Financial reform legislation faces an uphill battle in 1999 despite historic strides last year.

The impeachment trial of President Clinton, new leadership on Capitol Hill, and the threat of renewed legal clashes among industry factions layer new problems over the unsettled controversies that killed the bill in the fall.

A rocky forecast might seem surprising after Congress came closer than ever in 1998 to allowing common ownership of banks, securities firms, and insurance companies. The House approved landmark legislation by a single vote in May, and the Senate version was stalled in October by a handful of senators.

"Last fall was the most propitious time for bank modernization," House Banking Committee Chairman Jim Leach said in an interview this week. "There was a lost opportunity, but it doesn't mean it was the only opportunity."

The Iowa Republican plans to try again this year. He introduced a reform plan Wednesday-the first day of the new Congress-that mimics deals struck last year.

Richard M. Kovacevich, president and chief executive of Wells Fargo & Co., said he is confident a bill can be enacted.

"The commercial banking industry, the investment banking industry, and the insurance companies are in basic agreement," he said. "I firmly believe we will get some form of a level playing field, financial modernization law, in 1999."

But political uncertainty is causing other enthusiastic supporters to hedge their bets.

"Nothing is going to happen until the impeachment trial is over," predicted Bank One Corp. president and chief executive John B. McCoy.

New financial laws could be as many as five years away, Mr. McCoy said.

Such a delay could thwart cross-industry mergers such as the deal that produced Citigroup. When Travelers Group and Citicorp agreed to combine, they daringly sidestepped laws barring the affiliation of banks and insurance underwriters. Regulators gave Citigroup two years to comply with the law and could extend that grace period to as many as five years.

Even perennial advocate BankAmerica Corp. is gun-shy. "Our hope continues that modernization legislation will finally be passed," a spokeswoman said, yet "we are not overly optimistic that this will be the year for it."

So what has changed?

Key proponents in the House leadership have retired or been ousted, and Democrats may rally around a simpler alternative.

Meanwhile, in the Senate, the Banking Committee has a new leader, Phil Gramm-the Texas Republican who blocked the reform bill last year on grounds that it would expand the Community Reinvestment Act.

In the near term, the biggest problem may be impeachment. The Senate trial started Thursday, but key decisions are pending. Predictions about the length of the proceeding range from days to weeks to months.

During the holidays it seemed the President could count on a short, perfunctory trial and some kind of censure. Republican and Democratic leaders wanted a brief trial that could be short-circuited by a Senate vote on whether the alleged charges warrant impeachment. But they backed off when Sen. Gramm and other senators pressed for a full trial and verdict.

The wily Sen. Gramm, whose procedural maneuvers to bar a vote on the bill stymied Senate business at the end of the session, is probably the biggest wild card. Industry officials expect him to rewrite key portions of the reform bill, but do not know how.

"I have no idea," Mr. McCoy said. "Nobody has got any great insight whether it is positive or negative."

Rep. Leach said that he and Sen. Gramm had a long talk last month and that they agree on the basic framework of the legislation. "I am confident he will play a constructive role," Rep. Leach said.

This much is known: Sen. Gramm is expected to hold hearings on the Community Reinvestment Act. His unbending stance on the CRA-related sections of the bill could draw heavy opposition from the White House and Democratic lawmakers.

Still, it seems Sen. Gramm is trying to broker a compromise on last year's other major stalemate-the turf war between the Treasury Department and the Federal Reserve Board. Rep. Leach labeled it the most difficult remaining issue.

Treasury Secretary Robert E. Rubin has repeatedly threatened a presidential veto unless the bill grants broad financial powers to the operating subsidiaries of national banks, which are regulated by the Office of the Comptroller of the Currency, a Treasury unit.

The legislation, instead, would have required new powers to be conducted in holding company units, which are regulated by the Fed.

Neither agency shows any sign of budging. Sen. Gramm met with Mr. Rubin in November and is expected to meet with Fed Chairman Alan Greenspan soon. (A meeting scheduled for today was postponed by the impeachment trial.)

