The age of convergence envisioned in Gramm-Leach-Bliley may be facing its first counterrevolution even before it produces any of the market-transforming combinations and financial supermarkets the law was designed to encourage.

The idea of doubling deposits insured by the Federal Deposit Insurance Corp., first floated by FDIC Chairman Donna Tanoue in March, was criticized last week by both Federal Reserve Chairman Alan Greenspan and Treasury Secretary Lawrence Summers. The two were invited by their fellow free-market advocate, Sen. Phil Gramm, to argue against the idea and did so enthusiastically, without a moment's hesitation.

On Wall Street there was surprise that the idea had even arisen, given how many steps in the opposite direction recent policy decisions had taken. Brokerages, of course, compete for the same customer dollars as banks. With the exception of those, like Merrill Lynch, that are actively pitching FDIC-insured accounts, their appetite for such a program would understandably be muted.

Still, the arguments against expanding the safety net are strikingly parallel to the ones heard during the just recently deflated bubble in Internet stocks - namely, that customers must understand and bear risks for the system to work.

"I'm astounded that this deep into a credit cycle, when you can go into the Comptroller's Office and they're trying to send a message that they're very concerned about credit quality, that an idea like this is even being discussed," said Charles Gabriel, political analyst for Prudential Securities.

The question of who holds the bag when a bank gets into trouble is of secondary importance for those seeking to divine, or set, interest rate policy. The fact is, boosting FDIC insurance limits is effectively an artificial stimulus to low-cost deposit generation. As such, it could hinder the efforts of the Federal Reserve - and for that matter, the market - to gauge where the economy stands with respect to the credit cycle and the investment environment.

Indeed, there are plenty of market watchers who think the Fed will not consider its work done until poorly managed banks have been exposed and even weeded out of the system. The profit warnings by several banks over the last couple of weeks are part of that process, said ASB Capital Management Inc. chief economist Thomas Carpenter.

The performance of banks during a tightening cycle has long been used as a way to judge the economy's response to higher interest rates because bank earnings are a reliable early casualty of any economic slowdown.

Mr. Carpenter breaks down such cycles into six distinct phases (banks' performances play heavily in the middle phases), from Fed tightening in Phase 1 to Fed easing in Phase 6. He said the economy had already moved through Phase 2, where financial markets react in force to the tightening cycle, to Phase 3, where economic data start to show the effects of higher interest rates.

Among events that would indicate a progression to Phase 4 for Mr. Carpenter: "Severe and unexpected earnings shortfalls, a large hedge fund in trouble or a large bank encountering a severe asset-liability mismatch." (Phase 5 begins when inflation clearly eases and Phase 6 when the Fed eases, which Mr. Carpenter does not expect, absent a major financial crisis, to happen this year.)

So far, neither Mr. Carpenter, nor the range of analysts on Wall Street who cover the banks, see reason for major systemwide worry after profit warnings from Wachovia Corp. and Unionbancal - mainly because the issues behind those seem limited to syndicated loan positions. Their underlying businesses do not appear threatened.

At the same time, few analysts expect bank stocks to find many fans over the near term, in part because it remains difficult to discern the success stories from the potential failures. Once the market can differentiate the strong from the weak, investors can reward the strong with richer stock prices and adjust their expectations for the weak.

It's the kind of natural selection process fans of deregulation support, and how the debate proceeds is certain to be read as a commitment statement on financial modernization. The forces of convergence won't be unleashed until the market starts using a finer brush than the one currently being applied to financial companies. Once that happens, the winners will have the currency to buy and the losers will have all the incentive they need to sell. Then, perhaps, begins the convergence revolution.

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