Dampening the short-lived optimism on financial reform, the Treasury Department and insurance industry groups are blasting Senate Banking Committee Chairman Phil Gramm's latest proposal.

The Treasury labeled the Gramm plan "unacceptable" in a written statement late Wednesday because, the agency said, it would weaken the Community Reinvestment Act, discriminate against large banks seeking broader powers, and court economic disaster by permitting cross ownership of banks and commercial businesses.

Meanwhile, reawakening some recently dormant issues, insurance lobbyists complained Thursday that Sen. Gramm's plan would tilt reform in favor of banks by shunning detailed compromises on insurance powers and regulation in other versions.

"He has united the entire insurance industry and our regulators against the bill," said Robert A. Rusbuldt, executive vice president of the Independent Insurance Agents of America. "That's not an easy accomplishment."

The outlook for financial reform looked upbeat last week when Treasury Secretary Robert E. Rubin offered to compromise on regulatory turf disputes and the Republican and Democratic leaders of the House Banking Committee pledged to combine their competing bills. But Federal Reserve Board Chairman Alan Greenspan's immediate rejection of Mr. Rubin's overtures and the harsh criticism of Sen. Gramm's draft show that efforts to overhaul the nation's banking laws will remain complicated.

"As far as we are concerned, there is backward momentum," said Gary E. Hughes, vice president and general counsel of the American Council of Life Insurance. "This may not have been intended as a slap at the insurance industry, but that's the way it is being perceived."

Democrats on the Senate Banking Committee are reportedly lining up against the Gramm plan already. Banking industry officials want the bill to outlaw unitary thrift holding companies, and some also oppose the mixing of banking and commerce.

Yet the Treasury's response rings the loudest because the Clinton administration continues to threaten a veto.

Mr. Rubin testified before the House Banking Committee last week that legislation could facilitate market changes already under way-but is not needed at any cost.

Underscoring that message, the agency focused its critique on Sen. Gramm's proposal to shield merging banks with "satisfactory" or higher CRA ratings from community group protests. It also complained that the bill would not require banks to have or keep a "satisfactory" or better CRA rating to engage in new activities.

"We believe strongly that it is important to maintain CRA," the Treasury statement said. The draft "would diminish banking regulators' current ability to review a financial institution's CRA performance when assessing mergers or acquisitions."

The Treasury balked at Sen. Gramm's proposal to let national banks with less than $1 billion of assets underwrite securities and insurance in direct operating subsidiaries. "Financial modernization must provide all banks access to the advantages that the subsidiary structure offers," the statement said.

And the agency said letting banks earn up to 25% of annual revenues from commercial activities heads "in the wrong direction," given that similar banking-commerce combinations have spurred financial crises abroad.

On insurance issues, the agents dislike the Gramm plan because it expands protections for national bank sales of insurance, Mr. Rusbuldt said. For instance, it would let federal regulators override state laws that "prevent or restrict" bank insurance sales-a broader standard than the landmark Barnett case, he said.

Lobbyists hope to achieve changes before the Senate committee votes on the plan March 3. The committee has scheduled three days of hearings starting Tuesday. Mr. Greenspan is to testify the first day, followed by Mr. Rubin on Wednesday. Industry and other government witnesses have not yet been announced.

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