Rules Change Fits Tough Game of Banking

The Federal Reserve made headlines Thursday when, in effect, it repealed 57 years of legislative history and gave J. P. Morgan bank permission to underwrite and sell common stocks and other securities. The move spelled curtains for the 1933 Glass-Steagall Act, which separated the functions of banks and brokerage houses because banks in the 1920s had endangered their depositors’ money through stock deals.

But the Fed wasn’t repealing legislation so much as recognizing that the immense American financial services industry is now a pin-striped game of survival of the fittest, with everybody getting into everybody else’s business. General Motors, American Telephone & Telegraph, Citicorp, Merrill Lynch, Fidelity Investments and Aetna Life & Casualty are all competing in consumer finance now.

And whoever emerges the victor among them, the ultimate winner is supposed to be the customer--all of us--as we benefit from lower fees on every kind of loan or financing, while at the same time enjoying higher interest for our savings.

The Morgan action, one small step in that long process, should be followed immediately by similar permissions to other large, New York banks. Ultimately it will spread across the country and affect every bank and brokerage house.

The banks needed a boost. They have been losing business for years to all sorts of competitors--losing deposits to money market mutual funds, losing car loans and mortgage loans to automobile companies, losing corporate loans to commercial paper issued by Wall Street underwriters.

And so they have made loans to less credit-worthy borrowers and have suffered growing loan losses, as dramatized by Chase Manhattan’s announcement Friday of large layoffs and loan write-offs.

But the Fed’s action gives the banks a chance to regain some business. The Fed said Morgan could set up a separate securities subsidiary--without using insured deposits--and underwrite corporate stock, or bonds or commercial paper. It could compete, in short, with such firms as Salomon Bros., Goldman, Sachs & Co., Merrill Lynch and, significantly, with Morgan Stanley, the securities firm that was separated from the Morgan bank in 1933 by the Glass-Steagall Act.

Trouble is, the securities business is no great shakes right now. Underwriting is slow, there is already fierce competition and profit margins are narrowing. The addition of the big banks will further crowd an already-crowded market.

And the same is true for securities trading and retail stock brokerage, which banks will also want to enter. In trading, the big institutional investors who buy and sell billions of dollars worth annually have reduced commissions to 5 cents a share or less and are now working to bypass Wall Street altogether through direct computer trading.

Meanwhile, brokerage houses or banks vying for retail customers must compete with discount brokers and mutual fund companies with toll-free telephone numbers.

Note: For institutional trading, the key is using computers to cut costs; in retail business, the key is serving the customer by telephone. And those examples give you a suggestion of what the financial service business is all about these days: It’s an electronic competition, vying for access to customers, in which the ultimate victor may well be the company with the biggest and smartest computer.

It was a banker who saw this time coming. John Reed, now chairman of Citicorp, and his predecessor, Walter Wriston, started more than a decade ago building up Citi’s computer capability and steering one of the nation’s premier corporate lenders toward a future in consumer business. Citicorp now makes more consumer loans than business loans, and has become the nation’s largest bank issuer of MasterCard and Visa cards--a business it can handle because of its computer network.

But being the largest bank issuer of credit cards is not the distinction it once might have been because the credit card competitors, Sears and American Telephone & Telegraph, are putting Citi’s effort in the shade. Sears has issued 36 million Discover cards and AT&T; is coming on very strong with a credit card issued only this year.

So enraged was Citi when AT&T; came out with its credit card that it and three other big banks, including BankAmerica, filed complaints in May with the Federal Reserve and the Federal Communicatons Commission to try to block the telephone company’s card. But legal experts said that there was little the banks could do to keep the telephone company out of their business--and the AT&T; card continues to be a success.

But consider the astounding contrast between that dispute and last week’s action by the Fed. The Glass-Steagall issue seems positively quaint, a fussy separation of banks and brokerage houses in Wall Street long ago, while the issue in 1990 is whether banks anywhere can compete with the telephone company in making loans to consumers. Times change, and consumers become more important--and that’s the point of all this competition in financial services.