Nearly nine months after Citigroup Inc. was formed, the Independent Community Bankers of America is trying to persuade a court to reverse the unprecedented merger of banking and insurance companies.
"We want to have the deal undone," said Karen M. Thomas, the ICBA's director of regulatory affairs. "We want the courts to declare that the merger was illegal and the Federal Reserve acted outside the bounds of the law."
The group's latest salvo came on May 12, when it filed a brief with the U.S. Court of Appeals for the District of Columbia. The documents accused the Fed of violating the Bank Holding Company and Glass-Steagall acts when it approved the merger of Citicorp and Travelers Group in September.
Among the ICBA's arguments:
The Fed should have required Citigroup to submit a plan for divesting Travelers' insurance underwriting units within two years, the grace period contained in the law for a new bank holding company to sell impermissible businesses. Instead, the agency merely said the divestiture must occur within two years, subject to a maximum of three one-year extensions.
The merger violates Glass-Steagall because Citigroup's Salomon Smith Barney unit is a leader in the securities underwriting industry, even though banking companies may not be principally engaged in underwriting.
The Fed violated the Constitution's separation of powers doctrine by interfering with Congress' ability to enact legislation. This occurred because the Citigroup deal is too big to be undone at acceptable economic and political costs.
Citigroup's lawyers said the ICBA does not have a legal leg to stand on.
"The same arguments were raised, considered, and rejected by the (Fed's) board of governors," said William J. Sweet, a partner in the Washington office of Skadden, Arps, Slate, Meagher & Flom, who shepherded the Citigroup deal through the regulatory process.
The courts have consistently upheld the Fed's discretion to interpret the Glass-Steagall and Bank Holding Company acts, he said. "There is a very consistent record of Fed wins for years on this stuff," Mr. Sweet said. "They have just been supported by one court after another. Their track record is virtually unblemished."
If the ICBA thought it had a chance of winning, he said, it would have asked a court to temporarily block the merger until the conclusion of the lawsuit. "They didn't want to enjoin the deal," he said. "That says to us that they believe they don't have much shot on the merits."
But Ms. Thomas said the ICBA could not afford to ask for an injunction, because it could have been liable for millions in damages if the court had temporarily blocked the deal but then found in favor of Citigroup. "It was just a risk we could not take," she said.
A Fed spokesman said the agency does not comment on pending litigation.
Other lawyers said the ICBA has little chance of victory. "The odds are pretty slim that they would be successful in challenging the board's decision," said Gilbert T. Schwartz, a partner in the Washington law firm of Schwartz & Ballen. "Courts don't like overturning agency decisions."
The ICBA's best chance is its securities underwriting argument, Mr. Schwartz said. The Fed in previous decisions has indicated that there might be a point where a securities firm is just too big to combine with a bank, even if it earns less than a quarter of its revenue from underwriting securities. That is the maximum amount allowed by Fed policy. But even this argument is unlikely to fly, he said, because the court would have to rule that the Fed was wrong.
Even if the ICBA did win in court, there is no guarantee that Citigroup would be broken apart. The court would refer the case back to the Fed, which would make a new decision on the merger. During those deliberations Congress could step in and change the law, Mr. Schwartz said.