August 02, 2001

Johnathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549

Re: Interim Final Rules for Banks, Savings Associations and Savings Banks
Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934
Release File No. S7-12-01

Dear Mr. Katz:

We thank the Securities and Exchange Commission for extending the comment period to September 4, 2001 in the critical area of bank oversight now that the lines between banks and brokerage firms have been blurred with the repeal of the Glass-Steagall Act.

We believe that the comments made in the letter dated June 29, 2001 from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency should be disregarded in their totality. The banks of America have enough lobbyists and trade associations to argue their case before the SEC. It is not the charter or mandate of these three regulatory bodies to lobby on behalf of banks.

The body of evidence that should dictate how the SEC must now proceed since Congress saw fit to eliminate the critical protections afforded the investing public in the Glass-Steagall Act, resides in the tens of thousands of pages of transcripts of the Pujo Committee hearings held in 1913 and the Pecora Committee hearings of 1933 and 1934. Fancy promises from regulators that banks functioning in the dual role as brokerage firms can and will be self-policing is not what the SEC or Congress should rely on. The well-developed history of egregious abuses bestowed on the investing public prior to the enactment of Glass-Steagall, and since its recent repeal, is what the SEC and Congress must look to. To believe that the dynamics of power and greed have been materially altered in nine decades is to engage in naivete at the public's peril.

Mr. Ferdinand Pecora, Chief Counsel to the U.S. Senate Committee on Banking and Currency in 1933 and 1934, was prescient that this very day would arrive, writing as follows in his 1939 book "Wall Street Under Oath."

Bitterly hostile was Wall Street to the enactment of the regulatory legislation. It now looks forward to the day when it shall, as it hopes, reassume the reins of its former power. That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt. Indeed, if you now hearken to the oracles of The Street, you will hear now and then that the money-changers have been much aligned. You will be told that a whole group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they had nothing to do with the misfortunes that overtook the country in 1929-1933; that they were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob blindly seeking victims. These disingenuous protestations are in the crisp legal phrase, "without merit." The case against the money-changers does not rest upon hearsay or surmise. It is based upon a mass of evidence, given publicly and under oath before the Banking and Currency Committee of the United States Senate in 1933-1934, by The Street's mightiest and best-informed men. Their testimony is recorded in twelve thousand printed pages [now in the National Archives]. It covers all the ramifications and phases of Wall Street's manifold operations. The public, however, is sometimes forgetful. As its memory of the unhappy market collapse of 1929 becomes blurred, it may lend at least one ear to the persuasive voices of The Street subtly pleading for a return to the "good old times." …We may now need to be reminded what Wall Street was like before Uncle Sam stationed a policeman at its corner, lest, in time to come, some attempt be made to abolish that post.

The essential backdrop of today's inquiry must address the current economic downturn which results from the extreme concentration of wealth in America and concentrated power among investment and commercial banks: one percent of the population now controls in excess of 44 percent of the Nation's wealth. As a direct result, consumers, who represent two-thirds of Gross Domestic Product (GDP), no longer have the disposable income to buy the goods and services produced by the corporations and thus we have entered a spiral of overcapacity, layoffs, more overcapacity, more layoffs. This is the financial doomsday scenario investigated by the Pujo Committee and the Pecora Committee. And, it should be the scenario under current investigation rather than regulators fiddling and cheerleading for banks while Rome burns.

The concentration of money and power by a handful of banks and investment banks in New York City has led to the massive misallocation of our nation's capital. Over $4 Trillion of Americans' life savings has been lost to incompetently developed business models which these banks were only too happy to bring public at a virtually "fixed" underwriting fee of 7 percent. The public investor was told to hold their positions by stockbrokers facing loss of commissions if their clients sold ("penalty bids") while the powerful moneyed-interests, wishing to concentrate wealth in their own hands, bailed out.

Once it became clear to our Congress in 1933, in the midst of the Great Depression, that this concentration of wealth and power had created a doomsday scenario for our country, legislation was put in place to prevent further abuses. Today, facing the identical scenario, Congress has rolled back the protective legislation of Glass-Steagal and the regulators have reversed their role of protecting the public interest and are lobbying for granting greater powers to the very institutions that brought about this state of affairs.

