havenotbeendamaged when thathappens . It's theshareholders and themanagementwho are washed out. TheCHAIRMAN .That's truewiththebigbanks ,too ,isn't it? Mr. LAWARE .Sure. The CHAIRMAN . When Contine ntal , forinstanc e, the manage ment was in effect kickedout,the stock holde . That rs tooka bath wasexactly thesameasa fa ilure would be ofa man ufact urin g company,excep t the depos who had a commitment were saved itors . That's all. by the , justified was, I feel Mr. LAWARE. The rescueoperation ofthatbankwouldhave effect ofthefailure thattheripple fact butabroad ,notjustinthiscountry crisis created a majorfinancial choice thatsays .So we arefacedwiththatveryunpleasant aswell ofwhich and thefailure aresomebanksthatareso large there systemthat inthebanking wouldbeso damagingtoconfidence ithappen . let youcan't SHOULD OFFSHORE DEPOSITSBE INSURED ? TheCHAIRMAN .Before Iyield toSenator Graham ,let me askyou oneotherquestion alongthisline . Shouldtheoffshore deposits of U.S.headquartered banksbe insured and shouldthe FDIC assess premiumson thosedeposits theinsurance ? ? deposits ofU.S.banks Mr.LAWARE.Theoffshore deposits ofU.S.headquar . Theoffshore The CHAIRMAN. Yes, sir tered banks. Mr. LAW ARE .No ,Idon'tthinkso. The CHAIRMAN.Thank you,sir . Senator Grah am . SenatorGRAHAM .Thank you,Mr. Chairman . I wouldliketoreturn tothequestion thatI was asking before relative standards totheeffect ofrisk -basedcapital on developing nations. require a percentage will -basedcapital ,therisk As Iunderstand oftheloansand thatforlesser basedon theriskiness ofreserves list of fora scheduled loansthatthatreserve developed nation reserve re is100percent ofcountries countries orcharacteristics . quirement is ,itseems statement ofwhattheproposal Ifthatisan accurate forcommercial disincentive tome thatthatwouldbeaa significant whichisa predicate moneylending makingthefresh institutions ina posi these countries andplacing theeconomies torestarting obligations . financial domestic andforeign tomeettheir tion Mr. LAWARE. Senator , I thinkthere's a little bitof misunder standing there . Idon't think thattheregulators aresaying thatall of theselesser developed countryloansrequire 100 percentre 24 serves . What theyare sayingisthatreserves thatarespecifically allocated toa specific country debtora specific groupofcountries ' debtcannot becounted as primary capital . And that's whatI was getting atbefore you left togo voteinsaying thatsome ofmy col leagues interpret thatasa disincentive forreserving against those loans at allsince you move itoutofthatcalculation of primary capital . On theother hand,there isno requirement thatthatreserving go to100percent ofthevalue oftheloan .It's just thatportion of thereserve thatisspecifically allocated fora specific loancannot becountedaspartoftheprimarycapital . So I don't think thatisa sufficient disincentive atthis stage of thegametoslowdowntheprocess oftrying todosomething about restructuring thesedebtsand getting some fresh capital intothose countries . SenatorGRAHAM . Would itbe fairto concludefrom thatstate ment thatyou do notfeelthatany changeinpolicy oftheTreas uryor theFederal Reserverelative totheeconomic circumstances nations ofthese debtor isrequired asa consequence oftheadoption system oftherisk -basedcapital ? Mr. LAWARE. Therehavebeenseveral proposals . There have beenproposals forforgiveness ofsomeportion ofthose debts .There havebeenproposals forsomesort offacility tobeestablished with public fundstobuy up someofthatdebt . Iam veryviolently op posed toa taxpayer bailout ,andwhen youstart using public funds forthatpurpose ,that's whatyou've got . I am confident thatbasedon theprogress thatwe'vemadeover thelast 4 or 5 yearsthatifwe cancontinue alongthisline ,we can getthis situation under control using theprivate sector andnegoti ation and getthose capital flows going againandthose interbank deposits being madeagain sothat these countries canservice their debt. But some alleviation oftermsisgoingtobe implicit inthatsolu tion , probably withregard tointerest rates and probably with regard tomaturities ofprincipal , sothattheyhavesome breathing room and cangettheignition going . we are now that GRAHAM. Basedon the experience Senator and made inthe1970's living throughwithloansthatwerelargely was Reserve oftheFederal theposition where I gather early1980's areany thatthere ,doyou believe -offposition a hands essentially thatshould standards lending initiated Federal Reserve additional with experience banksbasedon this toU.S.commercial be applied it ? thegoalofnotrepeating And I wouldgiveasa specific example thedifference between Argentina andBrazil whereinBrazil there appears tohavebeena highpercentage oflending thatwent totangible projects thathad aneconomically advantageous relationship tothecountry andthe ability ofthecountry to repaytheloan , whereasin Argentina much ofthemoneyallegedly wentinto noneconomically productive purposes. Usingthosetwo countries as an example , do theyindicate the needforany Federal Reserve regulatory policy relative toforeign lending so as to mitigate the prospects of a recurrence of what we'renow living through ? 25 Mr.LAWARE.Well ,fortheFederal Reserve oranyother regula tortotryto establish credit standards forbanksin theirlending policies wouldbea complete departure fromanyhistoric precedent thatI'm aware of. There are to my knowledgeno lendingstandardsthatare im posedby regulators and I thinkitwouldbe a mistaketodo that . BANKS LENDING TO FOREIGN COUNTRIES ARE ALERTED TO PITFALLS I wouldsubmit thatifyou havetouched thestove and gotten burned that youstay veryfarawayfromthestove fora while ,and I wouldguess thatbanksentering intoforeign lending havebeen alerted tosomeofthepitfalls andare going to be a lot more cau tious inthefuture on justwherethemoney goesand whetherthe propersequence forproperrepaymentand service ofthatdebtis there. Justasa digression ifIcantakea couple minutes ,thehistory of ourlending inLatin America particularly ,buttoall thedeveloping countries , isa veryinteresting one.Itaroseasa result ofthehuge pool ofwhatwe called atthetime petrodollars thatcameoutofthe repricing ofpetroleum in1973 ,andthis moneywasgrowing inthe handsoftheOPEC countries , hugepools ofit, all in dollars be causetheoilsales were alldenominated in dollars .Itevengotto thepoint wheretheSwiss werecharging a negative rate ofinterest tokeepthemoneyfor the petroleum countries andtheyhadtodo something withitand everybody said ,well ,the private banking systemoughtto helpin recirculating or reallocating thosefunds . So thebankssaid ,OK ,we think that's a great idea , andthede posits begantocomeinto theUnitedStates French , ,British ,Japa nesebanks ,forthepurpose ofbeing recycled . Now theycameinon 90and 180daycertificates ofdeposits . So theyturnedaroundand said ,well , wherearewe goingtolendthis money? Well , we're goingtolend it toMexico andArgentina and Brazil and various countries in Africa and what isthepurpose going tobe?Well ,it's going tobeproject planning .We're going to build a subwayin MexicoCityandsteelmills in Brazil and so forth. Now that's thekindoflending thatyou wouldordinarily do on 25or30yearterms ,butifyoursource offunding forthose loans is 90 days ,you're really stretching ittoputiton 3 yeartermsand theproject wouldn't be evenfinished before itwouldbe maturing . Well,fora numberof years those werejust rolled over .When thematurities came,thetermswerereset and theloanwas rolled over . When political problems aroseinMexicoin 1982and thebanks beganto loseconfidence inthepolitical situation thereand with drew interbank deposits , theMexicansdidn't have thedollars to service thedebt , and ithad a dominoeffect .They said ,OK , ifthat canhappeninMexico , canithappeninBrazil andArgentina ? So thewholethingcollapsed . So therewerelots ofmistakes made. We wereforced tolendshort because our supplies ofmoney were short ,andweprobably didn't exercise the diligence over where the money wentthatwe shouldhave.I don'tthinkthose mistakes can be made again . 26 agreewith the premiseof your SenatorGRAHAM. I basically judgment should be a marketplace practices answerthatlending banks .I , inthiscasecommercial institutions made by thelending boundaries national toworkacross thatwhen you start do believe havetotakeon a different economics thatsome ofAdam Smith's inwhat flavor forsome oftheexactexamplesthatyou justcited is proposal -based capital thattherisk ,andIwouldsuggest happens in lending thatthereneedstobe somestandards itself a statement community . intheinternational Theconsequences ofsomeoftheactivities thatyoudescribed are notjustbeingfelt by thecommercial banks.Our tradedeficit isto a substantial degree , maybeasmuch as30percent ,a function of thefalloff ofourability toexport into these countries ,particularly inLatin America whichused tobesomeofourmajor trading part nersandtheir inability topurchase ourgoods asa function oftheir internal economicproblems whicharesignificantly a function of theirexternaldebt. So itisnotacross national borders justa matter ofmarketplace economicsand I thinkthatitwould be in the nationalinterest if theFederal Reserve Boardweretogivesomethought towhatits roleshould be basedon recent experience looking tothefuture whereglobal economics arelikely tobe a greater nota lesser part ofourtotal national economic well -being . . atthatverycarefully belooking Mr.LAWARE. I'msurewe will . ,Mr.Chairman GRAHAM.Thankyou Senator totakeyoubacktoyourbe .Mr.LaWare, I'dlike The Chairman , WI, , WI .When you came out of Columbus ginningin Columbus .We'vegota very unusual . That's University youwent toHarvard , asyouknow,butI madethesame inWisconsin gooduniversity mistake . Mr.LAWARE.My wifewenttotheUniversity ofWisconsin . The CHAIRMAN .Well , that's great .And thefactthatyou were borninColumbus , ofcourse ,isvery-Ihada business inWaterloo , WI,whichisn't veryfaraway,asyouknow. Thereason I'm getting on this beatisbecause youfinished your education and thenyouhad 2 yearsinwhichyou werea pilot - or youwereintheAirForce intheKoreanwar. Mr.LAWARE.Theywouldn't letme nearan airplane withmy eyes. TheCHAIRMAN . ButyouwereintheAirForce . Youserved your country intheAir Force .ThenyouwenttoworkattheChemical Bank in New York, one of thegreatmoney center banksinthe country ,andyourose veryrapidly andyoubecame a topofficial in thatbank. I guessan executive vicepresident or something like that. Mr.LAWARE .Seniorvicepresiden t. The CHAIRMAN.Beforeyouwent toShawmut. Mr. LAWARE .Yes,sir . The CHAIRMAN .Now I hopethatasa Governor oftheFederal Reserve underpinnings Boardyouwill notlose yourveryimportant inColumbus ,WI.I saythatbecause I hadan experience -Ihad a business inWaterloo and we had a local bankertherewho was ter rific .He made allthedifference .We werea profitable business .We grew . We didverywell . He helped us withourcostaccounting 27 system . He helped us withourpurchasing . He gaveus excellent advice - notcredit — thatwas important , but more important was the advicehe gaveus. And I thinkthisisone ofthereasons why you have a situation whereinthelast 10years we hadan increase ofabout 10million injobs , allofwhichhasoccurred insmallbusiness .Bigbusinesses , theFortune500, haveactually reducedtheir employment . So the greatgrowthinthiscountry and somuch oftheinnovation and so forth hascomefromsmall business andsmall banksthatnotonly provide credit butprovide something more important , whichisex cellent financial advice and makesaabigdifference . The reason Igointo thatisbecause I notice inyourletter inthe New York Timesand ofcourseinyourassociations theremay be tendency foryou,as theguruoftheFederal Reserve Boardinthe future on banking , to favorbank concentration , banksmovingin andgrowing through huge branches , and neglect ofcommunity banking . And I thinkthegreatgenius ofoureconomic systemtoa considerable extent isthefact thatwe have14,000 independent banksandnoother country hasanything like it .Ourbiggest banks onlydo about30 percent ofthebusiness . It's big ,andasyouhave already said ,theycompete effectively abroad ,butIjust don't want toseethatmarvelous baseofcommunity banksinplaces like Co lumbus ,Waterloo and thousands ofother small townsinourcoun tryeroded by banksmovinginbecause oncea bankbecomes part ofa bigholding company, theremay