The House banking scandal broke in early 1992, when it was revealed that the United States House of Representatives allowed members to overdraw their House checking accounts without risk of being penalized by the House bank (actually a clearinghouse).
Contents
This is also sometimes known as Rubbergate (from the expressions "rubber check" (bounced check) and "Watergate)". The term is misleading because House checks did not bounce; they were honored because the House Bank provided overdraft protection to its account holders, the Office of the Sergeant at Arms covered the House Bank with no penalties. It was also sometimes known as the "check-kiting scandal".
The scandal
The House banking scandal ultimately involved more than 450 representatives, most of whom did not break any laws. Twenty-two congressmen and -women were singled out by the House Ethics Committee for leaving their checking accounts overdrawn for at least eight months out of a sample of 39 months.
The following 22 House members were singled out by the House Ethics Committee:
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.
Among these, former Rep. Buz Lukens (R-OH) was convicted on bribery and conspiracy charges. Former Rep. Carl C. Perkins (D-KY) pleaded guilty to various charges including a check kiting scheme involving several financial institutions including the House Bank. Former Rep. Carroll Hubbard (D-KY) pleaded guilty to three felonies. The former Sergeant at Arms, Jack Russ, pleaded guilty to three felonies.
The House Bank functioned according to rules different from 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 did not 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) 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.
Many U.S. banks, like the House Bank, offered overdraft protection to checking account holders. However, the overdrafts in a regular bank's overdraft protection program are always secured by either a line of credit with the bank extended under standard lending protocols (including interest charges, if any), linkage of the protected checking account to another account with the necessary funds to pay the overdraft, such as a savings account, or charges made to a credit card held by the depositor.
Prior to and during the House Bank overdraft scandal, the security for the overdrafts in the House Bank was the Member of Congress' next paycheck, as posted to his or her checking account in a pencil ledger system. In the aftermath of the House Bank overdraft scandal, two federal credit unions, one for the House and one for the Senate now provide banking services to Members of Congress and the general public, with no special treatment for Members of Congress.
These credit unions existed long before the scandal. However, the Office of the House Sergeant-at-Arms had offered a much more convenient clearing house for Members of Congress' checks, and overdraft protection was managed in a much more lenient (and less expensive) manner than through the credit unions or, for that matter, any chartered bank.
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 congressmen with overdrawn accounts, most of them Democrats, out of power; Gingrich himself had 22 overdrawn checks, one a $9,463 check to the Internal Revenue Service. 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.
Gingrich pressured the then Speaker of the House Tom Foley 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.