A BANK TOO LARGE?
STELZER, IRWIN M.
A Bank Too Large? Why Congress Shouldn't Swallow the Citigroup Deal By Irwin M. Stelzer Sandy Weill and John Reed are on a roll. The merger of their companies, insurance giant Travelers and...
...D'Amato, facing a bitter reelection campaign, is putting together a campaign chest that will permit him to bury his opponent under a barrage of television ads...
...All they require is a reasonable probability—more than a slight possibility but less than total certainty—that the mergers under review are likely to result in a substantial lessening of competition or a tendency to create a monopoly...
...A Wall Street Journal study of the five biggest bank mergers showed that the merged banks' small-business lending declined by 6 percent, while their overall lending increased...
...True, the bill squeaked through by only one vote, but a win is a win, and resistance is softening in the Senate...
...The laws are aimed at nipping monopoly power in its incipiency...
...Conversely, a loan officer might well be tempted to lend money to a marginal or poor credit risk in return for the promise of the borrower's insurance business...
...this effort, now derisively known as selling "stocks and socks," failed miserably...
...There are three things that D'Amato and his banking committee colleagues have to worry about as they listen to the parade of Wall Street deal-makers who will importune them to abandon the old-fashioned notion that it is in the nation's interest to keep various parts of the financial services industry separate from one another...
...The Fed will then have to jigger U.S...
...It is only recently that Europe, in the person of Brussels policy wonks, has conceded it must do something to emulate America's friendly environment for venture capitalists—who invest in thousands of young companies every year, hoping some will grow into the next generation of Microsofts and Intels...
...So don't assume that there will be a Citigroup in America's future...
...That means that when they are in trouble—a circumstance in which Citibank found itself as recently as 1991, when it was struggling to survive—the Fed must keep the interest rates it charges these banks low, so that they can profitably re-lend the money to commercial borrowers...
...And who his stockbroker is...
...The son of Polish-Jewish immigrants, Weill now stands at the pinnacle of the financial services industry, astride a colossus that will serve more than 100 million customers in 100 countries...
...Irwin M. Stelzer is director of regulatory policy studies at the American Enterprise Institute...
...And consumers will ultimately rule on the merits of the cross-selling strategy...
...I can supplement King's observations with my own experience when starting a small business...
...But America is blessed not only with gutsy venture capitalists...
...Otherwise, it will just be big...
...This is, of course, highly unlikely, as anyone who has ever tried cross-selling can tell you...
...Weill and Reed make no secret of the fact that they hope Congress, faced with a fait accompli, will have no choice but to sanctify their marriage...
...It's easy to see what's in the deal for Sandy Weill, the Travelers chairman...
...Fortunately, tiny Irving Trust Company (alas, since swallowed up in some long-ago merger), in the person of an old-fashioned look-you-in-the-eye banker, saw things differently, and helped us to start a business that eventually created hundreds of jobs...
...Only a dunce would fail to get the hint that there is an implicit tie between the availability of the loan and the borrower's willingness to bring the rest of his business to the one-stop conglomerate...
...If the antitrust and regulatory authorities decide that the market for credit for small businesses is a competitive arena separate from the other markets in which the new megabanks will operate, and that newcomers cannot readily enter it and challenge existing banks—those are questions that can be answered only by the careful empirical analysis that is the routine stuff of antitrust inquiries—then they may challenge these mergers, rather than leave small businesses to the tender mercies of a dwindling group of increasingly remote banks...
...What a temptation to put before Bill Gates: Write contracts that violate the antitrust laws, and then persuade Congress that you are so big, so important, so great a source of campaign funds, that the Sherman Act should be repealed or amended to accommodate you...
...The early betting is that the 65-year-old Weill will soon preside at the 59-year-old Reed's going-away party...
...Weill and Reed still have a lot of persuading to do before their legislative and regulatory chaperones allow them to cohabit in the same executive tower...
...Presumably, Citicorp will persuade its credit-card customers to buy their insurance from Travelers, Travelers will persuade its policyholders to switch their checking accounts to Citibank, and so on and on until all customers end up availing themselves of what bankers now call "a single delivery system"—one-stop shopping at the new financial supermarket...