be some kindsofefficiencies , but therearegreatlosses because you justdon'thave the same kindofcommitment tothelocal community thatyouhaveifyou havea bankerwho lives there ,who'spartofthecommunity . ThatWaterloo bank, forinstance , isowned by 103people , allof whichlive intheWaterloo area ,noneofwhom live morethan20 milesaway.How aboutthat? Mr.LAWARE.Icouldn't agree withyoumore.As a matter offact , I'mnotsoconcerned about thedanger ofbigbanksasIam delight ed withthefact thatwe arechartering morenew banksall the time. The CHAIRMAN . Well , that's veryimportant , keeping up that charterbusiness. Mr.LAWARE.Absolutely . IfIcan takea momenttoreminisce a little bit . When the bankholiday came in 1933 , oneofthetwo banksin Columbusreopened almostimmediately because their loan portfolio wasmostly government bonds andthings backed by excellent collateral . NO INSURANCE Theother bank ,whichwasverymuchdedicated tothecommuni tyand had thebulkoftheloans to thefarmers and thelocal busi nessmen ,didn't reopen .And agroupoflocal businessmen who had notlost everything in thecrash stepped forward andsaid ,we will recapitalize thebankandgetitreopened andwe will payoffthe depositors who lost inthis process because there wasno deposit in surance in thosedays ; overtimewe willgive you allnotes for whatever .My father had a balance ofperhaps $200or$300inthat bankthatfailed andhe gotthefinal checkfromthat groupwho 28 tookitoverin1946 ,13yearslater .But that's thekindofcommuni ty identification and dedication thatyou're talking aboutand I thinkit's wonderful . In Massachusetts where we have had a lotof consolidation re cently ,Ithink we havechartered overthepast18monthsabout12 new banks , anditistheperception thatfroma competitive point ofviewthatthesmall , dedicated , locally identified ,highquality service bankcan compete withthebigguyandruncircles around him.The highest performing bank wehave inMassachusetts isone downontheCapethat's a couple hundred million dollars insize andjustdoesa superjoband theyearnalmost2 percent return on assets ,which isphenomenal. The CHAIRMAN.That' s very reas surin g. Mr.LAWARE.I'm withyou,Mr.Chairma n. The CHAIRMAN . What areyourviewson thequestion ofthede sirability ofseparation ofbanking andcommerce ?They're moving , asyouknow, verymuch inthedirection of- especially bigaggres sive corporations havebeentrying togetinto S &L'sandtrying to getinto banking . Mr. LAWARE .Thatworries me .I don'tthinkwe understand yet wellenough whattheimplications ofthat wouldbetomoveinthat direction atthispoint . I wouldbe infavorofkeeping thebarriers betweenbankingand commerceuntilwe know more aboutit .I thinkit's goingtobeoneoftheissues ,Iagree . PAYING INTEREST ON RESERVES The CHAIRMAN . FormerFDIC ChairmanIsaacs hasproposed a restructuring of the Federal Deposit Insurance Systemwhich wouldusefundsfromtheFederal Reserve's interest earnings on its open market portfolio topayfor therecapitalization ofthe Savings and Loan Insurance Fund, provided the banks at a laterdate would receive interest on reserves . Do you believe itisadvisable to pay back interest on theirre serves? Mr.LAWARE.Well ,thelack of payment ofinterest on reserves is really a hiddentaxon thebankingsystem . TheCHAIRMAN .Well ,theyought topaysometax .Theydon't pay verymuch really . Mr. LAWARE .We payourtax. You knowthatthebanksinMassachusetts arethehighest taxed by theState ofany State intheUnitedStates ?And it's aThe CHAIRMAN.Well,you don'tpay verymuch really inFederal income taxes . Theypay aboutasmuch as theyfeel theyshould from a PR standpoint . Mr.LAWARE.I won't accept thatformy bank . Ifyou'll lookat therecord ,I thinkyou willfindwe pay ourtaxes , ourfairshare . The CHAIRMAN.So doesyouranswermean thatyou thinkthatit wouldbeadvisable topaybanksinterest ontheir reserves ? Mr. LAWARE. No , I didn't mean to make a blanketstatement like thateither . Itisa question ofwhereyouwanttoallocate the taxburden . Ifyoupay banksinterest on their reserves , then there's goingtobe lessmoney turnedoverthe Treasuryby the 29 Federal Reserve System ,andthey'll havetopickup thatshortfall in revenuesomeplace . The CHAIRMAN. Well, do you favorusingthe resources of the Federal Reserve Systemtobail outthesavings andloanindustry ? Mr. LAWA RE .No ,sir . The CHAIRMAN.You'reopposedtothat? Mr. LAWARE .Yes, sir . The CHAIRMAN . Wh y ? Mr.LAWARE. Well,theFederal Reserve hastolendagainst ac ceptable collateral , and thestandards forthatcollateral arewell spelled out ,andI'mnotsurethere's thatkindofcollateral avail ablein theS& L industry . TheCHAIRMAN . Yes ,butwe havea terrific problem .We had hearings before thiscommittee , and thelatest estimates ,evenafter thehearings , were thatthebailout isgoingto havetocome,it's inevitable ,andthatitwill be between $25billion and$75billion . themoney come from? Whereshould tothatone. answer Mr.LAWARE.IwishI hada quick itshould notcomefromtheFeder saying .You're The CHAIRMAN , however. alReserve Mr. LAWARE . That'scorrect . TheCHAIRMAN .Well,ifitdoesn't comefromthere ,do we appro priate $25 billion to$75 billion and thenjustrun up thedebtthat much or increasetaxes? Mr. LAWARE. Either that or provide someotherway that the FSLICcanfunditself .Thatis ,either perhaps guarantees thebor rowing The CHAIRMAN .We'vegoneawfully fardownthatroadalready , as you know . Mr. LAWA RE .I understand,sir. The CHAIRMAN . Wouldwe impose now a premiumofone-eighth on topoftheone-twelfth -inaddition totheone-twelfth thatthey have topay on theirdeposits , terrifically burdensome forthe S &L's ,thehealthy S& L's ? Mr.LAWARE. Thereisa variety of solutions orpartial solutions thathavebeen proposed likerisk -related premiums ,but that's almost counterproductive because theonesthatareintrouble are theones least abletopaymore.Sothatdoesn't soundright . TheCHAIRMAN .Well ,shouldn't we promptly insist thatanynew insurance ofdeposits canonlygotoaninstitution whichcomplies withFederal restrictions on investment ? You see,we havea situa tion whereCalifornia andTexas , particularly , haveveryloose re strictions .InTexas ,Iunderstand ,theS & L's canevengetinto equi ties .Theycangetintoallkindsofrealestate ventures ,and soforth . And therisks areveryhigh . And atthesametime ,95percent of theirliabilities areinsured . Mr.LAWARE.One ofthefallouts ofthedualbanking system is thatyouhavethese banksthatarechartered by andoperate inin dividual States and theStates feel thattheyhavetheright toregu lateto some extentwhat thebanks in thatStatecan do. The CHAIRMAN .Well,lettheStateinsurethem. Mr.LAWARE.I thinkthatwe may be headedtoward thepoint thatinordertobe eligible forFederal insurance ,thatyou haveto havesomelevel ofcompliance withFederal standards . 88-455 - 88 - 3 - 30 TheCHAIRMAN .And hadn't we better veryrapidly ,because this isgetting worseby themoment ? Mr. LAWARE. I wouldnotbe in favorofthe dissolution ofthe system dualbanking . The CHAIRMAN. Well, neither wouldI,butitwouldjustseem to me thatifwe aregoing toprovide deposit insurance ,we oughtto justinsist on investment standards thatotherwise we arejust goingtobe constantly bled . The estimate now iswe arelosing $ 13 billion a year ,basedon thelosses inthefirst quarter forS & L's . That is$1 billion a month. Mr. LAWARE.As Senator Dirksensaid , thatbegins tosoundlike realmoney . TheCHAIRMAN.Right . UnitedStates current accountdeficits for1988are likely tobe wellover$130billion .At thesame time ,many experts aresuggest ingwe stabilize the dollar at current levels . The dollar haseven riseninrecentdays. How willtheUnitedStates and therestoftheworldadjust to eliminate oratleast drastically reduce theU.S.trade imbalance ,if thedollar doesnotdecline anyfurther ? Mr.LAWARE.Well ,theother partofthat ,ofcourse ,istheinfla tionary pressure . Ifthedollar goesdown significantly moreand thatcreates a further demandonourability toproduce whenwe're already operating at 83 percent ofcapacity , I thinkyou'dhave inflationary pressures severe . The CHAIRMAN .Yes, butthatwasn't my question . The question goesbackup again is ,whatifthedollar ? Mr.LAWARE.Ithink thatwe havetobealert tonothaving itgo up sohighthatitreverses thefavorable trend inourtrade balance that hascomeabout ,atleast partially ,because ofthedecline . The CHAIRMAN .So we havetoproceed on kindofa knife's edge there. Mr.LAWARE.Yes,sir .And thestability ofthedollar isprobably the bestanswer . THE BAKER PLAN country debt The CHAIRMAN. Now theBakerplanfordeveloping . in thedebtorcountries . First , the adjustment parts hasthree ,and capital , and third financial , injections ofmultilateral Second by banks. And , new lending thisiswhat I want toaskyou about . tohavebeenforthcoming doesn't appear third part that You've hadveryimpressive experience as a banker . Wouldyou please explain why bankshavebeenreluctant to adhereto their portion oftheBakerplan? Mr. LAWARE. I thinkthebigbankshavegenerally gonealong withit .Theyhavethebiggest stake , obviously , andtheyhavethe mostsophisticated understanding oftheproblem andtherealiza tionthatfreshmoney inevitably has togo in there . The smaller participants , some oftheregional banksand some of thelocal bankswho gotinthrough participations andsyndications , arebe wildered by thefactthattheyarebeingcompelled tothrowwhat theyconsider goodmoneyafter bad. 31 So therehas been a considerable amount of resistance from smallerbanks and regional banks to thosecallsforadditional funds .Thosearethebanksthattendtobe,asI outlined inanswer toan earlier question , theoneswho aretrying togetoutofthose loansnow, and theyaretheonesthathavetakenthe bigreserve hits ,andtheyaretrying tomanagethose portfolios down. The bigger fellows believe thatthismoney will allbe collected in the final analysis , and theyhavebeen more willing to make the additional investment togivethese countries theturning around timethattheyneed. Itishardtofault either strategy ,and Ithink itisjust going to thateverybody isn't goinginlockstep beinevitable . The CHAIRMAN. Mr.La are, you area ver y, veryimp ressi ve cand idat e forthe Fede ralReser ve Board. You arethe first person I've seen inthe30 years I havebeen on thi scommi tteewho has made more than,asI countthe m , at least 75 separ atecont ribu tions topolitic alcandida tesforoffice . Imade my first con tribu tion toa candidat e foroff icejustthislastweek,thefirs t one I've made in30years— itwasn 'tmade tomyself. Maybeyoucangiveussomehelp .Youare obviously a fine citi zenand a veryhonest person .Do youthink thatoursystem ofrais ingthousands ofdollars frompeople who havesomeinterest inleg islation needstobe reformed effectively , and do you haveany rec ommendations on how we should do it ? Mr.LAWARE. I thinkitisveryunfortunate , Senator . The CHAIRMAN . You thinkitisveryunfortunate . Comingfrom you,that's veryinteresting ,because youarea realist ,andyourec ognize that's theway thegame isplayed . Mr. LAWARE . Thatiswhy youread 75or 80 different contribu tions there overa period of8 or9 years .That's theway thesystem works .Thosecontributions ,bytheway,arenotmadeinconnection with specific piecesof legislation but ratherwithconcern for having qualified people inoffice , andyouwill notethattheyare notallforonepartyorthe other . The CHAIRMAN . Well, they're mostly Democrats , whichspeaks wellforyourjudgment .(Laughter .] Mr. LAWARE .And my regi strat ion,sir. The CHAIRMAN.But youthinkthatisthemotivation ofmostcon tributors ? Mr. LAWARE. No. No , I really don't . Obviously , political action committees andorganizations like thatdistribute campaign funds intheir own self -interest . Thatistheway thesystemhas evolved andthat seemstobe theway itworks .Thatdoesn't mean anyof us have to likeit , and leastofall , probably the candidates who havetoraise themoney torun theseexpensive campaigns . You area notable exception tothatatanylevel ofgovernment thatI am awareofand tobe congratulated , butmostcandidates don't havetheimpeccable record thatyouhavethatenables youto without spending money. getreelected The CHAIRMAN . Well , youknow, I am absolutely convinced that at least two-thirds oftheMembers oftheSenatecouldrun forre election without spending a nickel ,andtheywouldwin.The advan tagesof incumbencyare colossal . You have a million a yearfor your staff ; you have anothermillion bucks to send out newsletters 32 to your constituents . You have almostunlimited accessto the media , whichyouropponent doesn't have . You havea record of having run.People , oncetheyvoteforyou,they're likely to do it again , justoutofhabit , ifnothingelse .You havecolossal advan tages. And thenin addition tothat , you come up withtwice— asmost incumbents do,twice asmuch moneyasyouropponent . Itisalmost having thetenure ofa college professor .You're inforgood . Letme just asktwomorequestions , sir .I knowI've keptyou a longtime,butthese are,Ithink ,important . Mr.LAWARE.I'mhaving fun.