Supreme Court Hears Arguments On Fed's |Source of Strength' Policy

WASHINGTON -- The Supreme Court on Monday heard oral arguments in an important test of the Federal Reserve Board's authority to require strong banks within a holding company to prop up their weak sister institutions.

But the justices steered clear of a direct discussion of the so-called "source of strength" doctrine, focusing instead on procedural and jurisdictional matters.

The dialogue suggested that the ruling, which is expected early next year, will skirt the merits of the doctrine itself.

The case, Federal Reserve v. MCorp, grew out of the 1988 collapse of 20 of the 25 subsidiaries of Dallas-based MCorp. A federal appeals court in May 1990 ruled that the Fed could not force MCorp to transfer $400 million to its failed bank units.

The Fed has been prevented from completing administrative actions against MCorp, including cease-and-desist orders, because MCorp has gone under bankruptcy court protection.

Alan B. Miller, MCorp's attorney, told the high court that the Fed went too far in demanding the company infuse capital into weak subsidiaries.

Fed Calls Action Premature

The Fed's attorney said MCorp's case was premature, because the Fed hasn't issued a final order. "All that's at issue here are administrative proceedings," said Jeffrey P. Minear, assistant solicitor general.

Chief Justice William Rehnquist seemed to be leaning toward the government's position. "Until the administrative proceeding becomes final and is affirmed by an appeals court, it isn't going to have the effect of removing any property."

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