Sides to Square Off on Bank

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Times Staff Writer

Politics may make for strange bedfellows, but Washington has nothing on Wal-Mart Stores Inc.

The world’s largest retailer wants to open a limited-purpose bank in Utah, and that has prompted financial institutions, real estate agents and farmers to join with unions, housing activists and consumer groups in protest as hearings begin today on Wal-Mart’s application.

“I’m just a kernel of grain in a 50-gallon barrel, but we need to be heard,” said Arthur Douglas, president of the Utah Farmers Union. Douglas, a northern Utah cattle rancher and grain grower who has asked to testify, believes that a Wal-Mart bank could cripple the local financial institutions upon which farmers depend.


Supporters of Wal-Mart’s bid are a similarly unlikely combination as think tanks and professors unite with a missing-children’s organization and the Salvation Army.

The two sides began lining up almost as soon as Wal-Mart applied in July for a so-called industrial loan corporation charter in Utah, saying it would use the bank only to process a small portion of its credit card transactions in hopes of saving a few million dollars a year.

But as is often the case with the behemoth from Bentonville, Ark., critics are unwilling to believe that Wal-Mart would settle for anything short of market dominance.

The company, which got into the supermarket business less than 20 years ago, is now the biggest grocer in the United States. It is the No. 1 seller of recorded music and DVDs, toys, dog food and just about every other category in which it competes.

So despite Wal-Mart’s relatively modest stated intentions, the idea of its becoming a banker is one that is tough for local savings and loans -- as well as the people and institutions that do business with them -- to swallow.

The debate stands as a landmark in financial services history, said V. Gerard Comizio, a lawyer at Thacher Proffitt & Wood in Washington and a former senior banking regulator with the Treasury Department’s Office of Thrift Supervision.


“You’re pitting major U.S. financial services and banking institutions against each other, as well as major federal banking regulatory agencies against each other,” he said.

“To boot, you’re adding in major retail, auto and industrial corporations that support the charter.”

As the two camps prepare to square off at the Federal Deposit Insurance Corp.’s hearings, many banking experts say the hoopla is overblown.

“The conventional wisdom is that ultimately, the FDIC will approve this unless Congress does something to remove their authority or adds a factor upon which the FDIC can base a denial,” said Sanford Brown, a bank regulatory attorney with Bracewell & Giuliani in Dallas.

Still, said Brown, who spent three years at the Office of the Comptroller of the Currency, which regulates national banks, the debate over Wal-Mart’s application is so contentious that approval is not a foregone conclusion.

The FDIC has received 2,400 letters on the issue -- the most the agency has ever received for an application for deposit insurance, a spokesman said -- and expects to hear from 70 people during the hearings today and Tuesday in Arlington, Va., and April 25 in Overland Park, Kan.


Included in those letters, comments and public statements are impassioned arguments from members of Congress and both the past and current chairmen of the Federal Reserve -- which regulates other banks but not industrial loan corporations -- warning against a Wal-Mart bank or against the notion of combining banking and commerce.

The FDIC has seven criteria for evaluating an application, including the applicant’s financial health and the character and fitness of its management.

The regulatory body has issued “very few denials,” said FDIC spokesman David Barr, although the low number is attributable in part to applications being withdrawn when their prospects of success seem dim.

Wal-Mart isn’t breaking new ground. Among other companies, several automakers, notably U.S. market leader General Motors Corp., operate their own specialized banks.

Target Corp., a Wal-Mart rival, has an industrial loan corporation. When the Minneapolis-based company submitted its application for deposit insurance, the FDIC received no comment letters.

To Wal-Mart, the opposition is much ado about nothing. The company has pledged not to use its bank to make loans or take deposits.


“We are not going to branch -- we say it right in the application. We have told Congress that we’re not going to branch. So I think we’ve been about as clear on that topic as we can possibly be,” Wal-Mart spokesman Marty Heiers said. “All we’re really out to do here is to save some money and return the money that we save to our customers in the form of lower prices. That’s what we do.”