[Laugh ter.] MERGER MANIA The CHAIRMAN. First , the merger mania. Merger mania is swamping America ,an unprecedented debt .Mostofthis debtisin theformof immediate and long -termdebt .Hostile takeover financ ingbeginswithshort -termbank loans . What isyourviewofthis debtproblem ?What cantheFeddo to addressit, and do you favormore activist enforcement of the margin rules ? Mr. LAWARE. Well, I'm worriedabouta lotof the huge debts thataretakenon by thesecompanies ,intermsoftakeovers and in termsofsomeoftheleveraged buyouts . Idon't think thatyoucan condemntakeovers buyouts simply oryoucancondemnleveraged because someofthemareextreme .What happens ,typically ,inone ofthese high -cost debt -financed takeovers ofone firm byanother is thedebtlevel resulting after theconsolidation issoheavythat theystart dismembering thecompanythattheyfought tobuyin ordertopayitdown. TheCHAIRMAN.That's exac tlywhatconcer nsme. Mr. LAWARE.And what worri esme isthat go inand they . Even when people The CHAIRMAN. Win or lose has thatprevails , themanagement who prevail lose it ,thepeople , buy thecorporate . Theyborrowmoney gotten in debtto do it way. ofthestock andwinthat stock ,biduptheprice Mr.LAWARE. Or thecompanythat defended hastojustify toits shareholders down ordefending against thereasonforturning an ( offer whichmay havesounded pretty goodtotheshareholders ,and so theyhavetogo outand create a special dividend or a liquida tion ofsomething togive theshareholders someadvantage .SoIam notsurethatin thelongrun whether thatserves management goals verywell .Butthething thatworries me asa banker is that iftheyareverythinly structured , inother words , theleverage is ) toohigh , and ifwe go intoa period wherewe have a downturn , thentheability toservice that debtmay notbethere . The CHAIRMAN. Extremelyvulnerable , not onlythat , but they havea mandate toput thatmoney intopayinginterest instead of research and development , instead ofmanpowertraining , instead ofallthethings thatwillmake them more competitive . Investment inbetter equipment andsoforth . . notproductive Mr.LAWARE.Itiscertainly € 33 SUITAGAINSTSHAW MUT REGARDING ATM's tion .In December 1986 Bay The CHAIRMAN. One otherques ines. g autom aticteller mach ntrega rdin ustcom plai an antitr d Shawmut andfour otherNew England banks with Banks charge Inits suit BayBanks charged thatits competitors sought tore strain trade , tomonopolize the marketforautomatedteller sery ices inMassachusetts andtoemploy unfair methods ofcompetition , unquote. As oneexample Bay Bankspointed toa feethatShawmutwas planning tocharge its customers whentheyusedother ATM's.The feewasgoingtobe a hefty 8 percent ofthetransaction fee .This planhasbeendropped andthesuit hasbeensettled . Nevertheless , Mr. LaWare,theseproposals suggest exactly what Bay Bankscharged . suit ? inthis defense Can you expandon Shawmut's Mr.LAWARE.We thought thesuit had no merit . What we had doneinconjunction withbanks in Connecticut andother banksin Massachusetts and New Hampshirewas toforman ATM network wherethecardholders fromany ofthebanksthatweremembersof the association coulduse the ATM's of any othermember. Bay Bankswas invited tojointhisprocess ,buttheyfelt thattheywere at a disadvantage , iftheyjoined , thattheywouldbe giving up more thantheywould be getting from membership , because they hadthelargest proprietary arrayofATM's inNew England , and thattheholders ofotherbankswouldbe using their ATM's, and properly compensated theywouldn't begetting forit . Theytried to , inouropinion ,sir ,slowdown theprocess ofthe formation ofthis new network by bringing this suit .Thesuitwas settled ,theywithdrew thecomplaint , andI think that's all ancient history . Idon't think that-certainly , ourlawyers felt there wasno meritin the antitrustaccusations . The CHAIRMAN . Ifthere was no merit ,why didtheydropthe suit ? Mr.LAWARE.Probably theyrealized there wasn't anymerit toit either . The CHAIRMAN .Why didtheydropthefee ?Why didShawmut dropthe fee? sucha problem thatifthefeecreated Mr.LAWARE. We decided ,thenitwascoun aswell outofthenetwork mightstay thatothers thesame kindof ,becausethewholeideaistocreate terproductive .You canuseyour cards environment thatwe havenow forcredit , and we wanted cardanywherewithany bank'smerchant credit with debitcardsto be ableto use an ATM thatbe our cardholders with provide theconsumer theycould longed toanybank,so that . And ifthefeewas goingto ofthatkindofservice theconvenience and tothatandkeepbanksfromjoining becounterproductive makingtheir ATM'savailable ,thengiveitup. TheCHAIRMAN .Thankyou,sir . Thankyouverymuch. Mr. LAWARE. Thank you, Mr.Chairman . The CHAIRMAN .The committeewillstandin recess . [Whereupon at12:30 p.m. ,thehearing wasadjourned .] [Additional material supplied fortherecord follows :) 34 STATEMENT FOR COMPLETION BY PRESIDENTIALNOMINEES > Name : LaWare John Patrick NOT (OTMERO D Pos Dateof ition towhich nominated : Governor , Federal Reserve Board nomination : Date ofbirth : 20 (DAV Marital status : Name and ages of children : 02 28 CONTIN Columbus , Wisconsin , U.S.A. Full nameof spouse :_Marger y Ann Ninabuck Laware John Kevin Margaret Education : Place ofbirth :. CTWO Marrie d Ann 31 29 Date s attended Institution Degrees Datesof received degrees Harvard University 1946-1950 B .A. 1950 University of PA 1950-19 M .A. 1951 New York University 1954-1956 Harvard Business School Advanced Management Program 2 /75-5/75 ate'75 Certific Honors andawards : List below all scholarships ,tellowships ,honorary degrees ,military medals ,honorary society memberships ,andanyother special recognitions for outstanding service orachievement . Honorary Doctor Humane Letters, Suffolk University MinutemanCouncilB.S.A. , Distinguished citizen Northeastern University, College of Business, CEO of the Year B'nai Brith-AntidefamationLeague, Outstanding Citizen 1 35 Memberships : membe List below all rships andoffices held inprofes sional ,fraterna l,business ,scholarl y. ci ,cha ritable andotherorganiza vic tions . Omce held (ifany) Organization S EE ATTA CHED Dates L IST Employment record : List below all positions held since college ,including thetitle ordescription ofjob ,nameof employment ,location ofwork ,anddates ofinclusive employment . 1. U.S. Air Force, July, 1951-August, 1953, 2nd Lt. 2. Chemical Bank, New York , October, 1953 -October , 1978 Startedin trainingprogram ; became LoanOfficer ; rose to Senior Vice President in charge of Holding Companyoperations , 3. Shawmut Corporation, Boston, MA (Bank Holding Company) . Joinedin 1978as Presidentand Director Chairman 4. and C.E.O. 1980 -Pres ent , Shawmut National Corporation, Boston , MA and Hartford , CT (Bank Holding Company ) ChairmansinceFebruary1988 (date thatoperations commenced) 2 N 36 MEMBERSHIPS AND_OFFICES HELD Shawmut National Corporation, Boston, MA and Hartford, CT Chairma n 2/1988 to present Bank HoldingCo. , MA Shawm ut Corporatio n, Boston Bank Holding Co. President 10/1978 Chairman 6/1980 to present Shawraut Bank , N.A. , Boston, MA Commercial Bank President Chairman to 6/1980 10/1978 to 6/1980 6/1980 to present Shawm ut CreditCorporatio n , Boston, MA Di rector 10/1978 to present Commercial Finance ShawmutSecuri tiesClear anceCorporati on (activi ties transferred to Hartford Trust Company, New York ) Trust Company Activities (inactive) 10/1978 to present Director Chairma n 6/1980 to pr esent ShawrautFinancial Corporation,Boston ,MA Sale of Commer ) cial Paper (inactive Director Securities Compudata, Inc., Bosto n , MA Inactive Company Director Chairman 10/1978 to present 1/1979 to present 6/1980 to present ,MA r ), Boston ShawmutAssoc porate iationIncor d (NewPa Director 10/197 8 to pr esent 10/1978 to 1980 Inactive President Chairman 6/1980 to present ShawmutBoston Intern ation(formerly ationa l BankingCorpor ShawmutInternational Corporation ), Miami, Florida 11/1978 to present EdgeAct Corporation Director 6/1980 to present Chai rman Americ an AgCredi t Corporat ion,FortWorth, Texas ) Agric ultura l Finance(inactive Directo r 3/1980 to 11/1985 AtlanticInternational Bank Limited , London, England England Offshore Bank Alternate Director Director Deputy Chairman 11/1978 to 11/1980 11/1980 to pres ent 6/19 83 to 9/19 85 e Finan cial ServiceCorporatio n , Boston Devonshir , MA al-purpose Financi al Company (inactive) Speci Director President C.E.O . Chai rman Atlanti c Capita l Limite d , Hong Kong OffshoreDeposit-takingCompany Dir ect or on, MA Libert ance Co., Bost y Mutual Insur Director Casualty Insurance Liberty Mutual Fire Insurance Co. , Boston , MA Direct or Casualty Insurance 11/1978 to present 11/197 8 to present 11/1978 to pre sent 6/1984 to presen t 8/1980 to present 5/1980 to present 5/1982 to present 37 Memberships and offices Held (continued ) Travele rs Real Estate Inve stment Trust , Boston , MA Real Estate Investm ent Trust T rustee 2/1984 to 1986 Travelers Realty Income Investors , Boston, MA Real Esta te Inves tment Trus t Truste e 6/1985 to 1986 The Equitable Life Mortgage and Realty Investors , Boston , MA Real Estate Investm ent Trust Trus tee 1980-1 982 Associat ion of Bank Holdi ng Compani es, Washing ton, D.C. Trade As sn . Chairman Direct or United Way Of Massachusetts Bay, Boston, MA Charitable Chairm an Direct or Jobs for Massachusetts , Boston, MA Publ ic Servi ce Direct or Massachusetts Business Roundtable , Boston , MA Public Serv ice Cha irm an Director Boston Aquarium , Boston, MA Trustee Aquarium Boston Children's Hospital , Boston , MA Vice Ch air man Hospital Tru ste e Northeastern University , Boston , MA Education Vic e Cha irm an Member , Finance Co mmi tte e Chairman , Finance Committee Mount Holyoke College , South Hadley , MA T rus tee Education Ha rva rd Club of Bost on , Bosto n , MA Soc ial C lub Gov erno r 5 /1986- to 5/1987 1984 to pres ent 1 /1985 to 1/1 987 1984 to prese nt 1980 to present 5/1985 to 9/1986 1980 to prese nt 4/1981 to present 12/1983 to present 1980 to presen t 5/1985 to present 11/1981 to 11/1985 11/1985 to present 11/1983 to present 3/1986 to 3/198 7 Interbank Card Association, New York City Credit Card Assn . Dir ect or 1968 -19 72 Eastern States Bankcard Association , New York City Credit Card Service Organization Dire cto r AmericanBankers Assoc iation on, D.C. , Washingt Trade As sociat ion 1968-1 972 1960 to present Association of Reserve City Bankers , Washington, D.C. Trade Asso ciatio n 1979 to present Commit tee Member Bank Marketing Association, Washington, D.C. Member Professional Assn . 