Exasperated by political obstacles, leading executives urged Congress on Wednesday to enact financial reform now by spinning off controversial issues such as the regulatory turf war.
"If fiercely competitive financial firms can set aside our parochial interests and achieve consensus, surely our government agencies can do the same," David H. Komansky, chairman and chief executive of Merrill Lynch & Co., told the House Banking Committee.
He and other witnesses testified that U.S. companies will fall behind international competitors if the Treasury Department and Federal Reserve Board do not compromise on which will oversee the new powers awarded banks by the legislation.
"We ought not to keep our best teams off the field because we cannot agree on our referees," said Michael E. Patterson, vice chairman of J.P. Morgan & Co.
As if on cue, Treasury Secretary Robert E. Rubin endorsed a compromise that would let his staff supervise bank subsidiaries that underwrite securities and conduct merchant banking activities. Insurance underwriting and real estate development would be limited to holding companies units regulated by the Fed.
The Clinton administration threatened to veto financial reform last year because it did not give banks full financial powers, but, Mr. Rubin said, "We were prepared to give up the insurance as part of the effort" to get legislation enacted.
The Fed, however, remains unsatisfied, according to Rep. John LaFalce, House Banking's ranking Democrat and lead author of the legislation backed by Mr. Rubin. Co-sponsors include fellow Democrat Bruce F. Vento of Minnesota and Republican Richard H. Baker of Louisiana.
Rep. LaFalce touted his 161-page plan as a "streamlined" alternative to committee chairman Jim Leach's 317-page bill. Both bills would permit banking, insurance, and securities firms to own each other.
But the LaFalce plan would let financial holding companies derive 15% of annual revenue from commercial activities. It also preserves current law on unitary thrift holding companies, and creates consumer protections for sales of investment and insurance products.
Banks that affiliate with insurance or securities entities would need a "satisfactory" or better Community Reinvestment Act rating. Under the LaFalce plan, holding companies could face divestiture if their ratings slip below "satisfactory."
Although Rep. LaFalce said he hoped that his bill could be merged into Rep. Leach's, their opposing positions on mixing banking and commerce could divide lawmakers and industry factions. Even Mr. Rubin explicitly withheld his support on this issue because of "serious concerns" about its economic consequences.
Industry witnesses said they would still support the bill even if it bars holding companies from owning commercial businesses but would prefer the option of at least limited nonfinancial activities.
"The distinctions between financial services and commerce grow fuzzier every day, particularly in the area of electronic commerce," said John B. McCoy, president and chief executive of Bank One Corp. For example, he said, the ban might prevent banks from offering Web sites linking customers to commercial sites.
Aetna Inc. president and chief executive Richard L. Huber added that forays into commercial activities would be limited because shareholders demand that public companies stick to their core businesses.
Rep. Leach called the LaFalce proposal "a constructive addition to the policy dialogue" and seemed willing to compromise on some issues including powers for bank operating subsidiaries.
The Iowa Republican even suggested a compromise on the banking and commerce question. His bill already would let holding companies sell future products that are "financial in nature or incidental thereto" and expanding that definition could draw in more activities by including "complementary" products, he said.
Defending current law, which allows nonfinancial companies to own a single thrift, Rep. LaFalce said that "modernization is about moving forward, not taking authority away from existing institutions."
But bank industry officials said they will not support a bill that does not clamp down on commercial ownership of thrifts.
"We believe congressional action to stop further ownership of banking institutions by commercial firms is critical," said R. Scott Jones, president of the American Bankers Association and chairman of Goodhue County National Bank, Red Wing, Minn.