Firms Betting on Change of Federal Laws
Citicorp and Travelers Group, in agreeing Monday on a mammoth merger, are betting on a change of laws dating to the Depression that prohibit banks from getting into the insurance or brokerage business.
Prospects for revamping the law are murky, however, after Republican congressional leaders, sensing defeat, abruptly postponed final action last week on legislation to change those laws.
The companies’ proposed $83-billion pairing runs afoul of federal laws that bar bank holding companies from owning insurance businesses. In the nearer term, however, the two financial powerhouses expect, under current rules, to be able to operate as one for several years.
The firms intend to ask the Federal Reserve Board to grant them a waiver of up to five years from compliance with the law in order to give them time to persuade Congress to make permanent changes. Congress has for a decade debated modernizing the 1933 Glass-Steagall Act, which was enacted after the stock market Crash of 1929 to keep brokers and bankers out of each others’ business.
“My sense is it’s a reasonable gamble,” said Bert Ely of Alexandria, Va., a banking analyst who advises Citicorp on legislative issues. He said the merger news “increases pressure on Congress to do something.”
Indeed, that sentiment was acknowledged Monday by a key U.S. senator whose support would be needed to pass any reforms.
“I think it’s overdue, and this merger demonstrates it,” said Senate Banking Committee Chairman Alfonse M. D’Amato (R-N.Y.), who previously has resisted pressure to overhaul Glass-Steagall. “I think we need it, and I think we’ll have it. Unfortunately, we’ll probably have to wait until next year.”
Citicorp and Travelers also would need to have changes made in the 1954 Bank Holding Company Act, which, among other things, prohibits banks from selling and underwriting certain insurance products.
Legislation was pulled from the floor of the House last week after supporters fell short of the needed votes for passage.
Consumer activist Ralph Nader, who bitterly opposed the financial overhaul legislation, maintained that the proposed merger would be “a massive and dangerous concentration of economic resources” that inevitably would bring reduced choice and higher prices for consumers.
Nader called on the Fed to reject the proposed merger and suggested that it may be necessary for the Clinton administration and Congress to put forward emergency legislation to halt it.
The Securities and Exchange Commission will review the merger for its potential impact on shareholders, since it involves two publicly traded companies. It wasn’t immediately clear whether the Justice Department or the Federal Trade Commission would examine it for its effect on consumers.
Associated Press and Bloomberg News were used in compiling this report.