1965-1 978 Commit tee Memb er 38 Membershipsand officesHeld (continued ) Massachusetts Bankers Association, Boston, MA Trade Association Pa st Chai rman Coordinating Committee , Boston , MA Pub lic Ser vic e Past Chai rman 1978 to present 1980 to present Massachusetts Business Roundtable, Boston, MA Publi c Servi ce Past Chairman 1980 to present Boston Museum of Science, Boston , MA 1980 to present Corpor ator Museum Boston Symphony Orchestra , Boston , MA Overse Orche str a 1980 to present er Harvard Business School, Alston, MA Board of Ass ociate s 1984 to presen t Ed ucatio n International Financial Conference, Washington, D.C. Public Policy Discussion Forum Member 1982 to present Special Commis sionon Bird IslandFlats, Boston, MA Pu blic Usa ge Master Tax Commission Committee for Commonwealth Member 1981 of Massachusetts Studyof Tax Policyand Structure Committee Member 1983 to present Massachusetts Taxpayers Foundation, Boston, MA Nonprofit Watchdog AgencyforStateandLocalGovernment to 1982 Director Scarsdale Roundtable, Scarsdale, New York Discussion Group Member 1979 1945-1946 Federal Advisory Council of the Federal Reserve System, Member 12/1986 to 12/1987 Washington, D.C. Federal Reserve Bank of Boston, Boston, MA Director 1/1988 to present Algonquin Club of Boston , Boston, MA None Social Club 1979 to present Somerset Club, Boston, MA Social Club N one 1984 to present The Country Club, Brookline , MA Golf Club None 1979 to pre sent Sea Island Golf Club, St. Simons Island, Georgia Golf Club None 1987 to present St. Simons Islan s Island, Georgia d Club, St. Simon Golf Cl ub None Scarsdale Golf Club, Scarsdale, New York Golf Club N one Fox Meadow Tennis Club , Scarsdale, New York None Racquet Club Union Club, Cleveland, Ohio Social Clu b Member 1987 to present 1963 to present 1962 to present 1976-1978 1 39 ment Govern experience : List anyexperi ence inordire ctassociati onwit h Federal ,State ,orlocal governm ents ,in . orpositions . ,honorary orother part -time service anyadvisory ,consultative cluding Federal Advisory Council of the Federal Reserve System (member ) Federal Reserve Bank of Boston (director ). Bird Island Flats Commissi on Boston , MA r ). (membe Special Commission on Determination of Need Massachusetts (menbei Master Tax Commission for Commonwealth of Massachusetts (member Published writings : List thetitles ,publishers anddates ofbooks ,articles ,reports orother published materials ten. you have writ ks ive forfailingBan A ViableAlternat 0.P.ED. Page, New York Times, 22 June 1986 Political affiliations andactivities : List all memberships andoffices heldinandservices rendered toall political parties or 10years . committees during thelast election Registered Democrat, No offices held no election activities. 40 Political ons: contributi Itemize all political contributions of$500ormoretoanyindividual ,campaign organiza . tion ,political party ,political action committee orsimilar entity during thelast eight years andidentify thespecific amounts ,dates ,andnamesoftherecipients . S ee ons Qualificati : List Attac hed . State fully your qualifications toserve intheposition towhich youhave beennamed . (attach sheet ) See Attached Sheet . Futu ment reemploy relationships : 1.Indicate whether youwill sever all connections with yourpresent employer ,business firm ,association ororganization if youareconfirmed bytheSenate . Ye s 2.Asfar ascanbeforeseen ,state whether youhave anyplans after completing govern . ment service toresume employment ,affiliation orpractice with your previous em. ployer ,business firm ,association ororganization . None 3. Hasanybody madeyoua commitment toa jobafter youleave government ? No 4.Doyouexpect toserve the full term for which youhave been appointed ? Ye s 41 4 POLITICAL CONTRIBUTIONS : 1 CitizensCommitteeto ElectFinnegan 07/18/79 07/07/80 12/01/80 $500.00 (Mayoral Candidate) Massachusetts Bankers Association PAC 150.00 The Bulger Committee 250.00 (Massachusetts SenatePresident ) 06/01/81 Friends of Larry DiCara (Candidate in Mayoral Primary 1979) Committee to Elect Barney Frank (Candidate for Congress) Committee to Elect Ed King (Governor Candidate) Committee to Elect John Brennan (State Senate Candidate) The Bulger Committee (State Senate 07/29/81 09/25/81 09/25/81 09/29/81 100.00 50.00 500.00 100.00 100.0 0 President ) 10/26/81 Heckler CongressionalCommittee (Candidate for Congress) 400.00 04/14/82 Committeeto Re-electTimothyBasset 100.00 (Candidate, State Legislature) Committee to Retain William Q. MacLean (State Legislature) Friends of Ed King (Candidate for Governor) 05/06/82 05/06/82 200.00 300.0 0 06/30/82 Heckler 10/13/82 (Candidate for Congress) Barney Frank for Congress 500.00 10/15/82 (Fund - raiser Dinner ) Sears for Governor Committee 500.00 Committee 300.00 (Candidate for Governor, Massachusetts) 10/21/82 Committee to Re - elect Thomas P. O'Neill (Candidate for Congress ) 150.00 10/21/82 Committee to Re-elect George Keverian (Candidate for State House of Representa 100.00 01/07/83 The Bulger Committee tives ) (Massachusetts 02/01/83 05/02/83 .05/ 17 /83 200.00 Senate President ) The Bulger Committee Barney Frank for Congress Committee (U. S. Congressman, Massachusetts) 200.00 250.00 Tsongas for the Senate 500.0 0 (U. S. Senator from Massachusetts) Terry McDermott Committee 05/18/83 150.00 (StateLegislator ) 06/15/83 08/16/83 . 11/10/83 Markey for Congress Committee (U. S. Congressman, Massachusetts) 200.00 Committeeto Re -electKevin Fitzgerald 100.0 0 (State Legislator, Massachusetts) Friends of od Government 500.00 (BostonCoordinating CommitteePAC) 12/26/83 Committee to Elect Ray Flynn Mayor (Candidate for Mayor of Boston) 100.00 42 POLITICALCONTRIBUTIONS (Continued ) Page Two 03/06/84 03/07/84 Committee to Elect Mel King (Candidate for Mayor pay off debt) The Larry DiCara Committee $ 200.00 200.00 e) (Former Mayoral Candidat 04/19/84 D'Amours for Senate Commi ttee 250.0 0 (Candidate for Senate , New Hampshire) 04/20/84 05/24/84 Massac husetts Bankers Assn . PAC Committee to Re -elect Thomas W. McGee 100.00 100.00 (Massachusetts Legislator) fo r G overn or 07/02/84 Wick 07/02/84 (Candidate for Governor of Vermont) Barney Frank for Congress (Candidate for Relect 100.0 0 100.00 n) 07/11/84 Atkins for Congress Committee (Candidate for Congress) 500.00 07/27/84 08/08/84 Massachusetts Bankers Assn . PAC Tsongas Commit tee (Senator ) 150.00 500.00 09/18/84 10/12/84 Committee to Elect Andrew J. Rogers 100.0 0 150.00 10/18/84 Ray Shamie for U. S. Senate (Candidate for U. S. Senate ) 11/15/84 Friend s of Pau l Ki rk Re -elect Nancy Johnso n (Connecticut Candidate for Congress) (Chairman of Democratic Party. Not sure it constitutes political contri 500.00 1,000.00 bution ) 12/28/84 Fall / 85 The Governor's Inaugural (Sununu, New Hampshire) Contributionto David Dinkins 150.00 250.00 (Candidatefor ManhattanBorough Presidency ) 03/01/85 The Bulger Committee (State Senate President ) Rep . Thomas Finneran Committee (State Legislator ) Committee for State Senator John W. Olver (State Senator ) 100.00 06/03/85 Senator Slade Gorton Campaign (U. S. Senator, State of Washington) 500.00 06/20/85 08/13/85 Shawmut Citizens Action Group PAC 500.00 Re-elect Nancy Johnson to Congress (Connecticut Congresswoman) 200.0 0 09./11/85 Committee to Elect Raymond L. Flynn 200.00 03/27/85 05/03/85 100.00 100.00 (Mayor of Boston) 10/31/85 Friends of Good Government 03/18/85 g Committee PAC) natin (Boston Coordi ies ationof Bank Holding Compan Associ PAC 1,000.00 1,000.00 43 POLITICAL CONTRIBUTIONS (Continued) Page Three 01/30/86 The Bulger Committee (Massachusetts State Senate President) Association of Bank Holding Companies 01/31/86 The Sununu Commit tee 03/11/86 BarneyFrank for Congre ss 04/04/86 Represenatative 01/24/86 $ PAC 250.00 1,500.00 150.00 500.00 (Candidate for Congress) Thomas Finneran Committee 100.00 (StateLegislator ) 04/15/86 Committee to Retain William 0. MacLean Jr. 100.00 05/12/86 (StateLegislator) Raymond L. Flynn Committee (Mayor of Boston) 100.00 05/16/86 Fund for America's Future 250.00 (George Bush) 06/13/86 Rudman for the Senate Committee 150.00 07/18/86 (Senator, New Hampshire) The Doug Barnard Campaign (U. S. Congressman , Georgia) 500.0 0 08/21/86 The 200.00 08/25/86 08/27/86 10/14/86 10/16/86 D' Amico Co mmitt ee (State Legislator, Massachusetts) Re-elect CongresswomanNancy Johnson (Connecticut Congresswoman ) Friends of Good Government (Boston Coordinating Committee PAC) The Olver Committee (Massachusetts State Senator) Jim Shannon State Committee 100.00 250.00 100.00 200.00 (Candidate for Attorney General) 10/22/86 Committee to Re -elect Governor Sununu (Governor of New Hampshire) 01/12/87 The Bulger Committee 250.00 100.00 (Massachusetts Senate Presiden cy) 02/17/87 Association of Bank Holding Companies PA C 03/06/87 04/03/87 04/09/87 05/15/87 06/10/87 The Thomas Finneran Committee (Massachusetts State Legislator) Dukakis for President Committee The Blanchette Campaign Committee (Massachusetts State Legislator) Raymond L. Flynn Committee (Boston Mayor) J oh n Bur ke Co mm itt e e (State Legislator) 06/23/87 Ed Markey for Congress 1,500.00 100.00 1,000.00 100.00 100.00 100.00 125.00 (U. S. Congressman, Massachusetts) 10/21/87 The Sununu Committee 150.00 (Governor of New Hampshire) 03/08/ 88 Committee to Re -elect Robert Q. Crane (Massachusetts State Treasurer ) 125.0 0 44 1 QUALIFICATIONS I have been a banker for thirty-four years, with extensive experience in consumer, commercial, real estate and international lending , assetand liabilitymanagement , mergersand acquisitions , consumer affairs , andcommunity , governmentand regulatoryrelations . During a significant portion of my career , I have had senior executive responsibility for bank and bank holdingcompany operations , includingsubsidiary management , general managementat the chiefoperatingofficerlevel, and strategicplanningand development . During the period from 1980 to 1988, I served as chairman and chief executive officer of a major regional financialinstitution and have been activelyinvolvedfrom a private perspective in the public policy issues affecting banks and bank holding companies. As a member of the FederalAdvisoryCouncilof the FederalReserveSystem (since 1986) and the Board of Directors of the Federal Reserve Bank of Boston (since January of 1988). I have had the opportunityto considerthesesame publicpolicyissues from the perspective of the Federal Reserve System. I believe all of this experience is relevant to the various roles of the Board of Governors of the Federal 1 1 45 ReserveSystemin its activitiesrelatingto monetary policy and regulation. An intimateunderstanding of the structure and operation of the banking system should be a valuablecontribution to the Board in the years ahead, at a time when the bankingsystemmay be under significant pressure . 46 Potential conflicts of interest : compensation orother arrangements ordeferred agreements anyfinancial 1.Describe continuing dealings withbusiness associates ,clients orcustomers whowill beaf . focted bypolicies which youwill influence intheposition towhich youhavebeen nominated . No ne 2.List anyinvestments ,obligations ,liabilities ,orother relationships which might involve potential conflicts ofinterest with theposition towhich youhave beennominated . Shawmut Stock Chemical Stock (held by Wife ) Chittenden Bank Stock 3. Describe anybusiness relationship .dealing orfinancial transaction (other thantax . paying )which youhavehadduring thelast 10years with theFederal Government , whether foryourself ,on behalf ofa client ,oracting asanagent ,that might inany wayconstitute orresult ina possible conflict ofinterest with theposition towhich you have beennominated . Because of my present position as Chairman of Shawmut National Corporation , a bankholding company thatis regulated by the FederalReserveBoard, a questionmight arise regarding a conflict of interest due to my financial interestin ShawmutNationalCorporation or an appearance of conflict due to my past association with Shawmut. 47 4. List anylobbying activity during the past 10years inwhich youhave engaged for the purpose ofdirectly orindirectly influencing thepassage ,defeat ormodification of any legislation atthe national level ofgovernment oraffecting the administration and execution ofnational laworpublic policy . See Attached List 5.Explain howyouwill resolve anypotential conflict ofinterest that maybedisclosed by nsestotheaboveitem yourrespo s. Se e Attac hed S heet Civil ,criminal and investig atory actions : 1.Give thefull dciails ofanycivil orcriminal proceeding inwhich youwerea defendant oranyinquiry orinvestigation byaFederal ,State ,orlocal agency inwhich you were . thesubject oftheinquiry orinvestigation None . Information regarding investigationsof Shawmut. Bank, N.A. and Chemical Bank, but in which I was neither a defendant nor a subject is attached for the information of the Committee . 