Market Changes Render Congress Inconsequential

The award of the Bank of New England franchise to Fleet/Norstar Financial Group, with backing from Kohlberg, Kravis Roberts & Co., ushers in a new era in American banking. It sets the stage for a three-sided battle for supremacy of the industry.

Most visible in the fight will be the American versions of the Japanese zaibatsu.

In Japan, these industrial and financial groups have mutual stockholdings and other links and wield considerable power, though government regulation has blunted it somewhat since World War II.

The new American zaibatsu will be striving for market share against more-focused financial companies and traditional banking organizations.

The most probable loser in the struggle will be the traditional bank. The clearest winner is the single-focus financial company.

Congress Not Relevant

What Congress does or thinks about banking from this point forward is totally irrelevant.

The combatants, recognizing the total ineffectiveness of that institution, have gone beyond its confines to create their own "new order." Thus, private-sector companies must bet on the approach they believe will let them survive.

First let us deal with the political realities. In the past decade, the inability of Congress to deal with financial issues has become, once again, very evident.

Confidence Gone

The Garn-St Germain Depository Institutions Act demonstrated how Congress, when it exerted its authority, could meaningfully worsen a financial crisis. The disastrous results of that legislation destroyed the confidence of the legislators in their ability to deal with such complex dilemmas.

As a result, political issues once again dominated Congressional debate in the financial arena. On the Senate side, questions of ethics surfaced. On the House side, a key leader focused on impeachment calls. The President must go because he invaded Iraq. Key senators were declared unfit to run their financial committees. As a result, the working links between this branch and others were effectively sundered.

Into this political vacuum moved the regulators. However, they also fumbled badly. Over-zealous attacks on the banking industry created a credit crisis and recession.

This disarray created a need for a clear policy in the banking sector. This was developed by a group of policymakers who were focusing on the massive battle the United States was waging on the economic front with the Japanese and Germans.

The American policymakers believed that one clear solution to their problems was to create a new consensus between the government, industrial, and financial sectors -- to create American zaibatsu that would emulate, and defeat, the Japanese manifestations.

This group prevailed and expressed its banking concepts in the Treasury report to Congress titled "Modernizing the Financial System." This report calls for the creation of American zaibatsu composed of industrial, banking, insurance, and investment companies to meet the country's economic challenge. It is also a clear mandate to create very sizable companies that would span the nation.

Bush Favors Zaibatsu

The President clearly favors the creation of the American zaibatsu. It is also relatively clear that he will be in the White House for the next five years, given the lack of a serious Democratic challenger for 1992. Therefore, it seems likely that his regulators can do whatever they choose in banking, no matter what Congress thinks.

For the record, it appears that Congress feels as it has for the past 80 years: that American zaibatsu should not be created. It also seems likely that Congress will not pass the President's banking bill in 1991. However, Congressional action will be ignored, because it is just as evident that no one in the administration is disposed to enforce the banking laws, and no one is about to compel them to do so.

In a rather remarkable piece in The Wall Street Journal on March 27, Peter J. Wallison, an ex-Treasury official (and ex-counsel, no less) wrote: "Even assuming that at some time in the recent past there was a national policy of separating banking and commerce, it has clearly been abandoned without anyone having noticed or cared."

This statement may be somewhat of a shock to bankers, who are unable to enter the commercial sector. However, the ex-Treasury lawyer goes on:

"Banking generally consists of two main functions: taking deposits and making commercial loans.

"If we look at these functions separately, we can see that neither of them has ever been considered out-of-bounds for corporations engaged in commerce."

Those familiar with the operations of companies such as General Electric, Sears, or Ford - and soon also IBM - understand that these corporations perform both banking functions: They collect deposits (which are ultimately FDIC insured) and they make a wide variety of commercial and consumer loans.

Limitation on Banks

In essence, therefore, only banks are unable to be zaibatsu, while everyone else already has the power.

When the FDIC turned aside the bids of BankAmerica Corp. and Bank of Boston to acquire Bank of New England in favor of the KKR-Fleet/Norstar bid, the realities discussed above became apparent. The newly constituted Fleet/Norstar will have all the characteristics of a Mitsubishi or Mitsui group.

At the center will be KKR, which has controlling interests in wide variety of industrial companies as well as the largest block of stock in two of the top 10 bank holding companies in the country.

The companies contend in the press that they will not follow the Japanese model by sharing resources, directing business, or supporting the sister companies in the group that become troubled.

They also argue that the interlocking positions will not result in any exercise of control from the financial to the industrial companies or vice versa.

One might suggest that it makes little sense to establish zaibatsu if in effect they will be run like mutual funds. Also, there is no historical evidence of operating companies performing in this fashion in the United States. Therefore, it is more likely that over time these inhibitions will break down, and that in fact the American zaibatsu will operate in every fashion like the Japanese model -- which is, of course, what the administration wants.

Whether or not one gets exercised over the fact that these events are occurring, the next stage of the developments in banking, in my view, is likely to be the most interesting. Just as the government and the largest of the Fortune 500 companies bring together their grand design for the new corporate state in this country, a second, grass-roots economic development is emerging.

In industry after industry over the past decade, the concept of "outsourcing" has emerged. Companies seeking to cut costs have divested themselves of those divisions that represent vertical integration. They have slimmed down their financial statements, reconstituted their product offerings, and retrained their work forces.

By becoming entrepreneurial, lean, and market-oriented, they have moved effectively to take back market share from their foreign competitors.

In essence the concept of zaibatsu has not worked well in the American economy, because this society is too free, open, and fiercely competitive.

Thus in the 1990s the administration's zaibatsu must fight head-to-head with the focused financial firms. It will be another confrontation between the huge ungainly ships of the Spanish Armada and Sir Francis Drake's small privateers.

Mr. Richard X. Bove is a banking consultant with the Bove Group in Chatham, N.J.

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