John S. Reed defended Citicorp's merger with Travelers Group against sharp criticism from community groups Thursday, during an all-day hearing at the Federal Reserve Bank of New York.

The proposed Citigroup would make $115 billion in community reinvestment loans, pay significantly more taxes in New York, and offer consumers one- stop shopping for financial products, the Citicorp chairman said.

"We cannot be successful in our business if we don't serve the community," Mr. Reed said. "Our success over time requires we be good citizens."

But local activists demanded the Fed reject the $70 billion merger, which is scheduled to close in August.

"If you are a lower-income person of any race ... you better not look to Citibank for a loan," said Gwendolyn Jacobs, an organizer of the New York chapter of the Association of Community Organizations for Reform Now. "Citigroup has redlined low-income areas."

Gloria Waldron of Acorn said Travelers bases most of its agents in white neighborhoods and does little to promote its services in minority communities. "Travelers ignores inner-city areas," she said.

Hilary Botein, associate director of the Neighborhood Economic Development Advocacy Project, said Citicorp has "utter disregard" for the needs of low-income consumers. "From the neighborhood perspective, Citicorp is an elusive entity with a scarce presence," she said.

The start of the hearing was disrupted when about 40 red-umbrella- wielding members of Acorn stormed the front of the New York Fed's meeting hall and started chanting, "No to the racist merger" and "Together, united, we will never be defeated."

Fed officials did nothing to interfere with the protest, and the demonstrators left voluntarily after posing for television cameras and photographers.

The Citicorp-Travelers merger was supported by dozens of housing and economic development organizations, many of which get funding from one of the two institutions.

"Citibank's name is synonymous with community development," said Ceasar J. Claro, director of the Staten Island Economic Development Corp.

John Shemo, vice president of the Connecticut Capitol Region Growth Council, credited Travelers with saving 9,000 jobs in Hartford. "As a larger company, its ability to promote greater economic growth will be enhanced," he said.

The deal also garnered support from several local political leaders. New York State Sen. Nellie Santiago-Fernadez praised the companies as "forward- thinking" and "innovative."

This is the fifth public hearing the Fed has held on proposed megamergers in the past three years. The four prior deals were approved.

Glenn E. Loney, the Fed's associate director for consumer and community affairs who ran the hearing, said he wanted to know whether the merger is "reasonably expected" to benefit the public.

"We will particularly look at the record of the parties under the Community Reinvestment Act," Mr. Loney said. Citibank, Citicorp's lead banking subsidiary, is rated "satisfactory" under CRA.

Much of the hearing's debate centered on whether it is legal to combine a banking and insurance company. "We do not seek or do not require any change in the law to consummate this merger," said Charles O. Prince, executive vice president and general counsel at Travelers. (Travelers chief Sanford Weill was not at the hearing.)

An insurer is allowed to acquire a bank, provided it divests the underwriting operations within two years, though the Fed is allowed to grant up to three one-year extensions, Mr. Prince said.

He said he hopes Congress adopts a financial reform bill that would allow a single company to own banking, insurance, and securities firms. If the law is not changed, Citigroup would sell its insurance underwriting units, he said.

But Karen Thomas, director of regulatory affairs at the Independent Bankers Association of America, said Congress never intended for the Fed to use this exemption to permit such a massive merger.

"The divestiture period is intended to allow an orderly divestiture of impermissible activities within two years," she said. "It is not available to a bank holding company that has no bona fide or present plan to divest and is vigorously lobbying to change the law to avoid divestiture."

"The Federal Reserve Board must not approve Travelers' application because the proposed transaction is illegal," said Sarah Ludwig, coordinator of the New York City Community Reinvestment Task Force. "To sign off on this merger would constitute an affront to the public and underscore that large and powerful corporations influence government decision-making to the point of obtaining approval on illegal transactions."

The hearing concludes today, and written comments on the deal are due at the Fed by July 2.

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