2.Givethefull details ofanyproceeding , inquiry orinvestigation byanyprofessional association including anybarassociation inwhich youwerethesubject ofthepro ceeding ,inquiry orinvestigation . None 48 TESTIM ONY In 1970, I appearedbeforethe HousePost Office Committee on behalf of the American Bankers Association regardingcreditcard legislation . In 1986, I appearedbeforethe HouseBanking Committee on behalf of the Association of Bank Holding Companiesregardingthe financialservicesholdingcompany concept . In 1986, I appeared before the Subcommitteeon Commerce, Consumer and Monetary Affairs of the House Committee on Government Operations on behalf of the Associationof Bank HoldingCompaniesregardingproposals for restructuring the financialservicesindustry . In 1987, I appearedbeforethe SenateBanking Committee on behalf of the Association of Bank Holding Companies regarding proposals for restructuringthe financial services industry . In 1987, I appearedbeforethe Subcommittee on International Economic Policy , Trade , Oceans & Environment of the Senate Committee on Foreign Affairs. I appeared at the request of the SubcommitteeChairman to present my 49 on general views as the Chairmanof ShawmutCorporation issuesrelatingto trade legislation . Duringthe past 10 years, in my capacityas a seniorofficerof ShawmutCorporationand ShawmutNational Corporation, I have had periodic contacts with Senators, Congressmenand theirstaffswith respectto legislation affectingor potentially affectingthe bankingindustry . 50 RESOLUTION OF POTENTIAL CONFLICTS OF INTEREST Item 1 I will terminateall financialrelationships with Shawmut National Corporation prior to assuming office. If permitted , I will retainsupplemental healthcoverage availabletoretired ChemicalBankingCorporation employees under a plan administered by Metropolitan Life HI ME Insurance Company . Item 2 I will dispose of all stock listed under Item #2 prior to assuming office. 23 Item 3 SO 64 To eliminateany potentialconflictsof interest arising from my financial interests in Shawmut National Corporation, I will terminate all such interests prior to assuming office. To eliminate any potential appearance of conflict, I will recuse myself from any matter involving Shawmut for one year after taking office. Item 4 I willterminate membership in organizations under Item #4 prior to assuming office. 51 CIVIL , CRIMINAL AND INVESTIGATORYACTIONS ChemicalBank, in about1977, pled guiltyto several misdemeanor chargesin connectionwith a money launderinginvestigation of severalbranches . I had no responsibility forChemical's branchoperations duringmy employment with Chemical. voluntary As a resultof ShawmutCorporation's disclosure of failure to report certain cash transactions in excessof $10,000 , ShawmutBank, N.A. paid a civil settlementof approximately $295,000 . Following the voluntarydisclosure , the U.s. Attorneyin Boston , but no chargeswere initiateda criminalinvestigation brought . 52 RD COA OM OF GOVERNORS OF THE BOARD RESERVE FEDERAL SYSTEM WASHINGTON,D.C.20551 COE ERY RA! RES 41 M ICH AEL BRA DFIE LD G ENE RAL COU NSEL 15 11 Te * 4 July 6 , 1988 13 i The Honorable Frank Q. Nebeker Director Office of Government P.O. Box 14108 Washington, D.C. Ethics 20044 Re : John Patric k Lawa re Dear Judge Nebeker : In view of President Reagan's nomination of John Patrick LaWare to be a member of the Board of Governors of the Federal Reserve System and the requirementsof 5 C.F.R. $734.604(c)(2)(iii), I have reviewedthe finances, investments , and liabilitiesof Mr. LaWare and his wife, Margery LaWare, and the business and other affiliationsof Mr. LaWare as reported in his official filingwith this agency, in order to ascertain whetherany factsor circumstances existthat couldpresenta conflict of interest with the execution of Mr. LaWare's prospective officialresponsibilities as a Boardmember . In conducting this inquiry , I have had discussions with Mr. LaWare , the Counsel to the President , staff members of the Senate Committee on Banking, Housing and Urban Affairs, your staff , and others . I have examined various documents required to be prepared and submitted by Mr. LaWare, all of which he has now submitted , including his SF 278 Financial DisclosureReport, filed with the Board and with your office pursuant to Title II of the Ethics in GovernmentAct. This report sets forth Mr. LaWare's and his wife's investments , income , liabilities , outside affiliations and activities and other required information . A copy of Mr. LaWare's SF 278 financial disclosure report, certified by the Board's Ethics 5 3 -2 Official, is enclosed with this letter (Enclosure No. 1). also have reviewed materials submitted by counsel I for Mr. LaWare regarding the proposed resolutionof compensation and benefitsdue Mr. LaWareunderhisemploymentagreement with Shawmut National Corporation , Boston, Massachusetts ("SNC"); his current employer, and under various benefit plans of SNC and its subsidiary . ShawmutCorporation("Shawmut "), and Mr. LaWare'sformeremployer , ChemicalBankingCorporation , New York, New York( "Chemical "), as well as othermemorandaand . documents submitted to this office by Mr. LaWare's counsel and the General Counsel and Secretary of SNC regarding these matters . Mr. LaWare has also advised me by letter of certain actions that he has taken or will take in connection with his nomination , including the divestiture of all bank and bank holdingcompanystockand certainotherassetspresentlyowned by Mr. LaWare .and his wife , Mr. LaWare's resignation from positionswith bankingorganizations , businessesand other organizations , recusals from certain matters that may come before the Board , and other arrangements . A copy of Mr. LaWare's letter is enclosed (Enclosure No. 2 ) . Mr. LaWare has taken or will take all these actions to comply with the requirementsof the Federal Reserve Act and other applicable authorities , including 12 U.S.C. SS241, 244 and 260, 18 U.S.C. S9208 (a) and 209(a), and the voluntaryGuide to Conductfor Senior Officials of the Federal Reserve System . Based upon the foregoingreview , I have reachedthe following conclusions : 1. Ownership of Bank Stock The Federal Reserve Act prohibits Board members from owning stock in a bank, banking institution , trust company (12 U.S.C.$244) or Edge corporation(12 U.S.C.$620). Th e Voluntary Guide to Conduct for Senior Officials of the Federal Reserve System extends this prohibition to any affiliate of a bank and to spouses and dependent children of Board members . Mr. LaWare has advised me that, before he takes the - oath of office , he and his wife will divest all shares of stock they own in any such institutions , includingSNC, Chittenden Corporation , Burlington , Vermont , and Chemical , each of which is a bank holding company . Mr. and Mrs. LaWare will divest these bank holding company shares by sale, gift to charity and to their adult children , or by both sale and gift . If Mr. and Mrs. LaWare elect to divest these shares by gift , they may decide to do so 54 -3 by transfer to an irrevocabletrust that will be administered by an independenttrustee, probably a financial institution . Whether divestiture of these shares is by sale or gift or by both sale and gift , it will be an irrevocable and complete transferof Mr. and Mrs. LaWare's interestin these shares. the case of dispositionby irrevocable trust, the trust In instrument will grant authorityto the trusteeto administer the trust in the trustee's absolute discretion . If Mr. ir revo cab le trus t and Mrs. as LaWare des cri bed elect abo ve , to establish I will rev iew an the proposed trust instrument prior to its execution and before Mr. LaWare takes the oath of office as a Boa rd mem ber compliance with the above requirements . I wi ll for also sub mit the trust instrument to your Office for review . Neither Mr. nor Mrs. LaWare has any equity interestin an Edge Act corporation . 2. Marketable United States Government Securities The Voluntary Guideto conduct prohibitsBoardmembers States government owning any marketable United securities . Mr. LaWare dnes not own any Treasury bills, notes or bonds . He does own less than $5,000 in U.s. Savings Bonds, from which mature in September , 1988 . Mr. LaWare plans to hold these savings bonds until maturity. I do not view this holding as inconsistentwith the VoluntaryGuide. 3. Stock in u.s. Government Securities Dealers The Voluntary Guide to Conduct also prohibits Board members from owning stock in any U.S. government securities dealers . As shown by his SF 278 financial disclosure report , Mr. LaWare does not own any such stock . 4. Directorships serving The Federal Reserve Act prohibits Board members from a director of a bank , banking officer or as institution , trust company, Federal Reserve bank (12 U.S.C. $244) or an EdgeAct corporation (12 U.S.C.$620). The Federal Reserve Act also requires Board members to "devote their entire time to the business of the Board " (12 U.S.C. § 241 ) . Mr. LaWareis presentlyservingas a director of the Federal Reserve Bank of Boston and of SNC and several companies affiliatedwith SNC, includingan Edge Act corporation . He has informed me that before he takes the oath of office as a Board 1 55 -4 member , he will resign his position as a member of the boards of directors of these companies . Following these resignations, Mr. LaWare will no longer serve as an officer or director of a bank , banking institution, trust company , Federal Reserve bank , or Edge corporation , or a holding company for any such institution . Mr. LaWare is presently serving as a membe r of the boards of directors of a number of other organizations , as detailed in his SF 278 report . He has advised me that , prior to taki ng the oathof offic e , he will resi gn from all positio ns with these institutions, except as discussed below. 5 . Continuationas Trustee and ProspectiveChairman of Boston Children's Hospital Mr. LaWare has decided to retain, in his private , Hospital ofthe BostonChildren's , his trusteeship capacity Children's , and its affiliate , The Boston, Massachusetts the Office of , and to assume Medical Center Corporation Chairman of the board of trustees this fall . He would receive no compensation for these services . I have advised Mr. LaWare that he may retain and assume these duties in his private capacity without use of his official title or any official and working time or Board resources . Mr. LaWare understands agrees to these restrictions . The board of trusteesof Boston Children'sHospital, a nonprofit organization , meets once a month to consult with the presidentof the hospitalwho is responsiblefor its management and operations . The Chairman sets the agenda for these meetings and serves as the presiding officer . When a vacancy occurs in the office of president of the hospital, the board also selects a new president . The responsibility of the Chairman, and of theboard as a whole, is policymaking and consultative in nature, with occasional responsibilityfor selecting the president of the hospital . Mr. LaWare has advised this Office that he would not permithis serviceon the hospital's board of trusteesto with the discharge of his manner any interfere in responsibilities as a member of the Board of Governors . He expectsthat his serviceto the hospitalwill requireonly a limited amount of time, typicallyno more than one meeting of the board of trustees per month, during which time Mr. Laware would be accessibleby telephone. Based upon these assurances , I do not believe Mr. LaWare's service on the board of trustees of the hospital would be inconsistent with the requirement of the Federal Reserve Act that Board members "devote their time to the businessof the Board..." (12 U.S.C. $241). entire 56 -5 In addition to its buildings , furnishings , and equipment, the hospital'sassets consist of various parcels of real estate and securities . The securities portfolio is managed, including all buy-sell decisions, by an outside investment adviser . This outside company reports both to the Investments Committee , a subcommittee of the hospital's Finance Committee , and also directly to the Finance Committee . The board of trustees of the hospital does not approve 11 hospitalinvestments and is not invo lved with fund -raising. The outside investment adviser has full management of the hospital's securities , subject only to the guidance of the id Finance Committee and the hospital's chief financial officer. 