Even though reform efforts in Congress are dead, by yearend the country's first truly diversified financial firm will be born.

The Travelers Group soon will push beyond its insurance stronghold into the securities industry with its Salomon Inc. merger and then invade banking-via the thrift charter.

And it's all legal.

"This ought to be galvanizing Congress," said Treasury Under Secretary John D. Hawke Jr. "You have a big insurance company combining with a securities company and a thrift and none of it is subject to any congressional controls."

Travelers' $9 billion deal for Salomon, unveiled Wednesday, is the freshest evidence of how quickly market forces are reshaping financial services. Observers said lawmakers, who have debated financial modernization for the past two decades-and intensively over the last two years-could miss the chance to put their imprint on the industry if they don't act soon.

"If Congress does not act, you are going to see the financial landscape change dramatically with extraordinary unevenness in the competitive playing field," House Banking Committee Chairman Jim Leach said Wednesday.

"Congress has been busy with financial modernization, but meanwhile the world hurries on," said David S. Barry, director of research for Keefe, Bruyette & Woods. "Customers are looking for financing solutions, not at regulatory nits and bits about who can do what."

Until this year, companies shied away from aggressive moves across industry lines, figuring it was best to wait and see how Congress would design the future of financial services.

"There was a reluctance for different institutions to apply for a thrift charter," said Nicolas P. Retsinas, Office of Thrift Supervision director. "Now it's increasingly clear that the rules are not going to change imminently."

Consequently, companies are exploiting the existing hodgepodge of regulations and court rulings to do deals once forbidden by Depression era laws separating the banking, securities, and insurance industries. For example, a half-dozen commercial banks have announced deals for investment houses since February in the wake of the Federal Reserve's decision to more than double the amount of revenues banks may earn from their section 20 securities affiliates.

One factor fueling the consolidation: many industry officials fear that Congress, when it does pass legislation, will burden diversified firms with the Fed's holding company regulations or restrict the types of businesses they may own.

In addition, many firms are expanding now because Congress usually agrees to protect, or grandfather, existing operations. For instance, the current financial modernization bill would eliminate the thrift charter. However, companies that secure charters now will likely get to keep them. Travelers asked OTS for a charter in May and the agency is expected to make a decision by Oct. 26.

Five other insurance companies, including State Farm Mutual Automobile Insurance Co., have applied for thrift charters. A decision on the Principal Group's request is due by Nov. 2.

"These types of actions are defensive moves as much as anything," said Patrick Forte, president of the Association of Financial Services Holding Companies. "Some in Congress want to make the laws more restrictive for diversified firms, so the companies are putting business decisions on a faster track."

Mr. Hawke predicted that banks will come to regret their widespread opposition to the legislation. Banks have the most to lose if no deal is reached because they are barred from acquiring insurance companies, he said.

"This should be a wake-up call for them," he said.

Paul A. Schosberg, president of American Community Bankers, said the thrift charter will give diversified firms a big advantage over banks. "More and more firms are discovering that the thrift charter is more flexible and offers a lower cost delivery system," he said.

Bank holding companies are subject to stricter holding company oversight and more limits on their business, he said. "Bankers continue to be saddled by a cost structure that impairs their competitiveness."

Even banking industry officials agree they need legislation to stay competitive.

"If other firms are able to achieve a full range of affiliations by making use of the thrift charter, those on the banking side of the equation are going to get left behind," said Cory Strupp, lobbyist for J.P. Morgan & Co.

"The Travelers deal shows that if Congress doesn't act we're going to move rapidly toward two parallel banking systems-the more traditional one with commercial banks and a wide-open, much less regulated system for other firms," said Edward L. Yingling, chief lobbyist for the American Bankers Association.

But not everyone thinks the outlook for banks will be so gloomy without legislative change. Karen Shaw Petrou, president of ISD Shaw Inc., predicted that the Comptroller of the Currency will soon keep banks up to par by letting them add insurance underwriting and other businesses through operating subsidiaries.

"In the next six months we will see banks blowing the boundaries off their charters," she said.

Still, that route will force the banking industry to endure costly court challenges and "extensive legal maneuvering," Mr. Yingling said.

Also, banks won't always be able to rely on the Comptroller's Office to expand their powers, predicted Samuel J. Baptista, president of the Financial Services Council.

"After Comptroller Eugene A. Ludwig's term expires in April, whoever is confirmed is going to get a pretty good grilling from Congress," he said. "One of the deciding questions will be, 'How far are you willing to go with new powers?'"

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