As victorious supporters of the House financial reform bill descend from cloud nine, they are realizing that a surprise change in the legislation puts them in a political bind.

The problem: how to fight a popular ban on commercial activities by financial services firms without hurting the bill's already fragile chances of becoming law.

American Express Co., Merrill Lynch & Co., and Morgan Stanley, Dean Witter & Co.-among many other powerhouses-object to the ban because they already own or invest in nonfinancial businesses, ranging from publishing to bowling alleys.

To buy a federally insured commercial bank-which the legislation would permit for the first time since the Great Depression-these diversified firms would have to divest their commercial interests within 10 to 15 years of the bill's enactment.

But attempting to change this provision would put them at odds with key Capitol Hill allies, including the bill's sponsor, Rep. Jim Leach. The Iowa Republican stunned lobbyists when he successfully spearheaded an amendment that limited how long companies that own banks could also own commercial businesses.

"As we have seen in other countries, concentration of economic power does not lead to increased competition, innovation, or customer service," the House Banking Committee chairman said during debate on the House floor. "Mixing banking and commerce puts American job growth in jeopardy."

Granted, most observers predict that the Senate will not act on the bill this year. If it does not, the House-which approved the legislation May 13 on a 214-to-213 vote-would have to reconsider the issue in 1999.

The issue will remain front and center next year, but lawmakers who still rue the collapse of the thrift industry in the 1980s will not be easily convinced that financial firms should own technology companies or other nonfinancial enterprises.

Securities and insurance company lobbyists are still trying to reinsert the so-called commercial "basket." But they are doing so quietly in order not to strengthen the cause of opponents such as the banking industry and the Clinton administration.

"Whether at this point (the Leach amendment) is something that is considered a deal-breaker, that is doubtful," said Samuel J. Baptista, president of the Financial Services Council. "At the same time, don't expect us to go away on the issue."

Opponents predict these firms ultimately will give in rather than jeopardize the entire legislation and instead will try to change the law later.

"They used to say we must have a basket," said Edward L. Yingling, chief lobbyist for the American Bankers Association. "They are clearly not insisting that there be a basket in the final product although they would like one."

Under the Leach amendment, American Express likely would have to sell Food & Wine and Travel & Leisure magazines, and Fidelity Investments would have to unload its BostonCoach car service and chain of community newspapers in eastern Massachusetts.

Travelers Group-which agreed in April to merge with Citicorp-would have to seek a buyer for Phibro Inc., which trades crude oil and other commodities. A Citicorp lobbyist said the prospective merger partners support the bill even with the ban because Phibro's business is relatively small.

Although merchant banking is supposed to be protected under the bill, Wall Street lawyers are still combing through the legislation.

For instance, they want to make sure that Merrill Lynch won't have to unload its 20% interest in Bloomberg LP, a financial media company, and that Goldman, Sachs & Co. won't be forced to sell its majority stake in AMF Bowling Inc. of Richmond, Va., a multimillion-dollar operator of bowling alleys.

"We support financial modernization, but any financial modernization must take into account that for us and many other investment and commercial banks, principal investment is an integral part of our business strategy," a Goldman spokesman said.

House Banking Committee staff members said the bill specifically protects companies that conduct investment banking, provided they do not control daily operations of an investment and ultimately plan to sell it.

They added that the Leach amendment and other parts of the bill are carefully crafted to prevent any major disruption of a financial services company's core business.

Under the amendment:

Companies that own a bank could not own any nonfinancial business. Before the amendment, such firms would have been allowed to generate 5% of gross revenue from new commercial activities.

However, if a company that owns commercial businesses as of Sept. 30, 1997, buys a bank, it could keep the nonfinancial businesses for 10 years, provided they do not contribute more than 15% of nonbank revenues. The Federal Reserve Board could grant a five-year extension if it "would not be detrimental to the public interest."

These grandfathered companies could not acquire nonfinancial companies or enter new lines of commercial business.

The legislation leaves some loopholes.

Its definition of financial activities is broad, including commercial leasing and travel services, Mr. Baptista said. And the Fed has the power to define new activities as financial in order to keep up with technological or other advances in the marketplace.

Banking industry lobbyists complain that the bill is unfair because it lets competitors remain in businesses that are barred to banks. They add this would give nonbanks a competitive head start if they can persuade Congress to change the law before the divestiture deadline.

"They have commerce and 10 years to get the law changed," said Alfred M. Pollard, senior legislative affairs director for the Bankers Roundtable. "To my mind, this is a disadvantage to banks."

Critics say that the economic risk of letting companies such as Microsoft buy a bank far outweighs the inconvenience to these Wall Street firms of divesting relatively small commercial holdings.

The companies respond that they do not plan to merge with large industrial companies but want the flexibility to own side businesses.

"To suggest we should take a profitable part of the company and toss it away ... is unreasonable and unfair," a lobbyist for a financial services firm said.

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