Glass-Steagall: another falling wall


Walls are falling down.

The crumbling of the Berlin Wall in late 1989 signaled a victory for capitalism but also triggered considerable uncertainty.

Now a likely dismantling of U.S. laws that have maintained a wall between banks and securities firms since the Great Depression will usher in an uncertain era in financial services.

Banks, securities firms and insurance companies won't be the ++ same once they have the ability to enter each other's turf. In the future, the world's giant banks may be calling the shots on Wall Street.

This marks acceptance of a modern "bigger can be better" philosophy that will take the form of giant and small acquisitions among a myriad of financial players. In addition, firms will create and deliver products they've never handled before.

Any investor holding or considering purchase of stock in a bank, securities firm or insurance company must weigh all possibilities connected with this changing climate.

Many consumers will be perplexed by new competition for their business, even though increased competition usually bodes well for them.

"Reform would have positive impact on stock prices of companies, though whether it proves attractive over time remains to be seen," noted Paul Mackey, bank analyst with Dean Witter Reynolds. "Some banks haven't distinguished themselves in the basic business of banking, and now, coming into investment banking, I wonder whether it will spread talents even thinner."

All but the very largest securities firms are potential takeover candidates for banks -- despite recent derivatives blunders, questionable trading practices, the inability to cope with rising interest rates, and a stream of declining profits that transformed the securities industry into a field of concern.

"Much longer term, I see the possible changes as a negative for the insurance industry since banks have been dying to get into underwriting annuities, the major area of growth for insurance companies," predicted Adam Klauber, insurance analyst with Duff & Phelps, who expects some banks may buy smaller insurance firms.

No one yet knows the timetable or specifics of reform, but change is in the wind, likely this year. The Glass-Steagall Act, which since 1933 has separated banks from securities firms, was engineered by Carter Glass, a Democratic senator from Virginia who believed beleaguered banks shouldn't be "contaminated" with unnecessary equity risks.

A current House bill would let banks underwrite securities through an affiliate; permit securities firms to buy insured banks; give a single holding company the opportunity to own a bank and a separate securities unit; and give foreign banks the same legal treatment as domestic banks.

A Senate bill would permit a single company to own a bank, insurance business, securities firm and commercial company. A proposal from the administration would permit banks to own or affiliate with securities firms or insurance companies, and let either own a bank.

"You can't exclude any securities firm from the possibility of being purchased, since the largest banks are much larger than the largest brokerage firms," observed Joan Solotar, brokerage firms analyst with Donaldson Lufkin & Jenrette.

PaineWebber Group and Dean Witter Reynolds could be potential candidates. Lehman Brothers "would be more likely to be taken over by a foreign firm seeking domestic institutional presence," she said. Salomon Brothers might not fit as well with a bank, since it's a trading firm and that isn't the primary area banks wish to emphasize.

Oppenheimer & Co. has discussed with Nederlanden Groep N.V. the possibility of being acquired by that Dutch financial giant. There's talk on Wall Street that Donaldson Lufkin & Jenrette will be sold by its owner, the Equitable Cos., to a bank. Smaller brokers such as A. G. Edwards & Co. and Edward D. Jones are attractive.

"Commercial banks that don't have staffing to be in brokerage could look at regional brokers such as Legg Mason, Stifel Nicolaus or Raymond James," says James Schmidt, portfolio manager of Hancock Regional Bank Fund.

Smaller banks will be acquired in this world of growing, diverse institutions, Mr. Schmidt added. Examples of potential takeovers are AmSouth Bancorp in Birmingham, Ala., Integra Financial Corp. in Pittsburgh and U.S. Bancorp in Portland, Ore.

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