Customers Beware of Bank Mergers

The big players in the financial industry and their allies in the Congress have been trying to downplay the impact of pending deregulation legislation on the nation’s economy. Just an effort, they said, to change a few “depression era” laws to “modernize” the financial system so consumers could have something described as “one-stop” shopping centers for financial products.

But these benign sounding phrases took on a hollow ring April 6 when two of the long- standing residents on the Fortune 500 list–Travelers Group and Citicorp–announced plans for a merger that will create a conglomerate with $700 billion in assets. The behemoth will house the nation’s second largest commercial bank and a financial services company with extensive holdings in investment banking, consumer finance, life and property-casualty insurance.

The announcement makes it clear that so-called modernization legislation now pending in Congress is the stalking horse for a massive concentration of the nation’s financial resources. Derided as a gross exaggeration only a few years ago, fears that the nation’s financial resources will be controlled and dominated by less than a dozen big conglomerates now appears to becoming a reality in rapid fashion..

Congress can still stop the onrushing concentration of resources if it drops HR 10, the 400-page financial deregulation bill scheduled to come to the floor of the House of Representatives in May.

Obviously Sanford Weill, chairman of Travelers Group and John Reed, chairman of Citicorp, are betting their 700 billion dollars that the Congress can be stampeded into approving legislation.

In fact, they must have the legislation. Otherwise, major parts of the proposed merger will be wiped out under current prohibitions on combining securities and insurance companies with banks in a holding company.

Temporarily, the two corporations intend to exploit a loophole in the Bank Holding Company Act which allows a new holding company to continue operating prohibited activities for two years. The Federal Reserve can extend that loophole for three additional years. So, with a friendly Federal Reserve, the conglomerate could operate with all its baggage for five years.

But divesting the activities at the end of five years would be costly, not only in dollars, but for the egos of Mr. Weill and Mr. Reed who are taking bows from their financial brethren for this daring high-wire act.

So, it is a certainty that the clout–including generous campaign contributions– of Travelers and Citicorp will be felt immediately by Congress. The long-delayed HR 10 will suddenly be a “private” bill for Mr. Weill and Mr. Reed. Already, key Members of Congress are uttering approving words for the merger, and suggesting that the legislation will be law long before Federal Reserve’s loophole closes on Travelers and Citicorp.

The danger is great that both the Federal Reserve and the Congress will fail the public and the best interests of a competitive and affordable market place in financial products–a market that meets the needs of all segments of the population.

The type of economic concentration represented by the Travelers-Citicorp merger and the pending legislation will mean a reduction in the quality of choices and higher prices for consumers. The large banks have already demonstrated ability to tack extra charges and fees on every consumer product they peddle. Give them less competition and an expanded reach and the present gouging will look small indeed.

Even more alarming is the fact that these new conglomerates, many of which would soon control more than a trillion dollars of assets, will be regulated by a disjointed overlapping federal and state regulatory system. Instead of fixing the system, HR 10 weakens regulation even more by scattering supervision of the new conglomerates over five different federal agencies and the bank, securities and insurance commissions of 50 states.

Nothing should be done on financial legislation until Congress moves to consolidate the federal system into a single regulatory commission with the sole responsibility of regulating. The current system, like the system that existed in the savings and loan industry in the 1980s, is just waiting for disaster, not preventing it.

All the banks that will be housed in the conglomerate are insured by taxpayer supported funds. Mergers like the Travelers-Citicorp marriage add risk to the deposit funds. If something goes wrong with the insurance or securities entities, fear will grow among regulators that confidence will be lost in the giant insured bank that the government deems too big to fail. Translated, that means a call for gigantic taxpayer bailouts like the $500 billion of the savings and loan debacle.

Clearly, the public interest is best served by (1) the Federal Reserve summoning sufficient courage to reject the application; and (2) on Congress dropping HR 10 and going back to the drawing board on changes in financial law.

The next few months are going to be critical. The public is going learn how seriously the Federal Reserve takes its job when some of its biggest and most powerful constituents are asking for a quick ride through a questionable loophole in the Bank Holding Company Act. The roll call on HR 10 in the House and Senate will be instructive. Will this be a rush to judgment to meet the immediate needs of Mr. Weill and Mr. Reed? Or will a majority look to the longer range needs of consumers for a competitive, fair and affordable financial marketplace?