Hearing May Bring Fed-Treasury Turf War Over Reform to a Head

Before financial reform legislation can be enacted, the Federal Reserve Board and Treasury Department must agree on where to house new bank powers. And the big question is whether either side will compromise.

The answer is likely to emerge Wednesday when Fed Chairman Alan Greenspan and Treasury Secretary Robert E. Rubin testify on the bill before the Senate Banking Committee.

Committee Chairman Alfonse M. D'Amato could pressure Mr. Greenspan and Mr. Rubin to deal. "He really could throw the monkey on their backs," said Cory N. Strupp, chief lobbyist for J.P. Morgan & Co. "D'Amato really does have some ability to jawbone here."

That Sen. D'Amato, R-N.Y., is devoting the first of two hearings to testimony from Mr. Greenspan and Mr. Rubin underscores the fact that the regulatory turf war is the key stumbling block to enactment of financial reform by yearend.

Treasury adamantly opposes the reform bill approved by the House last month because it would require banks to enter new businesses through Fed- supervised bank holding company units. That is exactly why the Fed supports the legislation.

Treasury argues banks must be able to offer new products and services in direct subsidiaries, which not coincidentally are overseen by an arm of Treasury, the Office of the Comptroller of the Currency.

Fed officials contend strict limitations on operating subsidiary powers are necessary to protect the health of the banking industry and preserve the Fed's ability to manage the economy. Treasury officials disagree and contend the government has no business telling banks where new activities should be conducted.

While Fed and Treasury officials refused to comment on a possible compromise, the most frequently mentioned solution would let bank operating subsidiaries underwrite securities but bar them from insurance underwriting and possibly merchant banking. (Under the House bill, bank operating subsidiaries may sell securities and insurance products but not underwrite them.)

Arguing that operating units could safely underwrite securities would be relatively easy because banks already underwrite municipal bonds and government securities, banking lawyer Gilbert T. Schwartz said. "It is an activity they have experience with."

But Edward L. Yingling, chief lobbyist for the American Bankers Association, predicted Treasury will not accept any limits on bank subsidiaries. "Treasury people have made it clear that operating subsidiaries should be able to offer all financial powers," he said.

The industry would also oppose such a deal, he said.

Another possibility: the bill could specify legal activities for bank holding companies and not mention what powers are authorized for bank operating subsidiaries. A Republican aide on Senate Banking said this scenario would leave it to the Comptroller's Office to define bank operating subsidiary powers through applications as it does today.

"There is likely to be pressure to work something out," Mr. Yingling said, adding that he does not think a deal will be struck. "But if they could, it would change the (legislation's) dynamics significantly."

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