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Big Fish, Big Obligations

June 17, 2002

Large financial institutions acquire smaller competitors to improve their bottom lines, not, as the glitzy advertising suggests, out of a neighborly desire to make life better for consumers. Though economies of scale theoretically could generate lower fees for consumers, one sure result of Citigroup's proposed $5.8-billion takeover of California Federal Bank's parent company would be fewer choices for people who need a home loan, a convenient cashier window or other financial services.

Federal regulators are unlikely to stop the nation's largest financial institution from acquiring Cal Fed, the nation's third-largest savings and loan. But the Federal Reserve Board should at least investigate community activists' claims that Citigroup has done relatively little in other states to help consumers in low-income neighborhoods that traditionally get shortchanged on banking services.

Activists use phrases like "pervasive anti-consumer practices" to describe Citigroup's involvement in needier neighborhoods. Citigroup sparked concern two years ago with its $30-billion purchase of Associates First Capital, the nation's largest sub-prime lender (a company that charges higher interest rates to make riskier loans). The Federal Trade Commission is seeking hundreds of millions of dollars on behalf of consumers with poor or limited credit histories who allegedly paid exorbitant fees for mortgages with Associates First Capital before Citigroup's acquisition.

Citigroup maintains that it has fixed the problems at Associates First Capital. Regulators, though, should review Citigroup's community reinvestment efforts, which are required by federal law. The proposed acquisition would continue a string of deals in which California institutions--including Wells Fargo, Home Savings of America, Bank of America and Glendale Federal--have been gobbled up. Consumer groups worry that the Citigroup subsidiary Citibank, owner of Mexico's second-largest bank, would increase wire-transfer fees charged to Mexican Americans sending money back to relatives.

Cal Fed's 352 branches, mainly in California, would triple Citigroup's presence here. Citigroup hopes to use that larger presence to pitch its Travelers insurance arm, Primerica financial services unit and Salomon Smith Barney investment firm.

Other big banks have set down in writing what they intend to do on the community reinvestment front. Bank of America and Washington Mutual have made multiyear pledges totaling $725 billion for single-family home loans in low- and moderate-income neighborhoods around the country. Citigroup should be willing to spell out exactly how it would use its newfound market muscle to improve financial services for some of the state's poorer areas.

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