WASHINGTON - Mellon Bank Corp.'s bid to acquire Dreyfus Corp., the giant mutual fund company, has suddenly come under fire from two powerful members of Congress.
House Banking Committee Chairman Henry Gonzalez, D-Tex., and House Energy and Commerce Committee Chairman John Dingell, D-Mich., say the merger poses risks for both Mellon's main banking unit and for shareholders of Dreyfus' mutual funds.
Their concerns, aired in a barrage of letters to Mellon, Dreyfus, and bank and securities regulators, suggest that the megadeal faces far greater political and regulatory hurdles than initially expected.
"This proposed transaction raises numerous policy and legal concerns," the two lawmakers wrote in a letter to Eugene Ludwig, the comptroller of the currency.
"We ask that you address our concerns ... before acting."
In a prepared statement, Rep. Gonzalez added: "I hope the regulators are watching the traffic signals, because the one I set, is flashing yellow."
Congressional sources said the Mellon-Dreyfus deal, announced Dec. 6, will be the subject of hearings early next year by the House Energy Committee's oversight and investigations panel.
Votes of Confidence
Despite this surge of interest, some industry observers say they are sure the merger will withstand the scrutiny.
"There's no question that Congress has an oversight function to perform here," said Melanie Fein, a law partner with Arnold & Porter in Washington. "But I think Congress will be satisfied that there is a proper legal basis for the acquisition," she added.
The deal, which the companies expect to consummate by midyear 1994, would create a company with some $80 billion in mutual fund assets under management.
It would dwarf all other acquisitions of fund companies by commercial banks.
Application in Works
The merger is subject to approval by the office of the Comptroller of the Currency. A source close to the transaction said the application should be submitted by yearend.
The Gonzalez-Dingell letters, dated Dec. 20, were sent to Mr. Ludwig, Securities and Exchange Commission Chairman Arthur Levitt, and the merger partners.
A key issue, raised in the letter to Mr. Ludwig, is whether Mellon should be allowed to operate Dreyfus as a subsidiary of its lead bank, Mellon Bank of Pittsburgh.
The chairmen said their committees have consistently signaled - in financial services reform bills that the panels have considered but Congress has not enacted - that securities activities of banks should be carried out in separately capitalized subsidiaries of the bank holding company.
Industry sources said the lawmakers' implication is that Mellon is seeking a more lenient regulatory regime than it would get from the Federal Reserve Board, which regulates bank holding companies. But a source close to the transaction defended the banking company's decision to operate Dreyfus as a unit of the bank.
"Dreyfus throws off a substantial amount of earnings, and these earnings will be captured in the bank rather than being outside the bank," the source said.
In addition, Dreyfus has $800 million in cash on its books, and is debt free.
As a result, operating the fund company as a unit of the bank would boost the bank's capital ratio by more than 200 basis points.
"It's an enormous increase," the source said.
Spokesmen for Mellon and Dreyfus called the lawmakers' questions "appropriate and relevant" and said they would be answered by the Jan. 7 deadline imposed by Rep. Dingell and Rep. Gonzalez.
But the spokesmen declined to discuss the matter further, citing legal sensitivities.