The following are abuses unearthed during the Pecora Committee hearings which bear a stark similarity to today's abuses. (Sources include: newspaper archives, Pecora transcripts, and Wall Street Under Oath by Ferdinand Pecora.) Buying Influence Preferred lists for distributing hot issues of initial public offerings (IPOs) were maintained by the powerful investment banks of that day. Ex-President Coolidge was on the list; Charles Francis Adams, Secretary of the Navy under President Hoover; Newton D. Baker, Secretary of War under President Wilson; Charles D. Hilles, ex-Chairman of the Republican National Committee; H. Edmund Machold, former Speaker of the Assembly and State Chairman of the Republican Party of the State of New York; John J. Raskob, Chairman of the Democratic National Committee; Norman H. Davis, ambassador at large; Silas Strawn, ex-President of the U.S. Chamber of Commerce and the American Bar Association; Charles E. Mitchell, head of National City Bank; Albert H. Wiggin, head of Chase National Bank; Richard E. Whitney, President of the New York Stock Exchange; and William Woodin, who later became Secretary of the Treasury under President Roosevelt.

Here are excerpts from a letter issued to Mr. Woodin by J.P. Morgan on February 1, 1929:

My Dear Mr. Woodin:

You may have seen in the paper that we recently made a public offering of $35,000,000 Alleghany Corporation 15-year collateral trust convertible 5 per cent bonds, which went very well…We have kept for our own investment some of the common stock at a cost of $20 a share…we are asking some of our close friends if they would like some of this stock at the same price it is costing us, namely, $20 a share. I believe that the stock is selling in the market around $35 to $37 a share…We are reserving for you 1,000 shares at $20 a share, if you would like to have it.

Advertisements and Solicitations by Banks:

In 1927, Edgar D. Brown was a resident of Pottsville, Pennsylvania with $100,000 to invest. By 1933, he had nothing and was clerking for the Poor Board of Pottsville.

What set the wheels in motion for separating Mr. Brown from his money was an advertisement in a national magazine from National City Bank (predecessor to today's Citigroup). The advertisement read:

Are you thinking of a lengthy trip? If you are, it will pay you to get in touch with our institution, because you will be leaving the advice of your local banker and we will be able to keep you closely guided as regards your investments.

No sooner had Mr. Brown responded to the ad by the Bank when he received a visit from the Bank's brokerage arm, the National City Company. His money was invested in a myriad of foreign bonds: Greek, Peruvian, Chilean, Hungarian and Irish and leveraged through margin to a face value of $250,000. When these bonds declined, he was then persuaded to sell out and buy stocks, mostly National City Bank stock. Mr. Brown was eventually wiped out. Using the imprimatur of the Bank, the brokerage firm reeled in Mr. Brown and then gutted his life savings.

Contrast that story to the following excerpts from a story that appeared in the Business Section of the New York Times on Sunday, July 22, 2001: (One Investor. Two Brokers. An Account Runs Dry by Gretchen Morgenson.)

As Mr. Teeples was about to exit the fast track of 80-hour weeks in late 1999, he encountered two Morgan Stanley Dean Witter brokers: Arun Sardana, 36, and Michael Moriarty, 46, partners in the firm's office in Chevy Chase, Md. Assuring him that they would handle all his financial, tax and estate-planning needs, the brokers persuaded Mr. Teeples, who had never traded in the market, to entrust them with retirement accounts and stock options worth roughly $700,000…Within 16 months, Mr. Teeples said, what had taken him years to build was gone. By this April, all that was left of his portfolio was $403.95 and a $40,000 tax bill due next April…But perhaps the most troubling aspect of Mr. Teeples's story is that he is not the only current or former Microsoft employee to say he has lost his life savings under the guidance of Mr. Sardana and Mr. Moriarty. In several arbitration claims filed recently against the brokers and Morgan Stanley - most investor claims cannot go to court - a total of 13 customers on the East and West Coasts accuse the two men of a widespread pattern of sales-practice violations. These include recommendation of highly speculative stock trades and excessive use of margin borrowing. In about a year, these people lost $20 million, according to the complaints…Some of the plaintiffs' stock market loss may be a result of conflicts of interest between Morgan Stanley's retail business and its investment banking business - the very conflicts, so pervasive on Wall Street, that have caught the attention of securities regulators and members of Congress…Of the 23 stocks that the brokers bought for Mr. Teeples and his wife, 12 were companies which Morgan Stanley had brought public or provided with other investment banking services…Mr. Teeples learned the hard way how treacherous margin borrowing can be. When borrowing to buy stocks, the shares serve as collateral. When the shares fall in price, the investor must put up additional funds to shore up the loan. A margin call is typically set off when a stock has declined by about 40 percent from the purchase price…Mr. Teeples said he was stunned by the speed at which his money vanished. That shares in free fall create calls for more money had never been mentioned by either Morgan Stanley broker, he said. "They did not explain to me the downside of margin," Mr. Teeples said. "I had no idea."

