WASHINGTON - Justice Department officials are pressuring the Federal Reserve Board to scale back its proposed update of anti-tying rules.
R. Hewitt Pate, an assistant attorney general in the department's antitrust division, said in a letter to the Fed that the plan is still too strict despite efforts to accommodate contemporary cross-marketing arrangements. Furthermore, he wrote, the 33-year-old anti-tying requirements in section 106 of the Bank Holding Company Act are misunderstood and obsolete.
"The division is concerned that the board's proposed interpretation of section 106, while permitting a broader use of tying in the banking industry, will continue to prohibit pro-competitive practices such as multiproduct discounting, and will continue to encourage competitive inequities in markets in which banks and nonbanks compete," Mr. Pate wrote.
"The financial world is quite different from the one that existed when section 106 was enacted, and a more liberal interpretation of the section would not be inconsistent with the rationale that led Congress to adopt this provision."
A banking lawyer said after reading the letter that its arguments recall Reagan-era antitrust policies more than those of recent administrations.
"This seems to be consistent with the current administration's philosophy of loosening up economic barriers that they see might adversely affect competition," said Gil Schwartz, a partner with Schwartz & Ballen LLP. "What their view seems to be in this letter is that flexibility in structured transactions is good. You should allow businesses and banks to bundle up products and services, and offer lower prices with that."
Mr. Pate urged the Fed to "interpret section 106 to be consistent with, and not broader than, the federal antitrust laws."
Failing that, he wrote, the central bank should limit the rules to ties involving small businesses and individual consumers. That would leave out syndicated lenders and larger borrowers, groups the Justice Department feels have the resources to avoid being trapped in unwanted loans.
Tying rules were put in place, Mr. Pate wrote, to protect "small businesses and individual consumers from predatory business practices by a bank" and not to discourage competition among big players.
Nonbanks that offer financial products might have a competitive advantage over banks that have to abide by the new anti-tying policies, he wrote.
The Fed will review the letter along with 38 others before it finalizes its proposal. A spokesman would not give a timetable.
The proposal says banks may condition the sale of a traditional product or service, such as a loan, on customers' purchase of another traditional product. But banks could not tie a traditional bank product to a nontraditional product, such as securities underwriting, unless the customer picked it from a list that included traditional options or unless he or she requested the deal.
The letter contradicted the Association for Financial Professionals, which said in a survey report that it had found evidence of the existence of illegal tying.
"It doesn't have anything to do with how sophisticated or well trained anyone is," said James A. Kaitz, the chief executive officer of the association. "If you look at the concentration of market power that those large syndicated lenders would have, it would be naive to think" tying did not occur.
