House banking scandal

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The House banking scandal broke in early 1992 when it was revealed that the United States House of Representatives allowed members to overdraft their House checking accounts, but were not being penalized by the House Bank. However, it should be noted that the House Bank is in fact not a bank, but better defined as a clearinghouse.

This is also sometimes known as Rubbergate (a portmanteau from "rubber" bounced checks and Watergate). The term is misleading because House checks did not bounce; they were honored despite the overdrafts -- the more accurate term for the abusive practice is check kiting.

[edit] The Scandal

The House banking scandal ultimately involved more than 450 Representatives. Twenty-two congressmen and -women were singled out by the House Ethics Committee for having been overdrafted for at least eight months out of a sample of 39 months.^{[citation needed]}

The scandal contributed to a perception of corruption and malfeasance and was a contributing factor to major changes in the House, in which 77 Representatives resigned or were ousted in the 1994 election. Four ex-Congressmen, a Delegate, and the former House sergeant-at-arms were convicted of wrongdoing as a result of the investigation that followed.[1] Among these, Former Rep. Donald Lukens (R-OH) was convicted on bribery and conspiracy charges. Former Rep. Carl C. Perkins (D-KY) pled guilty to various charges including a check kiting scheme involving several financial institutions including the House Bank. Former Rep. Carroll Hubbard, Jr. (D-KY) pled guilty to three felonies. Former Rep. Mary Rose Oakar (D-OH) was charged with seven felonies, but she ended up pleading guilty only to a misdemeanor campaign finance charge not related to the House Bank. The House Bank investigation also led to Delegate Walter E. Fauntroy (D-DC) pleading guilty to an unrelated charge of a making a false statement relating to a charitable contribution to his church. The former Sergeant At Arms, Jack Russ, pled guilty to three felonies.[2]

The House Bank did not function in accordance with the laws governing deposit institutions. The facility was operated under very loose rules at the time, using a pencil and ledger system rather than a computerized accounting system, and the bank manager did not provide regular account statements to House members, nor were notifications sent to House members in the event they had overdrawn their accounts. Further contributing to the problem was the fact that the House Bank didn't post deposits in a timely manner, often as much as seven weeks after the fact. Thus, while some knowingly took advantage of the system (and were ultimately convicted of wrongdoing)^{[citation needed]} many members of the House who wrote overdrafts were not actually at fault, as it was the House Bank's responsibility to post deposits in a timely manner.

Another practice which contributed to the scandal was that House members were allowed to overdraw their accounts, provided that the overdraft did not exceed the member's next paycheck. Many House members used this practice to take unauthorized advances on their paychecks which they would repay in the future. In a corporate context the practice of drawing money out of the corporation's accounts for personal use is a violation of fiduciary duty to the corporation's shareholders. Congressmen, however, are specifically exempted from many of the laws of the nation, so most of the House members were not prosecuted for their activities.

[edit] Public Exposure

In the early days of the scandal, when the media began reporting on the loose practices, Republican Minority Whip Newt Gingrich, along with 7 freshman Republicans referred to as the Gang of Seven or "The Young Turks," made the strategic decision to publicize the scandal in an attempt to sweep lawbreaking congressmen, most of them Democrats, out of power. Gingrich realized that far more Democrats could be implicated in this scandal than Republicans, so he made the decision to make all of the culprits public and "let the chips fall where they may." Jim Nussle, one of the Gang of Seven, came to national attention when he made a speech from the well of the House while wearing a paper bag over his head to protest the "shameful" ethical behavior involved in the scandal.

Rather than caving in to pressure from Democrats to minimize the extent of the scandal by limiting publicity only to the handful of House members who repeatedly broke the law, Gingrich took steps to ensure that the special counsel appointed to investigate the matter informed the voting public of the overdrafts and the identities of all of the congressmen responsible[3]. This decision rebounded on Gingrich somewhat when it was disclosed that he himself had written a number of overdrafted checks.