...D'Amato's hearings will come at a time when the economy is booming—the stock market has added $1 trillion to Americans' wealth in the first quarter of this year alone—and business leaders seem omnipotent...
...Weill and Reed say that one of the main advantages of the merger is that it will provide the new behemoth with numerous opportunities for what is called "crossselling...
...Which brings us to the merger of Citicorp and Travelers...
...The second important policy issue is the effect that the Citicorp-Travelers merger and the other giant bank mergers in the works will have on the conduct of monetary policy...
...So found the Wall Street Journal, hardly a hotbed of antimerger sentiment...
...Although ordinary consumers can simply walk away from one-stop shopping if they choose, small businesses are not so well situated...
...But not too many for the small-business owners who would rather meet with a local banker when in need of credit than stand in line at the branch office of a financial conglomerate...
...If the Citicorp-Travelers merger combines with the $60 billion merger of BankAmerica and NationsBank, the $30 billion merger of Banc One and First Chicago, and their inevitable imitators to whittle the number of banks down to a few mega-institutions, woe betide small businesses...
...After all, partly based on past consolidations, investors have bid up the shares of big money-center banks by 600 percent over the past decade, twice the increase in the market as a whole...
...monetary policy to save Citigroup from itself...
...We also have thousands of banks—too many to please Wall Street's green-eyeshade types, who think giant banks are more efficient and hence more profitable...
...He can now look back with satisfaction on a career in which he has converted a troubled bank into one of the world's premier financial institutions, with $700 billion in assets...
...King and I are not unique...
...If he takes hat in hand and goes to a large bank, he deals with a "loan officer who hides behind a loan committee made up of other clerks...
...The theory assumes that it is relatively easy to open a bank...
...And it's even easy to see what's in the deal for shareholders...
...There's worse...
...The American economy has been leading the world in growth and job creation thanks in large part to the dynamic role played by small businesses and the entrepreneurs who create them...
...It's easy, too, to see what's in this deal for Citicorp chairman John Reed...
...America's corporations are today the envy of the world and are widely seen, with some justification, as the source of our prosperity...
...In any event, Congress shouldn't be stampeded into changing the existing laws merely because some very important institutions have chosen to defy them—in the hope that such defiance will be rewarded with the amendments they have thus far been unable to obtain in an orderly, democratic manner...
...Then there are consumers...
...The Senate, too, may still decide that these banks create insurmountable competitive and regulatory problems...
...Consumers, it seems, regard products such as credit cards and home-equity loans as free-standing, and will take such products from whoever offers the best combination of price and service...
...It didn't take a lot of persuading, even though earlier this spring the junior senator from New York said he couldn't find time in his committee's crowded schedule to consider the legislation that would permit the creation of the massive Citigroup conglomerate...
...But let's give everyone the benefit of the doubt, and assume that Weill and Reed are smart enough to accommodate each other's foibles, and to figure out how to make this giant operation run smoothly...
...Weill and Reed are hoping to parlay the current popularity of the business sector into quick passage of the legislation they need to go ahead with their merger...
...Weill dropped in on Alfonse D'Amato, chairman of the Senate banking committee, and persuaded him to schedule mid-June hearings on a companion bill...
...The effort failed, and American Express finally gave up, selling the brokerage company to Primerica, now Travelers...
...In King's view, it is America's small banks, lending to myriad small businesses, that enable our economy to outperform Europe's, where a few large banks in each country are notorious for their shoddy treatment of small businesses...
...Failure by a new entrant causes a regulator more grief than does a refusal to grant the necessary permission in the first place...
...It is true, of course, that no one can be certain the merger wave now rolling over the banking industry will be harmful to credit-seeking small-businessmen...
...Despite the whining of the usual consumer activists, there is no need to worry about consumers, since all of the markets in which the new Citigroup will be selling are reasonably competitive...
...If consumers don't like what Citigroup is offering, they can go elsewhere (although the number of else-wheres seems to be shrinking at an accelerating pace...
...The first is the precedent that might be created if Congress allows itself to be steamrollered by two giant financial institutions into passing legislation to legitimize an action that violates the law as it now stands...
...But the antitrust laws do not require the certainty that an anticompetitive result will occur...
