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Revisions in Banking Law Not Likely This Year

February 21, 1988|DOUGLAS FRANTZ | Times Staff Writer

WASHINGTON — Efforts to dismantle the legal barrier that keeps banks out of the securities business have been delayed, possibly even derailed, by political infighting, the stock market crash, a court ruling and lobbyists with pit bull temperaments.

The nation's big banks expected 1988 to be the year that Congress repealed parts of the Glass-Steagall Act, which prohibits them from owning securities firms and underwriting corporate debt.

It would open the door to a lucrative field for banks, which recently completed their worst year since the Depression. And it would be the first step in what many see as an inevitable upheaval in financial services that will alter the way billions of dollars are invested and will affect virtually every consumer in the United States.

'Not End of Road'

But a variety of forces have combined to dim prospects for even the first increment of the restructuring. While bankers and their lobbyists maintain publicly that they still expect Glass-Steagall reform, many concede privately that it is unlikely this year.

"I had hoped that the Senate Banking Committee would at least get out something that I would characterize as progressive legislation, but I don't think we are on that schedule now," the top lobbyist for a major banking company said in an interview. "It's not the end of the road, but I'm not optimistic."

The banks had reason for optimism just months ago, for they had gained a powerful and surprising ally.

Sen. William Proxmire (D-Wis.) is chairman of the Senate Banking Committee and a longtime critic of big banks. But last summer he reversed himself and joined their side on the critical issue of reforming Glass-Steagall. Proxmire announced hearings on the subject, with the aim of drafting legislation to alter the Depression-era bank regulations.

Glass-Steagall was passed in 1933 to separate securities and banking activities after the 1929 market crash and the subsequent collapse of the banking system. Before then, banks had owned securities firms and critics blamed that integration for contributing to the economic catastrophe by risking bank assets and fostering conflicts of interest.

In the more than half a century since the law was passed, however, the financial industry has undergone enormous changes. Technology transformed money into blips on a computer screen and linked the world's financial centers. Innovative products, such as mutual funds and Eurobonds, were introduced.

Banks complained that the outmoded restrictions of Glass-Steagall forced them to remain on the sidelines, watching profits shrink and business go to foreign banks and domestic non-bank competitors, such as the investment firm of Merrill Lynch. The banks wanted the right to compete by owning securities affiliates.

"The changes have been so great in the banking system that you can do this without the threat and danger we had before," Proxmire said the day before he introduced legislation last November to repeal the section of Glass-Steagall prohibiting banks from engaging in securities transactions.

Proxmire is pivotal to any chance for success. He is respected as a legislator of intellect and integrity, and many view this legislation as his last hurrah before retirement at the end of 1988. He added to his luster by persuading Sen. Jake Garn (R-Utah), the ranking Republican on the banking committee, to co-sponsor the legislation.

A central feature of the Proxmire-Garn bill would require that securities activities be restricted to an affiliate of the bank holding company, establishing what are generally called "fire walls" to insulate the bank from potential losses of the securities affiliate.

But the concept was called into question after the Oct. 19 stock market crash, when it was disclosed that Continental Illinois National Bank lost $90 million after making excessive loans to an affiliated options-clearing company. The subsidiary is not a securities firm, and Continental Illinois had assured regulators that it was risk free.

That event was outside Proxmire's control, but Washington insiders say the senator has made a couple of mistakes that also damaged prospects for his bill's success.

One was underestimating the impact of the market crash. Proxmire said the crash showed that the banking system had the strength to endure its biggest test since 1929. But the event raised long-buried fears in the national psyche and provided opponents with an emotional argument for keeping banks out of the securities business.

Banking regulators have supported the Proxmire bill and, as recently as Wednesday, H. Robert Heller, a member of the Federal Reserve Board, urged Congress to repeal the sections of Glass-Steagall separating commercial and investment banking. He said it would benefit the financial industry without undue risk to the banking system.

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