Citigroup
A Merger Too Far?

ALlfonse D'Amato has never been one to bite the hand that feeds him. So when Sandy Weill dropped in to persuade the junior senator from New York to schedule hearings of his banking committee on a bill that Weill and John Reed need to legitimize the merger of the Travelers insurance group with Citicorp, D'Amato didn't take a lot of persuading.

D'Amato is in the process of putting together a campaign chest big enough to permit him to bury his opponent under a barrage of television ads. In the past five years, he has received millions from his Wall Street supporters, and persuaded them to contribute millions more to the New York state Republican Party and to the races of favored Senate colleagues. The coincidence of the senator's need for campaign funds and Citigroup's need for legislation cannot have escaped either the senator or Weill during their meeting.

As I pointed out in the current issue of The Weekly Standard, the hearings, now scheduled for later this month, will come at a time when financial types are in good standing, the stock market having added $1 trillion to Americans' wealth in the first quarter of this year alone. Weill and Reed are hoping to parlay the current popularity of Wall Street on Main Street into quick passage of the legislation they need to go ahead with their merger.

But there is good reason to pause, and consider whether legislation that allows such consolidation of the banking and financial-services sectors is in the nation's interests. It is easy, of course, to see what's in the Citicorp-Travelers merger for Sandy Weill. The son of Polish-Jewish immigrants, he now stands at the pinnacle of the financial-services industry, astride a colossus that will serve more than 100 million customers in 100 countries. It's easy, too, to see what's in this deal for John Reed. He can now look with satisfaction on a career in which he has converted a troubled bank into one of the world's premier financial institutions with a market capitalization of about $140 billion.

And it's even easy to see what's in it for shareholders. The market seems to think that one plus one makes something more than two, and for all I know it may be right. After all, partly based on past consolidations, investors have in the past 10 years bid up the shares of big money-center banks by 600 percent, almost twice the gain registered by the Standard & Poor's 500 index.

But private and public interests do not always coincide. Consider, first, the precedent that might be created if Congress allows itself to be steamrolled into passing legislation to legitimize an action that violates the law as it now stands. Weill and Reed have made no secret of the fact that they hope Congress, faced with a fait accompli, will have no choice but to sanctify their marriage. 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 put pressure on Congress to change it.

The second important policy issue is the effect that the Citicorp-Travelers merger, and the others that have been announced since, will have on the conduct of monetary policy. Citibank and others in its weight class have always been considered by the Federal Reserve Board to be "too big to fail." That means that when they are in trouble--a circumstance in which Citibank found itself as recently as 1991--the Fed must keep the interest rates it charges these banks low, so that they can profitably re-lend the money to commercial borrowers. This, whether or not the condition of the economy requires such a policy.

Imagine, now, that the Travelers insurance arm of Citigroup is in trouble, and threatens to pull down the banking arm. The Fed would have to jigger U.S. monetary policy to save Citigroup from itself. D'Amato's colleagues might well wonder whether this is a chance worth taking.

Finally, there is the problem this merger and others like it create for small businesses. 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. "By contrast, small-business lending by the six biggest banks that didn't go through mergers increased 7.5 percent over the same period."

I can supplement that study with my own experience when starting a small business. 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. Fortunately, tiny Irving Trust Co. (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 up a business that eventually created hundreds of jobs.

There's worse. The typical small-business man, 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. The opposite danger is that a loan officer, eager for the insurance and other business of a shaky potential borrower, might make loans he would otherwise prudently refuse to make.

So our junior senator might want to hear from some of the small-business men who are so important a part of the economy of New York. Weill, Reed and their Wall Street brethren may be important contributors to his campaign fund, but the thousands of small-business men in this town, unskilled in the art of lobbying Washington, are important contributors to New York's economic health. Their needs should be worth a thought or two.

Irwin M. Stelzer is a fellow at AEI.

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