1 The FinanceCommitteeconsistsof hospitalofficials , three or four hospital "overseers , persons chosen for their financialexpertise, and some of the trustees of the hospital. The chief function of the Committee is to review the performance of the investment adviser. The chief financial officer of the hospital reports on budgets and investmentsto both the Finance Committee and the board of trustees . Mr. LaWare has stated that, during his tenure as a member of the Board of Governors , he will not serve on the finance committee of the hospital or its affiliate . In order to avoid having any connectionwith hospital investments , Mr. LaWare has agreed not to offer any investment advice to the hospitalpresident ,not to participate in discussions or votes about investmentpolicy or fund raising, and not to review, or receive any informationabout, hospital investments , including the monthly report of the chief financialofficer to the board of trustees . Under the facts and circumstances presented here and subject to Mr. LaWare's commitment to isolate himself from knowledge, of or participation in the management of the hospital's investments , I do not believe that Mr. LaWare's uncompensated services as a trustee of the hospital and his prospectiveservice as Chairman of the board of trusteeswould present a disqualifying financial interest under 18 U.S.C. $ 208 (a). Bas ed upon the foregoing, and after Mr. La Wa re completes the divestitures of bank stock and resignations described above, it is my opinion that Mr. LaWare will have complied with the requirements of the Federal Reserve Act, 12 57 -6 U.S.C. SS 241, 244 and 620; the Voluntary Guide to Conduct for Senior Officials of the Federal ReserveSystem; and 18 U.S.C. S 208 (a ) . 6. Salary Retirement , Pension and Other Interests As noted in Mr. LaWare's SF 278 report, Mr. LaWare currently has certain rights under an employmentagreementwith SNC and under various retirementand otherbenefit plans from SNC , Shawmut , and Chemical . Counsel for Mr. Laware has submitted a memorandumto this Office describingthese various benefit plans and the actions that Mr. LaWare proposes before taking the oath of office as a Board member to terminate his employment agreementwith SNC and his interestin these plans. Mr. LaWare'sinterests underthe agreementand benefitplans and the actions he proposes to take interests are discussed below . A. to terminate these Lump -Sum Payment of Salary Under 5 -Year Employment Agreement On February 23 , 1988 , SNC entered into an employment agreement with Mr. LaWare as Chairman of the institution. The agreement is for a term af five years and provides that upon Mr. LaWare's termination from SNC's employment , he would be entitled to the continuationof his salary for the remainderof the term of the five-year agreement , includingannual increases of not less than the percentage increase approved for SNC's salarystructure for thatyear. Counsel for Mr. LaWare has advised that Mr. LaWare will relinquishhis rights under the employment agreement and other SNC and Shawmut benefit plans and arrangements in exchangefor lumpsum paymentsrepresenting the balancedue him for salaryand for pensionrightsand otherbenefitsunderthe SNC employment agreement and benefit plans. In making the calculations regarding the lump-sum payments for salary and supplemental retirement benefits , SNC has assumed annual increases in salary over the remaining term of the agreement equivalent to the average of salary increases for Shawmut and Hartford over the past five years. These payments will be made to Mr. Laware upon his terminationfrom SNC's employment. The General Counsel of SNC has advised this Office by letter that the manner of resolving specific benefits due to Mr. LaWare from SNC is the same as or comparable to the mannerin which SNC, ShawmutCorporation , HartfordNationalCorporation , or their affiliateshave resolved benefits due to other officers upon their voluntary terminations . 58 -7 Mr. LaWare's employment agreement with SNC w as negotiated in connection with the February 29 , 1988 , consolidation of Shawmut Corporation and Hartford National Corporation to form SNC, the 22nd largest bank holding company in the United States with assets of appr oxima tely $26 bill ion. In connection with that merger, Mr. LaWare, then the Chairman and Chief Executive Officer of Shawmut , and Mr. Alvord , then the President and Chief Executive Officer of Hartford , and the two next most senior officers of Shawmut and Hartford (Mr. Hamill of Shawmut and Mr. Overstrom of Hartford) agreed to waive certain rights and employment arrangements they had with Shawmut and Hartford . The Proxy Statement for the merger , published in October 1987 , states that it was anticipated SNC would enter into new employment agreements with these four indi vidua ls . At Resou rces their February Commi ttee of the 23 , 1988 meetings , the SNC boar d of dir ector s and Hum an the SNC board of directors considered and approved the employment agreement for Mr. LaWare as Chairman of SNC , which he executed the same day . Co unsel for Mr. LaWar e sta tes th at the on employment agreement for Mr. LaWare is, in general , identical to those of Mr. Alvord , President and Chief Executive Officer of SNC , and Messrs . Hami !' and Overstrom , each a Vice -Chairman of SN C . The agreements with these individuals were al so approv ed by the SNC Human Reso urcesCommitt ee and boar d of directors on February 23 , 1988 , and executed on that day . Counsel states that the termination provisions of Mr. LaWare's agreement differ from the comparable provisions of the other three senior SNC officers in recognition of the fact that Mr. LaWare would not be serving as chief executive officer of SNC and his age . The General Counseland Secretaryof . SNC has advised this Office by letter that he has reviewed the agreementsof the four senior SNC officers and that they are substantially identical , except in the following four areas . Under the agreement , Mr. LaWare is entitled to salary continuation upon his voluntary terminationfrom SNC for any reason. The other three senior SNC officers are entitled to salary continuation only if their employmentterminationis for cause, for example, where the individual is not reelected to the board or his duties are materiallydiminished. In addition, the employment agreements for these individuals provide that the salary payments they receive from SNC subsequent to their employment terminationwill be reduced by any salary received upon reemployment . Mr. LaWare's agreement provides that his salary from SNC will be not be reduced unless he is reemployedat a higher base salary . Mr. LaWare's employment agreement also 59 -8 providesthatSNC will pay to Mr. LaWarethe amountof any excise tax he would be required to pay if payments due him under the agreementare determined to be subjectto federal excise tax under section 280G of the Internal Revenue Code (generallyrelatedto so-called"excessparachute “ payments ). Finally , SNC's GeneralCounselhas advisedthat there were differencesin the augmented retirementbenefits awarded Mr. LaWare and the other three individuals under their employment agreements . Mr. LaWare's increased benefitswere determined by a formulatiedto his currentsalaryas increased from time to time asdescribedabove , whereasthe otherthree individuals were creditedwith additional years of service . The GeneralCounseladvisesthat thiswas donebecause of Mr. LaWare's seniority and closeness to retirementrelativeto the other three individuals . He states that the different treatment was accordedinorder to achieveapproximate equity among the four given the differencein age between Mr. Laware and the other three individuals at the time the agreement was entered into . The SNC General Counsel has advised that the above differences in the employment terminationprovisions of Mr. LaWare's agreement and that of the other three senior SNC officers were in recognitionof Mr. LaWare's age (60) relative to the others and the fact that he would not be chief executive officer of the combined organization . The absence of a salary mitigation provision was to negate any implicationthat Mr. LaWare would, in the event of his employmenttermination , have an obligationto seek re -employment . Counsel for Mr. LaWare and the SNC General Counsel have further advised this Office that the terms of these four employmentagreements were developedin the lastquarter of 1987 and in early 1988 in consultationwith outside counselfor SNC and a compensation and benefitsconsulting firm (Towers , Perrin, Forster and Crosby), which Hartford had used for ten years prior to themergerto make recommendations regarding executive compensation based on an analysis of peer group compensation arrangements and other factors . We are advised that SNC followed this same general approach with respect to the compensationof the four SNC senior officers, includingMr. LaWare, utilizing largely Hartford personnel. The General Counsel of SNC states that outside counsel advised SNC that the four employment agreements , including that of Mr. LaWare, were withinthe normsof corporatepracticewith respectto such agreements and that Towers , Perrin advised SNC that the package of compensation and benefits available to these 60 -9 individualsand the levels of compensationand benefitswere within the range of compensationand benefitsprovidedby SNC'S peers within the banking industry . 2 basic The SNC General Counsel has also advised that the. reason for th e employment agre em en ts w a s the consolidation of Hartford andShawmut and that the agreements were authorized by the SNC board of directors and intended to allow the four senior SNC officers to devote their full attention to the operations of the newly consolidated organization without any concern as to how they could be IL affected personally by the merger . The precise level of salary to be paid these individuals under their employment agreements approved and executed on February 23, 1988, was not fixed in the agreements , but was establishedat the March 22, 1988 meetings of SNC's Human Resources Committee and board of directors . In addition, at those meetings the Committeeand board of directorsapproved compensationpackages, including stock options and restricted stock awards , for these four individuals . Counsel has 2 advised that at thatmeetingMr. LaWareand Mr. Alvordwere recommended th at th ese for identical levels of compensation and compensation recommendations were essentially the same as those considered by the Human Rvsources Committee at the February 23, 1988 meeting . The mi nut es of th e Ma rch 22 Com mit te e and bo ar d of directors meetings indicate that Mr. LaWare and Mr. Alvord I received identical salaries , grants of stock options and restricted stock awards . Tho se minu te s fur th er sh ow tha t Mr. LaWare's salary and that of the other three senior officials was raised by varying amounts with Mr. LaWare's representing the smallest increase in absolute dollar terms ov er 198 7 . 