Citicorp Gains in Bid For Insurance Powers
In a big victory for banks seeking broader powers, the U.S. government has decided not to appeal a court ruling that clears the way for Citicorp to underwrite and sell insurance nationwide.
The decision could be a fatal blow to efforts to strike down a 1990 Delaware law that permits major banks to market insurance products nationwide via subsidiaries in the state.
Uncertain Future in Congress
The powerful insurance lobby, which staunchly opposes the law, immediately picked up the legal battle started by the Federal Reserve, asking the Supreme Court on Tuesday to hear its appeal. But the chances of that tactic succeeding are considered slim.
Only one other roadblock remains for Citicorp, but it is a major one. Congress could decide this year to override the Delaware law as part of a comprehensive package to overhaul banking law.
While President Bush's reform package did not include that provision, House and Senate committees have approved such a change under pressure from insurance industry lobbyists. The prospect of those amendments being adopted by the full Congress this year is unknown.
The latest twist in the insurance battle came last week, when the Justice Department revealed it would not represent the Fed before the Supreme Court, a Fed spokesman confirmed.
Observers said the department believed the Fed's case -- which was based on its right to regulate units of bank holding companies -- was shaky. Furthermore, they said the agency probably considered that the suit might prove meaningless as Congress moves to restrict bank activities in insurance.
A Justice Department spokesman did not return phone calls.
Fed Reserves Its Rights
After the Delaware law was passed, the Federal Reserve barred Citicorp from expanding its insurance activities. The Fed said that while it was not opposed to banks having broader insurance powers, it was reserving the right to regulate units of bank holding companies.
In June, the U.S. Court of Appeals for the Second Circuit in New York overturned the Fed order, ruling that the Fed had no jurisdiction in the matter.
Because Citicorp's insurance business would be conducted through a unit of its Delaware-chartered bank, it fell under the auspices of state authorities, the company argued.
When the Justice Department decided not to appeal, the American Council of Life Insurance and several other insurance trade associations petitioned the Supreme Court to hear the case.
Court Intervention Doubtful
Last year the groups asked the Fed to stop Citicorp's plans. With the Fed's attempt to do that effectively thwarted, the insurance agents have the standing needed to ask the courts to intervene. But observers say it is unlikely that the Supreme Court will even hear the insurers' argument.
"When [Justice] itself doesn't think it is important enough to seek [an appeal] . . . how important can it be?" asked Michael F. Crotty, associate general counsel for litigation with American Bankers Association.
"The expectation is that the agents won't win," said Kenneth B. Keherer, publisher of a newsletter entitled Banks In Insurance. "The Fed would have had a better chance because, when it's a close call, the court sides with the regulator."
A Fed official said the central bank may file a friend-of-the court brief, urging the Supreme Court to hear the insurance companies' case.
"We will have to see what happens with this case," he said. "The board will decide what to do. We may do something in the interim."
A spokeswoman for Citicorp said the banking company is reviewing the insurance agents' petition. "We do intend to file a petition in opposition."
Most activity remains on hold at Family Guardian Life Insurance Co., a subsidiary of Citicorp's Delaware bank, until all legal questions surrounding the Delaware law are settled, the spokeswoman said.
Richard M. Whiting, general counsel with the Association of Bank Holding Companies, said that, if the case stands, the Fed cannot use its authority under the Bank Holding Company Act to regulate the nonbanking activities of a state bank owned by a bank holding company.