Banks Win the Fed’s OK to Underwrite Securities

The Federal Reserve Board on Thursday cleared the way for major bank holding companies to enter the securities market, despite a 54-year-old law intended to separate the two businesses.

The board approved, on a 3-2 vote, the applications by J. P. Morgan & Co., Citicorp and Bankers Trust New York to underwrite commercial paper, mortgage-backed securities and municipal revenue bonds. Several other New York and regional banking companies have also asked for investment banking powers, including California’s Security Pacific and First Interstate Bancorp.

The decision was quickly contested and is expected to be challenged in court by the securities industry. The Securities Industry Assn., a trade group, said it would file suit Friday in federal court in New York to test the legality of the decision.

“The Fed’s action is unprecedented, untimely and unauthorized by law,” said Edward I. O’Brien, president of the trade group.

Sen. William Proxmire, (D-Wis.), chairman of the Senate Banking Committee, also has insisted repeatedly that such a decision was beyond the board’s authority. Lawmakers have put off for a year any definitive legislation to resolve the question.

Citicorp, in a statement issued late Thursday, said, “We are pleased with this first, small step in the right direction.”

None of the banks indicated how quickly they would move to offer securities underwriting, but sources said they were disappointed at the limitations.

The securities involved have long been considered off limits to commercial banks under the Glass-Steagall Act, a Depression-era law written in response to banking abuses that were blamed for contributing to the 1929 crash of the stock market.

The board said the bank holding companies could avoid the prohibitions of Glass-Steagall by limiting securities underwriting to less than 5% of the business done by the subsidiary handling the underwriting.