Senate Democrats have sent a clear message to Treasury officials pushing to remove the barriers between banking and commerce: Forget it.
Sen. Tom Daschle of South Dakota, the Senate minority leader, and Sen. Paul Sarbanes of Maryland, the Banking Committee's top Democrat, have pledged to kill any reform legislation that would let banks mix with nonfinancial firms.
Their intransigence has stalled efforts in the Senate, where Banking Committee Chairman Alfonse M. D'Amato of New York has said he favors removing all restrictions on cross-industry mergers.
But a more narrow bill may be the only option-exactly what House Banking Committee Chairman Jim Leach has demanded.
"The issue now is not to worry about commerce and banking, but how to marry financial industries in a way that everyone can live with," said J. Denis O'Toole, lobbyist for Household International.
That's a big turnaround for Treasury officials who have for months been on the brink of recommending that banks be allowed to invest in nonfinancial businesses.
Though Treasury Under Secretary John D. Hawke Jr. is an ardent advocate of cross-industry mergers, Democratic lawmakers appear to have more sway with the White House, which must sign off on any administration proposal.
The Treasury Department missed the March 31 deadline for submitting its financial reform plan to Congress and still appears weeks away from being ready.
"This is a bottom-line issue for Sarbanes," said one congressional aide. The Maryland lawmaker has complained repeatedly that merging banks and nonfinancial companies would lead to domination of the economy by huge conglomerates and will pose new risks to the federal safety net.
Sen. Daschle, on the other hand, worries more about preserving party unity, said a Capitol Hill source. "We don't want the President breaking off from most Democrats to join D'Amato," he said. "Why go down that path when there is no consensus among economists or policymakers about this proposal?"
The standoff has put the spotlight on the House Banking Committee, which is moving ahead with its legislation, with or without administration input.
Though Rep. Leach failed with a narrow approach in the last Congress, several committee aides are convinced the Iowa Republican has a better shot at winning approval this time.
Recent court decisions expanding bank powers have made the insurance and securities industries desperate for legislation. Bankers may be convinced to negotiate after Sen. D'Amato's recent threats to strip bank regulators of their power over bank securities and insurance sales.
Staffers are already trying to draft a bare-bones bill that Rep. Leach wants to put to a vote in early June. Staff members said the bill might do little more than allow affiliations among financial services firms and let banks add new activities in operating subsidiaries.
Other difficult issues, such as whether the Federal Reserve would regulate all financial holding companies, may be decided when the committee votes.
Not everyone is convinced that more aggressive reform has been taken off the table.
"Rep. Leach may have to accept some commercial business to get a bill out of his committee," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, which opposes cross- industry mergers.
To be sure, supporters of banking and commercial affiliations, such as Reps. Marge Roukema, R-N.J., and Richard Baker, R-La., are expected to keep up the pressure until the committee votes.
Even if a broader bill passes the House, the legislation would likely die in the Senate, where opponents could filibuster.
To avoid another sticky issue, several staffers and lobbyists said the House Banking Committee may drop plans to eliminate the thrift charter, which allows a nonfinancial firm to own a single thrift.
"If you preserve the unitary thrift charter, you provide a safety valve on the banking and commerce question," said Samuel J. Baptista, president of the Financial Services Council.
Also, the panel may not spell out supervision rules for bank insurance and securities sales. Congress isn't likely to reach agreement on supervision, said a Democratic aide. "Let the courts and the OCC continue to deal with regulation," he said.
