Who's right: Comptroller of the Currency Eugene A. Ludwig or House Banking Chairman Jim Leach?

The two men squared off last week over the OCC's decision to let Magna Bank of Missouri, a state bank, convert to a federal charter without divesting insurance and real estate activities generally off limits to national banks.

Rep. Leach was outraged last week, lambasting the comptroller for what he viewed as attempts to skirt federal law to grant national banks new powers.

The Iowa Republican called the comptroller a "maverick banking regulator.

"What is so galling to Congress about the comptroller's advocacy is the presumptive hubris of his efforts," Rep. Leach said. "Having lost legislatively, the comptroller is in effect thumbing his nose at Congress and proceeding administratively."

For his part, Mr. Ludwig kept a relatively low profile, saying simply that he's trying to let national banks offer what the market demands.

"When you scratch beneath the veneer of politics and get to the essence of this debate, it's really about the free market and its ability to provide goods and services in the most efficient way possible," Mr. Ludwig said last week.

So what's Magna all about? In January, the Comptroller's Office quietly released a November decision that allowed Magna to keep its insurance and real estate brokerage subsidiaries after converting to a federal charter.

Rep. Leach has already sponsored legislation barring the OCC from expanding national bank insurance powers for five years. The Magna decision so perturbed Rep. Leach that he is considering amending that measure to specifically overturn it. In addition, the House Banking Committee's financial institutions subcommittee is expected to hold hearings on Magna in late April.

The Conference of State Bank Supervisors weighed in on Rep. Leach's side March 6, writing an 11-page legal analysis of the Magna decision.

The Comptroller's Office has said that in deciding the Magna case it relied on the second paragraph of Section 35 of the National Bank Act, which gives the agency authority to let a bank converting to a national charter keep "nonconforming assets." However, the state regulators said Section 35's first paragraph mandates that banks converting to federal charters may only possess the same powers as banks originally chartered as national banks.

"The first paragraph of Section 35 specifically deals with the 'powers' of national banks, and the second paragraph's narrowly limited reference to nonconforming assets does not enlarge such 'powers,' " the state regulators argued.

The state regulators also accused the OCC of taking the opposite tack in an earlier interpretation of Section 35.

The group pointed out that in a recent decision permitting Society Bank, a Michigan-chartered bank, to convert to a federal charter, the comptroller wrote: "Section 35 makes it clear that a national bank resulting from a charter conversion is no different from a newly formed national bank."

The order also described the second paragraph of Section 35 as granting only limited permission to converted banks to retain nonconforming assets, such as corporate stock.

And in previous court decisions, newly converted national banks were forced to divest certain holdings under the second paragraph of Section 35, the regulators group argued.

"Case law is really quite contrary to the comptroller's position in the Magna decision," said Art Wilmarth, an associate professor at George Washington University Law School who wrote the legal arguments in the state bank supervisors' letter.

In an interview, OCC chief counsel Julie Williams argued that the second paragraph was added to permit the comptroller make exceptions to the first paragraph.

The exception, she said, is crucial in cases like Magna's, where divesting its subsidiaries would have put the bank at a competitive disadvantage to other Missouri banks.

"The parent bank has an asset - the investment it holds in its subsidiary," Ms. Williams said. "We are permitting it to retain that."

She argued that despite the fact that national banks are generally barred from retaining subsidiaries like Magna's, the bottom line is that they are assets, and not "powers," as the state bank supervisors argued.

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