2 Materials submittedby counsel for Mr. LaWare to this Office also indicate that Mr. LaWare's employmentagreementwas negotiated beforeMr. LaWarewas contactedby the WhiteHouse Personnel Officeregarding his consideration for serviceas a member of the Board of Governors . Counsel for Mr. LaWare has indicatedthat Mr. Lawarewas firstcontactedby the White House PersonnelOffice regardingthe possibilityof his appointment to the Boardof Governorsby telephone on April1, 1988 ; that he received a written request for information subsequently , dated April 2 , 1988 ; and that he met with various officials in Washington, D.C. on April 19 and 27 , 1988 , regarding the appointment . not until there was Counsel for Mr. LaWare has also advised that it was mid -March 1988 that Mr. LaWare became aware that not an active candidate under consideration for the 1 61 -10 existingvacancyon the Board of Governors . At that time , counsel states that Mr. LaWare informally considered various issues that might be involvedin connectionwith an appointment to the Board of Governors, including the possible financial impact . Counsel has advised that while Mr. LaWare discussed the matter with various individuals at SNC , no outside director and no member of the Human Resources Committee of SNC was informedof the possibilitythat Mr. LaWare might be considered for appointmentto the Board or that he might have an interest in such an appointment , prior to the publicationof an article to that effect in the Wall Street Journal on April 22, 1988. Mr. Laware has confirmed these statements and has advisedthisOfficethathe was firstcontacted by a memberof the federal government regarding the possibility of the . appointment to the Board on April 1 , 1988 . He has further advised that the benefits he is due under his employment agreementwith SNC and SNC's retirementand other benefit plans were negotiated before he was contacted by the White House regarding appointment to the Board or considered such an appointment, and that they are not intended to supplementhis salary as a federal official. The SNC General Counsel has advised that he was directly involved on a day-to-day basis in the negotiation , drafting and executionof Mr. LaWare's employmentagreementand those of the other three senior SNC officers , and that he attended all meetings of SNC's Human Resources Committee and board of directors at which the agreementswere acted upon. He states that he was unaware Mr. Laware was under consideration for appointmentto the Board until the middle of April 1988 or of any indication on the partof membersof the HumanResources awareof such a possibility priorto Committee that they were April 1, 1988. B. Lump_Sum Paymentof RetirementBenefits Counsel for Mr. LaWare has also advised that Mr. LaWare will receive, prior to taking the oath of office, lump -sum payments representing an amount calculated to produce the discountedequivalentafter-tax economic benefit he or his survivorwould be due underShawmut'sSupplementary Executive Retirement Plan, dated January 1, 1985, as modified by Mr. Laware's February 23, 1988 employment agreementwith SNC, from the date of his employment termination until age 65 in the case of the early retirement benefit. under the plan; and continuingthereafter for an assumedlifeof 20.3years( based upon 1983 Group Annuity Mortality Table , single life ) in the case of the supplemental normal retirement benefit under the 62 - 11 plan; and for an assumed 8.7 additional years (based upon 1983 Group Annuity Mortality Table, joint and survivor) in the case of the supplementary survivor benefit under the plan. C. Prorated Bonus Pursuant to SNC's Annual Incentive Plan , members of SNC senior management are awarded annual cash bonuses. annual bonus for Mr. LaWare is set by SNC's Human An Resources Committee on the basis of his performance during the preceding year . Mr. LaWare will forfeit any entitlement for 1988 under Plan . this Lump . Sum Payments For SNC Stock Restricted Stock Award Plan D. Option and SNC'S Stock Option and Restricted Stock Award Plan , the to successor the Shawmut Performance Share Plan , was approvedby the Shawmut and Hartfordshareholdersin connection with the merger of Shawmut and Hartford into SNC. The Plan is availableto senior SNC executiveofficers. On March 22 , 1988 , withstockappreciation 30,000options Mr. Lawarewas granted The exerciseprice of each rights under the Stock Option Plan . option is $23.875 . The closing price for SNC on July 1 , 1988 , was $ 25.875 . Becauseof the one-yearminimumwaitingperiod prior to exercise of the options, it is doubtful whether Mr. LaWare will exercise these options upon terminationof his employment with SNC . If he does not exercise the options before terminatinghis employmentwith SNC, he will surrender them to SNC at that time . Pursuantto this plan and subsequent actiontakenby SNC's board of directors on March 22 , 1988 , Mr. LaWare also received an award of 27,000 shares of restricted SNC stock . Under the EmploymentAgreement, SNC's Human Resources Committee is required to take all actions necessary to provide for the full vesting of the restrictedstock awards upon Mr. LaWare's termination of employment with SNC . The SNC General Counsel has advised that in recognitionof this contractualprovision, the distribution of 27,000 shares of SNC will be made to Mr. LaWare upon his termination from SNC's employ . Mr. LaWare has statedthat, immediatelyafter receivingthis stock and before he takes the oath ofoffice as a Board member, he will divest these shares by sale, or by gift to charity or to his adult children . 63 - 12 E. Lump.Sum Payments For Insurance (i) Split dollar life insurance. Under Mr. LaWare's employmentagreement with SNC, and pursuant to a plan available to the senior officers of SNC and its subsidiaries , SNC is required to maintain split-dollar life insurancecoverage for Mr. Laware through February 22, 1993. The policy provides for life insurance for Mr. LaWare until he reaches the age of 65 in the amount of at least four times Mr. LaWare's annual compensation . Afterage 65, Mr. LaWarehas a choiceof either (I) receiving retirementpaymentsfrom SNC under the policy, or (II ) continuing insurance coverage . SNC owns the cash value of the policyand is a beneficiary underthe policyto the extent of premium amounts paid by SNC. At the time that Mr. LaWare resigns from the company, SNC will make a lump sum payment to the insurance carrier of its portion of the premium on the split-dollar life insurance for coverage through February 22, 1993. At the same time , Mr. LaWare will pay the carrier his share of the premium for insurance coverage until age 65 . Mr. LaW are wi ll also waive his right to elect continued insurance coverage beyond age 65 . In addition , SN will make a lump sum payment to Mr. LaWare in an amount that representsthe discountedpresent value of the retirement payments SNC would have made to Mr. LaWare, upon his election of retirementbenefitsunder the insurancepolicy beginningat age 65. Upon Mr. LaWare's death , SNC is entitled to receive from the death benefitproceedsof the policythe lump sum payments paid to the insurancecarrier and to Mr. LaWare at the time of Mr. Laware'sresignation fromthe company . I believe that the above arrangementsatisfies the requirementof 18 U.S.C. S 209(b) in that it appears to be a bona fide benefit plan from a former employer. The plan is available to senior SNC executive officers, one of whom is Mr. LaWare . Mr. LaWare is entitled to receive the life insurance pursuant to his employment agreement , whether he remains in the employof SNC or resigns , and the continuing insurance isnot linked to his prospective federal appointment . Because SNC will provide the insurancecarrier with a lump sum payment in full for its obligations through February 22, 1993, thereby severingits relationship with Mr. LaWare , the insurance will not be a "financialinterest " in SNC for Mr. Lawarethatwould bar his officialparticipation in SNC mattersunder18 U.S.C.S 208 (a ) . 64 -13 (ii ) Medica l Health Insura nce . Pu rsuan t to the SNC employment agreem ent, Mr. La Ware is entitled to various medical an d insura nce health benefi ts , which , up on his resignation from the company , he will waive to theextent that similar coverage is provided by the Board of Governors . compensate for medica l and healt h ben efits To Mr. LaWare presently has from SNC that would not be available from the Board of Governors , if any, SNC will either give an equivalent lump sum cash payment for these Mr. LaWare an alternative arrangement for benefits benefi ts , or make acceptable to Mr. LaWare and the Board of Governors . We wou ld apprise your office of any such arrangements . F. Payment of Excise Tax Under $ 2806_of the Internal Revenue Code Mr. LaWare's employment agreementwith SNC provides that, in the event that payments and benefits provided to Mr. LaWare under the agreement are deemed to be covered by the so-called "excess parachute payments" in section 280G of the InternalRevenue Code so that an excise tax must be paid, SNC is obligated to reimburseMr. LaWare for the amount of any excise tax incurred . SN and Mr. LaWare have consulted an independentpublic accountingfirm to determinethe amount, if any , that may be payable as excise tax pursuant to section 280G of the Internal Revenue Code . Before Mr. LaWare takes the oath of office , SNC will pay him a lump sum for the amount of excise tax so determined , if any, or will place such amount in an escrowaccountwith any overpayment to be remitted to SNC. 7. Benefits Deriving From Employment by Shawmut Corporation . A. Lump Sum Payment for Benefits Under Shawmut Corporation Employees ' Retirement Plan . The Shawmut Employees' RetirementPlan is a qualifiedpension plan that covers all Shawmut employees who have at least one year of service and who meet other plan requirements . Benefits are subject to forfeiture upon termination of employment before age 65 with less than 10 credited years of service. It is not likelythat Mr. LaWarewill satisfythe 10-year servicecredit requirement (employment until October 31, 1988 , would be required ) to qualify for regular retirement benefits under this plan . Instead , these payments will be covered by the Shawmut Supplementary Executive Retirement Plan ("SSERP ") , as amended by Mr. LaWare's employment agreement with SNC, as described above . If, however, service credit requirementsshould be met, the amount due under the Shawmut retirementplan amount will be 65 - 14 paid out in a lump sum in a manner consistentwith the Plan, and payments under SSERP and the employment agreement will be reducedaccordingly . B. Shawmut Performance Share Plan . About 50 Shawmut employees participatein this plan. Pursuant to the terms of the plan, dated January 1, 1986, and its predecessorplan, Mr. LaWare will receive an award of shares and cash (half and half) based upon Shawmut'sperformancefor the period prior to 1988, and SNC's performancefor the part-year 1988 to his date of resignation . Actual performanceis measured against ROA and ROE goalsestablished in the plan, except that on February18, 1988, the Shawmut CompensationCommittee decided to adjust the goals for calendaryear 1987 to excludethreeextraordinary items: LDC provisions , merger expenses and Shawmut's pension gains . For part-year 1988 , ROA and ROE goals will be based on SNC's current performanceforecast. Mr. LaWare will receive the cash portion of the award outright, and will divest the stock portion of the award, approximately 7,400sharesof stock , beforetakinghis oath of office . C. Shawmut Thrift Plan . The Shawmut Thrift Plan is a qualified plan, available to all employees with one year's service , that permitsdeferralof certaincompensation for tax purposes , with a matching contribution equal to one -half of the first six percent of deferred compensation . Under the Shawmut Thrift Plan, employeesmay elect to leave funds investedin SNC stock or one of two stock funds or to receive a lump sum distribution of vested benefits . Mr. LaWare will receive a lump-sum distributionof vested benefits, which will be placed in an IRA rolloveror comparableaccount. D. Shawmut Employee Stock Option Plan ("ESOP " ). The Shawmut ESOP is being terminated for all employeeseffective July 1 , 1988 . Distributionsof vested benefits are being made as of that date . Mr. LaWare's lump sum distribution of vested benefits will be placed in an IRA rollover or comparable account . E. Other Benefits . Pursuant to Mr. LaWare's employment agreement, he is also entitled to seven or eight other benefits , which he will either waive or forfeit before taking his oath of office as a Board member. 