The Federal Reserve Board is investigating allegations that banks are illegally linking their loans to underwriting assignments, according to Fed Chairman Alan Greenspan.
Several Wall Street firms have claimed that the underwriting units of bank holding companies, known as Section 20 subsidiaries, are violating anti-tying provisions of the Bank Holding Company Act.
In a letter dated Oct. 2 to Reps. John Dingell and Edward Markey, Mr. Greenspan said his staff has "asked for information from a number of Section 20 subsidiaries concerning their procedures for compliances with the anti-tying laws."
Checking Municipal Bond Ties
He also said the Fed is probing possible tying activities outside underwriting units, an apparent reference to claims that banks link credit activities to municipal bond assignments.
Mr. Greenspan's letter came in response to questions from the Democratic congressman on why the Fed has proposed modifying limitations on banks' securities units. Reps. Dingell and Markey lead committees that oversee the securities industry.
Under current Fed rules, Section 20 subsidiaries cannot derive more than 10% of their revenues from "ineligible activities," such as underwriting or dealing in corporate debt and equity, municipal revenue bonds, commercial paper, or asset-backed securities.
But due to interest-rate volatility that has diminished the Section 20 units' "eligible" bond revenues, several banks have apparently bumped up against the 10% limit and sought relief.
The Fed in July proposed adjusting the revenue test to 10% of an underwriting subsidiary's assets, rather than revenues. Alternatively, it proposed "indexing" the revenue calculation to changes in the level and slope of the yield curve.
The securities industry has used the proposal as a forum for attacking banks' incursion onto their turf.
Morgan Stanley & Co., for one, cited numerous instances that is said indicated an unusually high correlation between underwriting assignments and credit activities at J.P. Morgan & Co. and Bankers Trust New York Corp. It also included a copy of a term sheet from National City Corp. that made a letter of credit contingent on an underwriting role.
National City |Cooperating'
Spokesmen for Morgan and Bankers Trust said their companies do not comment on communications with regulators. A National City spokeswoman previously said that her company is cooperating with the Office of the Comptroller of the Currency in an investigation of the allegation.
In his letter to the congressmen, Mr. Greenspan refused to identify banks at or near the 10% revenue limit. But he said "about a quarter" of the Section 20 subsidiaries at June 30 derived 7% to 10% of their revenues from "ineligible" activities.
A Fed spokesman said 31 banks have set up underwriting units, though not all are active
Mr. Greenspan also said the Fed this year refused requests from Section 20 units to delete "dividend and interest revenues" from the 10% calculation.
"It's interesting that some of the same folk who are being investigated for tying practices are the same ones asking for changes in the rules," said Jeffrey Duncan, a senior finance policy analyst for Rep. Markey.