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Advocates assail bank deal
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October 22, 1999: 5:49 p.m. ET
Investors, large cos. will prove winners, but some fear consumer rights are lost
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NEW YORK (CNNfn) - While Friday's compromise on financial modernization legislation will likely benefit investors and merger-minded institutions, consumer advocates assailed the deal for putting profits above the interests of the average customer.
The agreement, reached between Senate and House leaders after an all-night bargaining session, effectively eliminates Depression-era firewalls that prevented the outright merger of commercial banks, insurance companies and brokerage firms.
But consumer advocates and community leaders complained the compromise will not only hamper regulatory oversight over such deals, it also stands to weaken the Community Reinvestment Act designed to ensure consumer and community needs are being served by their financial institutions.
"We could not agree more...that the big financial interests got what they wanted, but the common folk got left behind," said John Taylor, chief executive officer of the National Community Reinvestment Coalition, in a statement.
Clinton administration likes deal
Advocates from both sides cautioned it was much too early to tell exactly what impact the compromise might have, particularly since few of the deal's details have been released.
Broadly, the agreement ends a nearly two-decade long debate on whether financial institutions should be allowed to join forces by repealing parts of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act.
The Clinton administration had threatened to veto a Senate proposal repealing the laws unless certain Community Reinvestment Act provisions included in a similar House bill were included as part of a final compromise.
But while administration officials indicated Friday they supported the compromise agreement, community advocates -- who supported CRA provisions in the House bill as a minimum standard -- accused the administration of giving away to much.
"Few Americans are clamoring for legislation that would allow mega-mergers among the nation's largest financial institutions," Taylor said.
Specifically, advocates were upset with language relaxing how often banks' efforts to meet CRA requirements are reviewed and eliminating certain financial penalties for those that fail to meet those requirements.
But administration officials countered that Clinton will not sign any bill he believes allows banks to circumvent CRA principles.
"The president has set a principle: No bank with an unsatisfactory CRA rating could take advantage of any of the powers granted by this deregulation," Lawrence Summers, U.S. Treasury secretary, told CNNfn.
Summers also believes the agreement hammered out Friday will actually reduce costs for consumers and increase competition for their business.
"It means lower costs for consumers because more people can compete to sell them insurance, to sell them mortgages, to sell them other financial products," he said.
Financial stocks turn north
Industry officials and analysts said the compromise offers companies the opportunity to establish one-stop financial shops that will allow them to better serve customers and compete with overseas financial conglomerates making inroads into the United States.
"This is going to turn around an industry that's been dead on its feet for sometime. I think there'll be a great deal of room on the upside for investors to make serious money," said Miles Seifert, an analyst with Gray, Seifert & Co., a division of Legg Mason Wood Walker.
Indeed, investors promptly bid financial stocks across the board Friday as word of the compromise hit Wall Street.
Large and mid-sized insurance companies were the biggest winners, as analysts view them as the most likely target of merger-hungry commercial banks.
But brokerage and bank stocks also benefited from Friday's rally as investors toyed with a variety of combination possibilities - even though many institutions, such as Citigroup Inc. (C) and Travelers Property Casualty Corp., have already completed such deals using loopholes in the current laws.
"I think this frees up everybody else who was thinking in this direction but wasn't going to take the plunge," said Jon Holtaway, an investment banker with Danielson Associates Inc., a banking research and consulting firm in Rockville, Md.
Holtaway said the one sector likely not to be impacted much by the compromise will be the $500 million and under community banking sector, which could assuage some consumer advocates since that sector is best designed to aid the minority and working class community CRA is designed to protect.
But consumer advocates countered that larger banks have the ability to offer customers a greater array of resources and should hardly be exempt from serving those needs.
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