66 - 15 8. Lump Sum Payments for Benefits from Chemical Banking Corporation A. Retirement Pension . Plan Mr. LaWare's vested pension rights in Chemical's retirementplan are for past services rendered to Chemical , which services ended more than 10 years ago , and are also in no way connectedto his appointment to the Boardof . Before taking his oath of office, Mr. LaWare will receive a lumpsum distribution of vested pension benefits, Governors whichwill be placedin an IRA rollover or comparable account . B. SupplementaryHealth Benefits. Participationin Chemical'shealth insuranceplan is available to all Chemical retireeswhose positionswere similar to the one held by Mr. LaWare during his tenure at Chemical. Mr. LaWare will receive a lump sum cash payment in lieu of his right to supplementary medical benefits under the Chemical Bank RetirementPlan ; or, if the lump sum payment is not feasible, then Mr. LaWare will waive these benefits , if any . CONCLUSIONS Mr. LaWare's acceptance of the above-described lump sum payments will sever his relationships with SNC and Chemical , and he will have no other continuing arrangements with these banking organizations , or with any other former employer . For a brief period of time, Mr. LaWare will continue to participate in SNC and Chemicalmedicaland healthinsurance plans in order to continue this protection for himself and his wife . Based upon the above submissions by counsel for Mr. LaWare regarding the background and circumstancesof Mr. LaWare's employmentagreement, the statementby the General Counsel of SNC regarding that agreementwith SNC, the relevant minutes of SNC's board of directors and Human Resources Committee, and Mr. LaWare's statement, it is my opinion that Mr: LaWare'sreceiptof the above -described payments due under the SNC employment agreement, related pension and otherplans of SNC and Shawmut , and his benefits under Chemical's Retirement Plan were not intended as a supplement to his salary as compensation for his service as a federal official and would not , therefore , present a question under 18 U.S.C. $209 (a ) . It is also my opinion that Mr. LaWare's receipt of these payments will remove any "financial interest" Mr LaWare may have in SNC or Chemical that could bar his prospective g d member in matters involvin official participation as a Boar these financial institutions under 18 U.S.C. § 208(a). 67 - 16 In order to avoid any appearanceof a conflict of interest that may arise from any of Mr. LaWare's benefits from a former employer or his present business or other affiliations , however, Mr. LaWare will not, for a period of one year followinghis appointmentto theBoard, vote on, or participate in any discussionswith other Board members or staff relatedto any particular matterthat comesbeforethe Board for decision that involves SNC or Chemical or that directly affectsor involvesany companyor organization (other than the Reserve Bank ) that he has served as an officer, director or trusteeduringthe last 12 months , including particularly SNC and its affiliatedcompanies. In addition , Mr. LaWare has advised that if he decides to give his shares of SNC to his adultchildreneitherdirectlyor by establishing an irrevocable trust for their benefit, in order to avoid the appearanceof such a conflictof interest , he will not voteon, or participatein discussionswith other Board members or staff regarding, any applicationor other particular matter that directly involvesSNC so long as the childrenor the trust held this SNC stock . Accordingly , and ba sed u pon the act ions that Mr. LaWare has already taken with regard to his investments and outside activities, and commitments he has made in his SF 278 t and in the writte n statemen t concer repor ning divesti tures , tions and recus als, it is my opini resigna on thatMr. LaWar e wil have of of fice satisfied, or will satisfy pri as a member of to taking the oath the Board of Governors , all ents for eligib ility to take this oath, otherthan requirem ativefilingrequ nts. certain administr ireme Sincerely , Michael/Beadfied Enclosures 68 QuestionsSubmittedby SenatorD'Amato to Mr. LaWare Nomination Hearing --July7, 1988 : Question 1: At the time of the Shawmut disclosure of its failure to report cash transactions, what was your position at Shaw mut ? Answer : I was Chairman of the Board and Chief ExecutiveOfficerat ShawmutCorporationand Chairmanof the Board and Chief ExecutiveOfficerof ShawmutBank of Boston, N.A. Question 2: to dis close ? Whendid you becomeawareof the failure Answer : Neitherpast audits by Shawmut'sinternalor externalauditors, nor in examinationsby the Office of the Comptroller of the Currency , revealed currency transaction reportingerrors. Afterthe publicdisclosure in earlyFebruary 1985 that Bank of Bostonhad paid a fine for violationof the Bank SecrecyAct, I directedseniormanagementto conductan intensive reviewof Shawmut's own procedures for complying with the BankSecrecy Act. Throughthatreview , whichwas begun immediately , we discovered errorsin Shawmut's procedures for complyingwith that Act. 69 -2-3 Questi cipat n to on 3: Did youparti e in thedecisio make voluntar y disclosur e? Answe eredthattherehadbeen r: When we discov report ent of Shawmutto makea ing errors, I directedthe Presid voluntar sureof the res ultsof therevie w tothe y disclo Depart Comptro mentof theTreas ury. llerof theCurrenc y andthe This disclosu re was madeon Febr uary19, 1985. Question4: Are youawareof the conclusions of the U.S. Attorney's investigation ? Answer : Thestaffattorney at theDepartment of the Treasury whowasreviewing Shawmut's voluntary disclosure case informed Shawmut inlate1986thattheinvestigation bythe Office of theU.S.Attorney fortheDistrict ofMassachusetts hadbeenconcluded without an adverse finding withregard to Shawmut Bank . 70 -4-5 on 5: The Federal Reserve Board currently finds Questi g contro versyabout"mone itself inthe centerof a wide-rangin tary policy. Many industries are operating near capacity, and ent is relativ ploym ely low in the countryin gener unem al. These signals indicate a risk of inflation . Yet many believe that the Fed's tightmoney policyof lastyear promptedtheOctob er stock marke t crash . What is your pers onalbelief aboutthe econo my's immed iate future ? Answer : How should the Fed respond? In many respects, we can be pleased with the curr ent econ om ic sit uat ion . The expansion has passed the five an and a half year mark and the prospects are highly favorable that it wi ll co nti nu e . One reason that we can be optimistic is that we have not experienced the pickup in inflation that has acc omp er econo aniedoth mic expansi ever, I don'tthink ons . How we can be complacent about wage and price trends, given that unemployment rates have declined this year to the lowest levels in some time and labor markets have become quite tight in many areas . Also, plantutilization rateshavereachedhighlevels in some major industries . And we cannot ignore the inflationary risks that are presenttoday in the farm sector. It is impor tantthatmonetary policybe perceived as a stabilizing influence. I do not believethatthe stockmarketexperience of lastfallshouldbe a seriousdeterrent to monetary restraint , if that were to be necessaryto check growinginflationary 2 71 -6-7 pressures . Higher interest ratesmayhaveplayed somerolein the decline of stock prices after last August. But it is impor tant to recognize thatsharepriceshad climbedto unsustainable levels . Whatevermay have triggeredthe Octoberbreak--and the trade outlook or taxandbudgetary concerns werecertainly major factors alongwith interest rateworries --was largelyincidental t o an inevitable market correction . Question 6 : How would you assess theFed's performance under Chairman Greenspan as compared to the Fed under his prede cessor , Mr. Volcker? Answer : The Fed's performanceunder ChairmanGreenspan has beenoutstanding , justas it was underMr. Volcker . 72 -8 Question 1: Do you believethat the currentregime of federalfinancialservicesregulationcan be improvedby centralization of regulation undera singleorganization ? Answer : The highlyinte grate d natureof our financi al system sugge sts the import anceof coordin ationamong the vari ous regulatory agencies that oversee financial institutions and markets . The need for such coordinationis underscoredby the increasing evidence of overlapin functions betweenproviders of securitiesand of bankingservices. Banks, for example, have made the naturalextensioninto securitizedproducts, while securities firmshavecontemporaneously undertaken manyof the activitiesthat have been traditionallythoughtof as unique to banking. In light of this situation , it may well be appropriate to consider ways thatcoordination and cooperation can be strengthened . However, I see no need at the presenttime for a "super -regulator " or forthecentralization of regulation for the entirefinancial services industry undera single organization . 1 73 juestions Submitted by Senator KarnestoMr. LaWare NominationHearing-- July7, 1988 Question 1 : Over the last several years there has been rabletake overacti vityin the corpo rateworld conside , and some of it has been hostile in character . Banks have, for the most part , been spared of this. In your view, are hostiletakeoversbeneficialin restructuring American industry andhow doesthisrelateto banks as takeovertargets ? Ans wer : Hostile takeovers can be beneficial in restructuringindustry . Such takeoverssubjectpoorly or mar ginallyperforming management to marketdiscipline by offering shareholders an opportunity to selectnewmanagement . Since bankingorganizations are required to competein financial mar ketswithothercorporations , it is reasonable thatmanagement of bankingorganizations shouldbe subjectto the sametypeof discipline . Prohibiting hostiletakeovers of bankingorganiza tions could, in the long run, be detrimentalto the banking system because of thegreater likelihood of entrenching management of poorly performing organizations . Contested banking acquisitions should notbe considered to be fundamentally different fromnegotiated acquisitions . A contestedtakeoversimplyindicatesthe targetcompanymanage ment's oppositionto the offer. Theuncertainty generated by management's opposition is justanotherfactorto be considered in determining whether an acquisition proposal is in thepublic interest as required by the BankHoldingCompanyAct. The Board'sapplication procedures enableit to evaluate each proposalon its own merits, and to imposeadditionalconditions if necessary (e.g., highercapitalization ) to ensurethe safety and soundnessof the acquiredorganizationand the banking sys te m as a wh ole . 74 -3 Question 2: As an executive and a director of a bank onalregula tionfirst dingcom pany e seenfuncti -hand . hol , youhav Do you believethatfunctional regulation worksand do you have anyfearsof whata "super -regulator " wouldmeanfor the financial markets ? Answer : tiona My exper eststhat func l iencesugg iate approach for regulation is indeed a workable and appropr izatio t organ ns are ensur ar activiti es in differen ing thatsimil --regardl superv ess of the nature or y and equitably isedevenl charter of the institution that carries out the activity. ormit Functi y in the ationcan helpto achieveunif onalregul o te tutio offic sightof financia l insti ns and can elimina ial over singfrom ualit etiti iesari unn stifi ve ineq ecess ed comp aryor unju the imposition of different supervisory or regulatory systemson the same activity conducted in separate firms . While cooperationand coordinationamong regulatory and circumstances , underpresent desirable ishighly authorities all overseeing -regulator I seeno needfora super conditions among aspects of our financial markets . Clearlycoordination , giventhatrigidlinesno is essential agencies regulatory longer completelyseparatethe activitiesand powersof banking of financial firmsand otherproviders , securities organizations services . The financialinstitutionregulatoryagencieshave --both a numberof ad hoc and ongoingarrangements developed and ofbanking theoversight --tocoordinate formal andinformal my responsibilities . As I assume companies financial services 75 on the Board, I intend to take an active interestin what additionalsteps, if any, are necessaryto improveor expand effortsto coordinate supervisory and regulatory activities with respect to our banking and financial markets. Question3: It has been said that the risks associated with margin in the securitiesmarkets and those of the futures marketsare different. Do you agree that there is a differencein the related risksand shouldthosemarginrequirements be identical or should they be coordinated ? Ans we r : I find myself in agreement with the conclusion ofthe Preside nci ets on the nt'sWorkingGrou p onFina alMark 188ue of margin levels. The Working Group concludes that from the standpoint of protection of the market system from large pricemovements, the present higher margin levels on individual stocks are quitecomparable to the lower margins on stock index fu tu res . This is beca use fluctuations in the prices of indi vidual stocks are larger than broad stock indexes and individual stocks typically have longer settlement periods. Thus, margin . levels need not be identical across these markets . O 88-455 (80 )