During the Pecora Committee hearings, the following public testimony occurred between Fedinand Pecora, Chief Counsel to the United States Senate Committee on Banking and Currency and Mr. Baker, President of the National City Company:

Mr. Pecora: Do you know that many depositors of the Bank who had never been customers of the Company or buyers of its securities were approached directly by representatives of the company and their business solicited for the Company?

Mr. Baker: That might possibly be, but the way the name might have come to the attention of the salesmen does not necessarily follow, Mr. Pecora…

Mr. Pecora: Would it surprise you to know that many of the Bank's depositors who never before had had any business with the Company were approached directly by salesmen or representatives of the Company and greeted with the remark that the salesmen knew that they were depositors of the Bank?

Mr. Baker: Well, that could still be possible...

Mr. Pecora: And…it was not an unusual thing for the National City Company to suggest investment in securities that the Company was sponsoring, was it?

Mr. Baker: That is right…

Here is an internal contest announcement produced during the Pecora Committee hearings, issued by National City Company:

September 27, 1929:

We are pleased to announce this morning the beginning of one of the greatest sales contest ever held by the National City Company. There will be liberal cash prizes for a large number of men in every part of the organization and higher premium schedules. Contest will be organized and operated between control organizations and six contesting units, being territories controlled from San Francisco, Chicago, Philadelphia, Boston, New York metropolitan, and New York control offices outside New York City. Security issue with premium schedule and point ratings for prizes are as follows…This premium schedule will hold straight through entire contest. Total prize money for entire organization will be $25,000 divided among various controls in proportion to the work done and to be subsequently divided among the highest ranking men in the various controls according to the rules set forth below…

Illicit Trading in the Bank's Own Stock:

The following is an excerpt from Wall Street Under Oath by Ferdinand Pecora:

Perhaps the most extraordinary of its activities during those frenzied years was the orgy of trading by the [National City] Company in the stock of the Bank itself…National City Bank stock, which had a par value of $100, was pushed up and up until it reached dizzy heights. In January, 1928…it was sold at $785. In June, 1928, it stood at $940; in January, 1929, it climbed to $1,450; a few months later, it reached the fantastic price of $2,925 (actually, $585 per share, after a 5 for 1 split.) The highest book value ever ascribed to it was only $70. And the National City, which had removed the stock from the Exchange "to prevent manipulation," was itself the principal trader! Altogether in the three-and-a-half year period ending December 31, 1930, the National City Company sold almost 2,000,000 shares of the stock of its Bank…In the single year 1929 it sold more than 1,300,000 shares. For the proud privilege of owning these shares, worth $140,000,000 at their highest book value, the public paid the stupendous sum of $650,000,000. Most of this inflated value was, of course, wiped out during the years of depression, when National City fell from 585 to 21…The Company was by far the largest customer of the "specialist" in this stock…

Our Nation's prosperity, democracy and the productivity of its citizens demand a level playing field to acquire and safeguard financial assets. Society crumbles when assets achieved through years of honest hard work can be fleeced by brokerage firms masquerading as insured-deposit banks. It is the role of federal regulators to maintain a level playing field through stringent regulation.

Women and minorities are particularly vulnerable, having been given only limited access to working on Wall Street and understanding its investment schemes over the past century. Under the current non-regulatory environment, women and minorities are walking into banks to buy safe, insured Certificates of Deposit and walking out with covertly named "High Yield Bond Funds," which are, in fact, high risk junk bonds.

We ask that the SEC immediately impose the same regulations that govern outside broker-dealers to securities' operations within banks. And, we herewith ask Congress to reconsider the repeal of the Glass Steagall Act or be held accountable for the peril that unfolds from this unwise and inadequately deliberated decision.


Nancy Millar
National Organization for Women-NYC
150 West 28th St., Suite 304
New York, New York 10001
(212) 627 9895