In fact, the company said, it holds long-term leases with 300 financial institutions that operate bank branches in 1,150 Wal-Mart stores across the country. The company has agreements with 250 more banks to open in future stores.

But the company’s opponents worry that once Wal-Mart gets its giant foot in the banking door, it will find a way to morph into a retail bank.

And with Wal-Mart at the teller’s window, they say, it wouldn’t be long before neighborhood savings and loans would be as rare as the oldfashioned mom-and-pop general stores that fell by the wayside as Wal-Mart spread its 3,800 stores across the country.

John Taylor, chief executive of the National Community Reinvestment Coalition, said a lot of people would not take Wal-Mart’s word on the matter.

“It’s not like this company is arriving with a tabula rasa; it’s viewed as the poster child for bad corporate behavior,” he said.


Although Wal-Mart might have little to fear from an FDIC ruling, its bid for an industrial loan corporation could cause other problems. Wal-Mart’s banking application has alienated part of a constituency that has been the company’s mainstay: rural Americans and nonretail businesspeople across the nation’s conservative Southern and middle states.

“As big as they are, I don’t think we can say they won’t go farther than this,” said Utah farmer Douglas, raising concerns about Wal-Mart’s potential effects on smaller competitors. “What if they say, ‘Farmer Doe, we’re willing to borrow you the money for a new John Deere tractor or your operating loans or the expansion of your farms and ranches’? I think that would be a detriment to the community and state.”

Stuart Shoaf, president of St. Joe Natural Gas in Port St. Joe, Fla., and a board member of the only locally owned and operated bank in his 5,000-resident Panhandle town, wrote to the FDIC because he too worried about what would happen if Wal-Mart opened a bank there.

“At the rate they’re going, [Wal-Mart] might be the only business in the U.S. or the world someday,” he said. “One day soon you’ll go there to give birth to babies and buy an automobile. Where does it end?”

The National Assn. of Realtors, which is scheduled to testify at the hearings Tuesday, has opposed what it calls “an erosion of the separation of banking and commerce.”

“NAR is deeply concerned about the pending application from Wal-Mart Stores,” the association wrote to the secretary of the Treasury.


“Banks must be ‘honest brokers’ of financial services and must not be swayed into making credit and other business decisions based on their affiliation with commercial firms.”

But Ernie Allen, CEO of the National Center for Missing and Exploited Children, said Wal-Mart asked him to testify as a character reference and that he was happy to oblige because of the company’s efforts to recover lost children.

“I think it’s a great, caring company that really tries to do positive things for the communities in which it is located and serves,” he said.

The Salvation Army also believes that Wal-Mart is good for communities. In the last five years, the group has raised $73 million outside Wal-Mart stores and received millions in donations from the company itself, said George Hood, who holds the rank of major in the organization.

“The reality is, I don’t know a whole lot about banking,” he said, “but I know about community service, and they have been phenomenal.”

To an extent, Wal-Mart has been in the financial services business for the last few years, offering money orders, check cashing and a co-branded credit card with Discover.


Before that, in the late 1990s, the company began the first of several unsuccessful attempts to enter retail banking.

In 1999, Congress blocked Wal-Mart’s bid for a savings and loan in Oklahoma by adopting the Gramm-Leach-Bliley Act, which prevented non-financial services companies from getting into banking. The act grandfathered applications on file before May 4 of that year. Wal-Mart’s application was dated May 5.

The company tried and failed again in 2001 and 2002, with its last attempt blocked by the California Legislature when it applied for an industrial loan corporation charter here.

That left Wal-Mart to try this time in Utah, one of the few states that offer charters for the specialized banks, which served originally to provide loans to workers and evolved into a way for entities other than banks to own a financial institution.

Taylor, of the Community Reinvestment Coalition, said that even if the retailer stayed true to its word to limit its financial activities, he still wouldn’t like the idea of a back-office Wal-Mart bank.

“If Wal-Bank is culling the cream off the basic banking services,” he said, “what they’re going to do is undercut other institutions that offer more to working poor people.”