As the financial modernization bill sprang back to life on Friday, industry leaders hailed it as watershed legislation that will make the U.S. financial services industry more dynamic and efficient.
Though banks, securities firms, and insurance companies have been finding paths into one another's business for years, the bill would provide clear passage by lifting barriers that can make such combinations complex and cumbersome. Dismissed by some as a "so what" measure, its impact is sure to be dramatic.
"By liberating our financial companies from an antiquated regulatory structure, this legislation will unleash the creativity of our industry and ensure our global competitiveness," said Citigroup Inc. co-CEOs John Reed and Sanford I. Weill in a joint statement. "As a result, all Americans -- investors, savers, insureds -- will be better served."
It was no surprise that Mr. Reed and Mr. Weill seemed jubilant that a key hurdle had been cleared. Citigroup, the most illustrious example today of a merger of commercial banking, insurance, and securities underwriting and brokerage under one roof, has the most riding on reform -- and its very existence has provided a substantial impetus for the bill's passage. With an eleventh-hour compromise reached early Friday between lawmakers and the White House, the measure was expected to move to a vote by the congressional conference committee early this week.
But it wasn't just the money-center banks that were celebrating the pact and promising a revolution. Scott Reed, chief financial officer of BB&T Corp. of Winston-Salem, N.C., said the legislation would eliminate the financial constraints that have stunted BB&T's growth strategy.
"We would have liked earlier on to have the opportunity to have the securities business and the opportunity to underwrite insurance risk," Mr. Reed said. "We're not in the business of just making loans and deposits."
In recent years, many other banking companies, including Bank of America Corp., Chase Manhattan Corp., and Mellon Financial Corp., have purchased securities firms or asset management firms. Despite these inroads, hurdles remain for financial companies that want to move into new businesses.
"There's a school of thought that says the passage of this bill is going to be anticlimactic, because a lot of provisions of Glass-Steagall have been pushed and pushed and pushed," said Ronald D. Reading, managing vice president of First Manhattan Consulting Group. "But it would be useful that the laws of the land were in sync with practice. You could argue that the pace of the change has been slower than it would have been."
The new law, observers said, would accelerate cross-industry mergers by lifting revenue restrictions on bank securities operations and cutting down on the time and legal maneuverings that it takes to create such combinations.
"The pace of convergence will quicken,'' predicted H. Rodgin Cohen, a partner at Sullivan & Cromwell. "When Great Britain allowed banks to buy securities firms in the early 1990s, you saw a disappearance of the securities industry. My guess is that you will see an acceleration of consolidation, but it won't be on the same scale as you saw in Great Britain. There are simply too many asset management firms and securities firms in this country.''
The legislation also has important implications for global competitiveness. By streamlining the U.S. financial regulatory system -- a patchwork system, by the standards of other developed economies -- it could make the industries more efficient and vibrant.
"This legislation, if ratified, will be good for American consumers and corporations and will enable U.S. financial services firms to maintain their global leadership into the 21st century," said William B. Harrison Jr., president and chief executive officer of Chase Manhattan. "We are very encouraged."
Some said that banking companies, with their deep pockets, could have the upper hand in driving deals. "It will be just a bit easier for banks to do more things. Merrill Lynch has to be worried," said Lawrence White, a professor of economics at New York University.
"Banks have more excess capital than the entire market capitalization of the insurance industry,'' says Robert Devlin, chief executive officer of American General Financial Group, a Houston-based life insurance and annuities underwriter. "At the end of the day, banks are ones that will be doing all the buying. In Europe, banks have done more buying of insurance companies than the other way around."
Indeed, the news of bill's likely adoption has shares of several publicly traded insurers, including American General, Conseco, and Jefferson-Pilot soaring Friday. (See related article on page 1.)
The insurance industry is celebrating the presumed adoption of a financial modernization law, but for reasons quite different from banks'.
While banks have shown an interested in branching out into other areas of financial services, many insurance industry chief executives lack the inclination and capital to move boldly into other financial services business. Besides, under current law, insurers already have the ability to purchase securities firms and thrifts, and a number of firms have exercised that option.
"The insurance industry's main reason for getting behind this legislation was to prevent banks from getting insurance authority of a basis more favorable than we have,'' says Allen Caskie, senior counsel for federal relations for the American Council of Life Insurers.
Mr. Caskie is elated that the current bill achieves that end by ensuring that banks that delve into insurance underwriting and brokerage would be subject to the same state regulatory structure as the insurance industry. "This industry has begged Congress to come up with a legal and regulatory framework that we could live with,'' he added. "Now it's a done deal."
Not everyone, however, thought financial modernization would change their world. Alan "Ace" Greenberg, chairman of Bear Stearns Cos., said the act was written to the advantage of commercial banks and warned that firms that tried to compete in many industries may lose focus.
"We're not worried about the banks," Mr. Greenberg said. "If they do well, we'll do well.
"We've lost 90% of our competition in the last 50 years. I'd be a crybaby if I complained about this. ... We're not interested in buying a bank. We're going to stick to our business."