Mr. Kovacevich said Congress will have to impose a solution, which he argued should let bank subsidiaries conduct all financial activities except insurance underwriting and real estate development.

Approval by the full House may be tougher this year, too.

The House leadership, which was instrumental in steering the bill through last spring, has changed drastically. Gone are key supporters: Speaker Newt Gingrich, Rules Committee Chairman Gerald B.H. Solomon, and Republican Conference Chairman John A. Boehner.

Undeterred, Rep. Leach vowed to "move forthrightly and early" on the House side. His new bill is nearly a carbon copy of the version that drew support from bankers before Sen. Gramm and others killed it.

The legislation would overhaul the nation's financial laws by letting banks, insurance companies, and securities firms affiliate with each other. It would bar banking organizations-except unitary thrift holding companies that are grandfathered under the bill-from owning nonfinancial businesses. Commercial companies could not purchase unitary thrift holding companies.

Bank operating subsidiaries would be barred from underwriting activities, merchant banking, or real estate development.

In response to Sen. Gramm's concerns, Rep. Leach proposed scaling back a key community reinvestment provision. Banks seeking to affiliate with a securities or insurance company would have to have "satisfactory" or better ratings in their most recent Community Reinvestment Act exams. But merged entities would no longer face divestiture or other penalties if the CRA ratings of their banks subsequently dipped.

However, the plan would extend the CRA to uninsured wholesale financial institutions, or "woofies." Sen. Gramm opposes that as expansion of government red tape to nonbanks. Rep. Leach said that little demand exists for woofies and he would consider eliminating them from the bill to solve that dispute.

Rep. Leach could have trouble getting the legislation through his committee. House Banking's ranking Democrat, Rep. John J. LaFalce of New York, this week questioned whether using "last year's failed product" is a mistake and urged lawmakers to find alternatives more amenable to the Clinton administration.

In an interview, Rep. LaFalce said he is developing an alternative. While he would not provide details, Rep. LaFalce may introduce a simple repeal of the Glass-Steagall Act that separates investment and commercial banking.

While insurance and securities firms would likely balk, scaling back the bill is attractive to many. "It should not take a thousand pages to pass a financial modernization bill that is nondiscriminatory," Mr. Kovacevich said.

Historical conflicts also could flare up between the House Commerce and Banking committees, which share jurisdiction over the legislation, without a heavily involved leadership to act as referee. Notably, Commerce Chairman Tom Bliley did not mention financial reform in his three-page-plus agenda for the committee.

Also, the fact that the survivors in the House Republican leadership, Reps. Tom DeLay and Richard K. Armey, are both from Texas could be a factor. The opposition of bankers from the Lone Star State, who said the bill gave insurance commissioners too much power over bank activities, is considered a major reason for Sen. Gramm's opposition last year.

Regulatory and legal decisions could affect the legislation as well. Numerous applications for thrift charters-which permit broad financial powers and nonfinancial investments-have been filed by insurance and securities firms. As more companies gain these powers, interest in reform could lessen.

If new Comptroller of the Currency John D. Hawke Jr. aggressively grants banks new insurance or other powers, the banking industry's interest might wane, too.

Lawsuits could fracture the detente between insurance agents and bankers. For instance, Huntington National Bank and three trade groups asked a federal judge in November to overturn an Ohio law that they said illegally restricts bank insurance sales. Similar suits are possible in at least three other states.

However, supporters contend regulatory and court rulings-as well as the slew of megamergers among financial companies-may actually nudge Congress to act. It would be similar to 1994 when lawmakers finally allowed interstate banking long after most banks found ways to cross state lines.

Looking for opportunities to reach across the aisle after the impeachment battle, Republicans and Democrats could embrace the banking bill. Republicans are eager to shed their do-nothing, "impeachment party" image, veteran banking lobbyist Richard F. Hohlt said.

Considering these conflicting forces, betting on financial reform is as fruitless as forecasting the weather.

"I know of no bill that one should predict with less certitude than bank modernization," Rep. Leach said. "There is a credible possibility of early consideration and action, but I am not in a position to do any handicapping."

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