The Facts About Bad Checks -- The House Bank: How It Worked, And How It Didn't
WASHINGTON - The House decision to disclose the names of dozens of members who wrote bad checks leaves the issue with the ultimate ethics committee - voters.
The following is an explanation of how the House bank worked, based on records and interviews with officials from Congress, the House bank, the General Accounting Office, the Treasury and the Federal Reserve.
Q. What was the House bank?
A. It was a depository where members could keep their salaries and other money in checking accounts. In effect, it was a cooperative. Until it was closed last year, the bank was run by the Office of the Sergeant at Arms.
Q. How did the House bank compare with a commercial bank?
A. Much like a commercial bank, the House bank took deposits, issued checkbooks, cashed its own checks and checks written at other banks, and gave members monthly statements.
But unlike a commercial bank, the House bank did not pay interest on deposits. Nor did it make interest-bearing loans, issue credit cards or otherwise invest its assets for profit. The crucial difference was that the House bank's policy on bad checks was far more generous.
Q. How many members used the House bank?
A. All 440 members and delegates were assigned account numbers. Not all participated, but bank officials refused to say how many used their accounts.
Q. Where was the House bank's money kept?
A. The bank operated out of the office of the Sergeant at Arms in
the Capitol close to the House floor. It would have between $20,000 and $200,000 in cash on hand. The rest of its assets were at the Treasury in a "members' balances" revolving fund. Its average daily balance topped $1 million. Sergeant-at-arms officials kept records of each member's balance; the Treasury tracked the aggregate total in the fund.
Q. How did members deposit money in their House bank account?
A. Most participants chose to have their salary deposited directly into their House bank account. When the bank closed, members earned $125,100 a year and were paid $10,425 monthly. Once a month, each account would be credited with the member's net salary, $7,000 more or less, depending on deductions. Members could also deposit money to their account by going to a teller window in the bank.
Q. How did the House bank cash checks?
A. Members wrote checks, exchanging them for cash. House bank officials debited their account on the bank's books.
Q. How did the House bank handle member-account checks written to other people?
A. Members could write checks on their House bank accounts to third parties. These checks would flow through the Federal Reserve's check-processing system in much the same way as regular checks. Recipients of House bank checks would deposit them at a commercial bank. That bank would send the check to the Fed, either directly or through an intermediate bank. The Fed would credit the Fed account of whichever bank sent it the check.
The House bank would adjust its books by reducing individual members' accounts for the amounts written on each member's checks - unless the member's account did not have enough money in it.
Q. What happened when members wrote checks for more than they had in their House bank accounts?
A. Members who wrote checks for more than they had in their account - commonly known as "bad checks" - had little to worry about because the bank would almost always honor the checks and collect later.
That is not the way of commercial banks. Unless the check-writer
has overdraft protection, commercial banks usually "bounce" such checks and charge the check-writer a fee.
Q. How long was this going on?
A. Congressional records contain evidence of member overdrafts as far back as 1830.
Q. Did the House bank do anything about members who wrote bad checks?
A. George Chapin, who has worked in the Sergeant at Arms Office for two decades, says that in his early days, the House bank never bounced checks.
The House bank's overdraft policy was never put in writing. Members were only told what it was if they asked.
As the policy evolved, bad House bank checks were handled one of three ways, depending on the size of the overdraft (the face value of the check minus the member's balance) and when the check came back from the Fed:
-- If the overdraft involved less than the amount of the next salary deposit and the check was received near payday, the House bank would delay posting the check to the member's account until payday, and the member would not be told.
-- If such an overdraft check arrived more than a couple of days before payday, a House bank employee would call the member to ask that the deficiency be covered with a deposit. If the member failed to do so, the House bank would delay posting the check until payday anyway.
-- When overdrafts exceeded the member's next salary deposit, the member would be asked to make a deposit to get the overdraft down at least to an amount less than the next month's pay. If the member refused or did not respond, the check was sometimes (but not always) bounced.
Q. How many members wrote bad checks?
A. The Government Accounting Office found that in a recent 12-month period, there were 8,331 bad checks - an average of 19 per member. The House ethics committee found 355 current and former House members wrote nearly 20,000 bad checks during a 39-month period.
Q. Did anybody else bounce checks at the House bank?
A. Journalists and staff members also overdrew checks on commercial banks at the House bank, the GAO says. It found 314 bad checks for a total of more than $300,000 in one year.
Q. How did the way members' bad checks were treated differ from overdraft protection at a commercial bank?
A. Overdraft protection at a commercial bank usually is a line of credit, with a steep short-term interest rate like that of a credit card. The limit on overdraft protection depends on the credit-worthiness of the account holder but rarely exceeds $5,000. The House bank had a higher limit - the next month's net salary - and no interest or penalty.
Q. Did overdrafts cause the House bank to lose money?
A. Although large amounts of money have been embezzled from the House bank in the past, some by a check-kiting member early this century, officials say members eventually covered all recent overdrafts. But there was a risk. "The fact that no loss occurred," says the House Administration Committee, "was clearly a happy accident."
Q. How might voters react to the issue?
A. Next Tuesday, Illinois could provide a test of voter anger. About a dozen incumbents face serious primary fights the same day presidential candidates face their opponents in Illinois. -----------------------------
SOME NAMES
Here is a partial list of House members who acknowledged having written checks on insufficient funds at the House bank. There has been no official notification of specific dollar amounts or the number of overdrafts.
Reps. Don Young, R-Alaska; John Rhodes, R-Ariz.; Duncan Hunter, R-Calif.; Dana Rohrabacher, R-Calif.; David Skaggs, D-Colo.; Chris Shays, R-Conn.; Newt Gingrich, R-Ga.; Charles Hatcher, D-Ga.; Richard Stallings, D-Idaho; Jill Long, D-Ind.; Frank McCloskey, D-Ind.; Philip Sharp, D-Ind.; Jim Slattery, D-Kan.; Clyde Holloway, R-La.; Gerry Studds, D-Mass.; John Dingell, D-Mich.; Jim Oberstar, D-Minn.
Reps. Tim Penny, D-Minn.; Gerry Sikorski, D-Minn.; Vin Weber, R-Minn.; Mike Espy, D-Miss.; Richard Gephardt, D-Mo.; Harold Volkmer, D-Mo.; Alan Wheat, D-Mo.; Walter Jones, D-N.C.; Steve Neal, D-N.C.; David Price, D-N.C.; Byron Dorgan, D-N.D.; Robert Mrazek, D-N.Y.; Mary Rose Oakar, D-Ohio; Louis Stokes, D-Ohio; Mickey Edwards, R-Okla.; Les AuCoin, D-Ore.; William Goodling, R-Pa.; Peter Kostmayer, D-Pa.; Mike Andrews, D-Texas; Dick Armey, R-Texas; John Bryant, D-Texas.
Reps. Albert Bustamante, D-Texas; Ron Coleman, D-Texas; Kiki de la Garza, D-Texas; Jack Fields, R-Texas; Greg Laughlin, D-Texas; Bill Sarpalius, D-Texas; Lamar Smith, R-Texas; Charles Stenholm, D-Texas; Charles Wilson, D-Texas; Harold Ford, D-Tenn.; Bart Gordon, D-Tenn.; Wayne Owens, D-Utah; Tom Foley, D-Wash.; Scott Klug, R-Wis.; David Obey, D-Wis.; Thomas Petri, R-Wis.