Sunday, September 28, 1997

Merger shows markets unwilling to wait on Congress

By MARY DEIBEL

Scripps Howard News Service

With Travelers Group's announcement Wednesday that it will buy Salomon Inc. in a stock swap valued at more than $9 billion, two of the nation's most powerful financial institutions will be brought together under one red umbrella.

Salomon, a venerable Wall Street investment bank known for underwriting the finances of much of Corporate America, will be merged with Travelers' Smith Barney Holdings, parent of the Smith Barney retail brokerage house.

Travelers Chairman Sanford Weill said the combination "will create a financially powerful and formidable competitor in virtually every facet of the securities business."

Outside analysts agreed, saying the Travelers-Salomon deal shows no firm is too big to resist the urge to merge in the financial services industry.

Increasingly, mergers are reshaping the nation's financial landscape as brokers, banks, insurance companies and other asset managers get into each other's business in the drive to provide customers with one-stop financial shopping.

The trend has accelerated this year in the wake of the Federal Reserve's decision to let the commercial banks it regulates set up subsidiaries to sell stocks and bonds and enter other financial fields. Earlier, bank regulators and the Supreme Court let banks get into insurance -- to the insurance industry's dismay.

What the markets and the regulators have brought about, however, has been done without the blessing of Congress.

The Fed's decision to free up commercial banks, and the insurance and brokerage house reaction to it, was supposed to make 1997 the year Congress finally passed legislation tearing down the Depression-era fire walls built to keep banking and other financial services separate from one another.

But try as he might to move the Financial Services Competition Act of 1997, House Banking Chairman Jim Leach, R-Iowa, has been stymied in his efforts to bring the bill up for consideration by the full House before Congress quits for the year. And Senate Banking Chairman Alfonse D'Amato, R-N.Y., has let it be known the Senate won't move unless the House goes first.

"The Travelers deal proves the adage that the market keeps moving, whether or not Congress does anything," says the Brookings Institution's Robert Litan, a student of Congress and the financial services industry.

"Congress still has an opportunity to clear away the legislative underbrush and what's left of the regulatory roadblocks that remain to one-stop shopping, where financial service companies eventually plan to be. That's what will happen if the legislation is written right, but we're not there yet."

Columbia University business professor Charles Calomiris, an expert on financial regulation, sees no harm for now in the lack of congressional action with "one large caveat: They have to reform the safety net that goes with deregulation."

"Taxpayers cannot be held accountable, the way they were in the 1980s with the savings and loan bailout, when thinly-capitalized thrifts got into bad investments with deposits guaranteed by federal insurance," he says.

Having learned that lesson, Calomiris says, the financial services industry shouldn't be confined into "separate little boxes" when it is moving toward one-stop shopping, with the improved efficiencies and customer service it promises to bring about.

"As for regulators and Congress," he adds, "they should get out of the way, subject to the protection of the nation's taxpayers."

(Mary Deibel is a reporter for Scripps Howard News Service.)