The marketplace has once again demonstrated how far behind the curve Washington policymakers are. No sooner had the House leadership withdrawn a timid, convoluted financial reform bill than three blockbuster mergers were announced.
Citicorp and Travelers announced the largest merger deal in world history. The merged company - Citigroup - will become the world's largest financial institution.
It was followed almost immediately by the announcement that NationsBank and Bank of America had agreed to merge. This deal will create the largest bank in the United States, and arguably the most attractive banking franchise in the world. The same day Banc One and First Chicago announced they would create by far the largest bank in the Midwest.
The Citigroup deal was breathtaking in both its size and boldness. Combining banking, insurance, and investment banking firms isn't permissible under current law.
Citigroup is betting that regulators will allow it up to five years to divest impermissible activities, and that Congress will enact enabling legislation before the five-year period expires. Should it fail to achieve its objectives on those fronts, Citigroup will likely need to convert its bank to a thrift charter or divest major business activities. Either step would be disruptive, so Citigroup has made a courageous bet.
All of which makes the behavior of self-styled "free-market" Republicans in Congress seem even more bizarre. While they're mired in special interest politics, financial firms are moving forward with their essential restructuring at a blistering pace.
While the largest financial company in the world was being formed, Congress was fiddling with a bill that would preclude banks from entering the insurance agency business except by acquiring existing firms. While the largest banking franchise in the United States was being forged, Congress was piddling with a bill that would force banks to operate through expensive, cumbersome holding company structures.
It's no small wonder that bankers are becoming increasingly frustrated with the Washington politics. They worked hard to elect Republicans who said they would get government off people's backs, only to find them promoting legislation that a Democratic President threatened to veto because it was antibank and anticompetitive.
The status quo is particularly deleterious to smaller institutions. The mega-firms have legions of lawyers and advisers to find ways around the maze of restrictions. The smaller banks fall further behind the longer those restrictions are in place.
The recent megamergers raise public policy issues far more complex than the financial reform issues currently before Congress. It's imperative that Congress get the current bill out of the way so it can address these larger questions.
Once the Citigroup merger is completed, we will have a $700 billion financial institution offering a vast array of products and services to hundreds of millions of people around the globe. Traditional banking will be a relatively small part of the enterprise. My guess is that roughly $40 billion of its deposits will be insured by the Federal Deposit Insurance Corp.
How are we going to regulate this institution and others like it? To what extent will it be regulated by the marketplace and to what extent by government?
Which national governments - domestic or foreign - and how will they coordinate? Which levels of government in this country - state or federal - and which agencies? Is any state or federal agency up to the task of regulating an organization of such size, scope and complexity?
The combined entity will be larger in insurance than in traditional banking. Insurance is regulated almost exclusively at the state level, while banking is regulated largely by the federal government. How do we resolve that conflict?
To what extent do we want the federal safety net to be available to an organization of this sort? Do we expect the FDIC to deal with institutions approaching $1 trillion? If so, do we expect it to deal with the entire entity or just the insured deposits - can we afford the "too big to fail" doctrine? The list of major public policy issues could go on at some length.
Congress has been struggling for decades to complete the obviously needed and relatively simple task of tearing down government-imposed barriers to competition. I've got news for them - they ain't seen nothing yet.
Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and CEO of Secura Group, Washington.