...This would expose the banking system to risks it should not be bearing, risks that might shake it in a business downturn...
...But experience with industries as highly regulated as banking suggests that regulators are none too eager to allow newcomers to try their hand at regulated business...
...Even though Fed officials profess to be unconcerned about this prospect, many in Congress feel this is not a chance worth taking...
...The typical small-businessman in need of a bank loan is street-smart enough to know that his chances of wringing a "yes" from a loan officer will not be increased if he gives his insurance business to someone else...
...His willingness to push new banking legislation isn't exactly technology-to-China, but it does have the odor of a quid in anticipation of a quo...
...The market seems to think that one-plus-one makes something more than two, and for all I know it is right...
...Imagine, now, that the Travelers insurance arm of Citigroup is in trouble, and threatens to pull down the banking arm...
...Whatever the merits of the merger, and of the bill before the Senate, it can't be a very good idea to invite any businessman, unhappy with legislation that sets limits on his behavior, to ignore the law and then pressure Congress to change it...
...Citibank and others in its weight class have always been considered "too big to fail" by the Federal Reserve Board...
...But there is good reason to pause and consider whether legislation that allows such consolidation of the banking and financial services sector might not hand Europe and, eventually, a recovering Asia a leg up in the international competitiveness league...
...A former Citicorp executive, Kovacevich told the Financial Times that Citicorp is "probably averaging two products for every customer, just like everyone else, and adding another hundred products to the mix they offer isn't going to make much difference...
...Picture this: The potential borrower is sitting across the desk from the loan officer, who quietly wonders who handles the supplicant's insurance business...
...Sears Roebuck acquired Dean Witter with the idea of marketing stocks through its many retail outlets...
...Anyone who still thinks that cross-selling has the potential for profit that Weill and Reed ascribe to it should have a word with Richard Kovace-vich, chief executive of Norwest, the Minneapolis bank that, with $96 billion in assets, is the ninth largest in the United States...
...Of course there is also the little matter of yoking the very different personalities of Weill and Reed into a team that will pull in the same direction...
...By contrast, small-business lending by the six biggest banks that didn't go through mergers increased 7.5 percent over the same period...
...The merger of their companies, insurance giant Travelers and banking colossus Citicorp, has now received the blessing of the House, which passed a banking deregulation bill in May that would legalize the deal...
...And only a loan officer insensitive to his prospects for advancement would fail to ask the questions that would permit him to boast of his cross-selling prowess...
...Finally, there is the problem this wave of mergers creates for small businesses...
...Prudential tried to convert its strength in insurance into securities sales, and lost over $1 billion on limited partnerships...
...The pot of gold at the end of the cross-selling rainbow is substantial...
...Llewellyn King, publisher of the always interesting White House Weekly, calls the current merger wave "a catastrophe in the making . . . [for] small business...
...In the past five years, D'Amato has received almost $3 million from his Wall Street supporters and persuaded them to contribute millions more to the races of favored Senate colleagues...
...This, whether or not the condition of the economy requires such a policy...
...The loan officer at Chase, then a New York giant, could barely contain his amusement at the impertinence of a group of young economists seeking to borrow a few dollars from his august institution to start, of all things, a consulting firm with no hard assets...
...When he was an executive with that company, it tried to concoct a financial supermarket by buying Shearson Loeb Rhoades...
...if the current wave of mergers whittles the number of banks down to a few mega-institutions, woe betide small businesses...
...That is, assuming the merger happens at all, which it won't if the Senate doesn't go along...
...Mercer Management Consulting says its data show that 10 percent of a bank's customers typically produce 90 percent of its profits—and these are the customers who use several of the bank's products...
...A small-businessman who wants to borrow $500,000 from a small bank deals with the chairman, writes King...
...If they find one-stop shopping convenient, Citigroup will be a big winner...
...Weill must remember the experience of American Express...
...The question then is whether—at the very moment that its economic model stands as the unrivaled envy of the world—America is about to emulate Europe, whose handful of giant banks are famously indifferent to entrepreneurs...
...Free-market theoreticians tell us there is no reason to worry: If the megabanks abuse small businesses, or merely fail to serve them well, new banks will arise to cater to them...
Vol. 3 • June 1998 • No. 38
