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Nearly a year has passed since Congress tore down the barriers separating the banking, securities and insurance industries, but so far the results have been far more limited than many observers expected. All of the big banking deals that grabbed headlines recently could have been completed without passage in October 1999 of the Gramm-Leach-Bliley Act. This includes such whoppers as Chase Manhattan Corp.’s $39 billion acquisition of J.P. Morgan & Co. and Citigroup’s $29.5 billion bid for Associates First Capital Corp. It also includes less traditional combinations, such as Dresdner Bank AG’s $1.37 billion purchase of Wasserstein Perella & Co., UBS AG’s $12.2 billion acquisition of PaineWebber Group Inc., and Credit Suisse First Boston’s $11.5 billion takeover of Donaldson, Lufkin & Jenrette Inc. (Wasserstein Perella & Co. is the general partner in a fund that owns The Daily Deal and Law.com). The most radical new power granted by the legislation — clearing the way for banks and insurance underwriters to combine — has not been used to join giant players. Yet lawyers said passage of the law after nearly 20 years of nonstop lobbying from the banking industry was worthwhile because it has made it far less complex to close a megabank deal. “It has facilitated getting the deals done even though they might well have been able to do them without it,” said Robert Clarke, a former comptroller of the currency who is now a partner in the Houston office of the Bracewell & Patterson LLP law firm. Gone are complex loopholes banks exploited to enter the securities underwriting business. This has made marriages between banks and securities firms much more appealing, said William Sweet, a partner in the Washington office of New York-based law firm Skadden, Arps, Slate, Meagher & Flom LLP. “It clearly has made doing transactions far simpler, even those that would have been permitted prior to the legislation,” said Sweet, who devised the regulatory strategy Citicorp and The Travelers Group used in 1998 to get around laws barring the marriage of a bank and insurance company. For instance, some parties were scared off by the so-called Section 20 rules, which said a bank’s securities arm could only earn up to 25 percent of its revenue by underwriting corporate securities. They also disliked limits on mutual fund businesses and restrictions on key employees working for the bank and the securities unit. Such restrictions may have discouraged companies such as DLJ, PaineWebber and Wasserstein from selling out to banks in the past, he said. “Today we no longer have to deal with a bunch of artificial constructs,” Sweet said. “The operating restrictions are clearer.” The legislation also was the first signal from Congress and the Clinton administration that consolidation in the financial sector was acceptable, said Gilbert T. Schwartz, a partner in the Washington law firm Schwartz & Ballen. Bank mergers have been rampant for the last two decades. From 1980 to 1998 there were 8,000 bank mergers, according to a Federal Reserve study. Yet most involved small institutions. Megadeals are a more recent phenomena. “The law has created an atmosphere that encourages financial institutions to aggressively combine,” he said. “It said bigger is better.” Banks have used the law to grow despite lagging stock prices in the financial industry, a malady that typically slows deal-making dramatically. These include Wells Fargo & Co.’s $2.8 billion acquisition of First Security Corp., Charles Schwab Corp.’s $2.6 billion purchase of U.S. Trust Corp., National Commerce Bancorp.’s $1.9 billion takeover of CCB Financial Corp., and BB&T’s $1.2 billion buy out of One Valley Bancorp. Also, Chase bought Robert Fleming Holdings for $6.9 billion, Alliance Capital Management Holding LP spent $3.5 billion for Sanford C. Bernstein & Co. Inc. and Citigroup got Schroders’ investment banking unit for $2.2 billion. Mergers between banks and insurance companies are not on the list because economic barriers still make these deals unfeasible, said Eugene Ludwig, managing partner of Promontory Financial Group, a Washington-based merchant bank that specializes in financial institutions. “The market is currently not valuing insurance company stocks as highly as they might deserve and their price-earnings ratios are pretty low,” said Ludwig, a former comptroller of the currency in the Clinton administration. “That has oddly enough put a damper on banks’ willingness to buy.” Dealmaking also is impeded because the states regulate insurance and because many insurers have a mutual ownership structure, said H. Rodgin Cohen, a partner in New York’s Sullivan & Cromwell law firm. Still, he expects these problems to be overcome once bank stock prices recover. “All of the macroeconomic trends encourage consolidation,” said Cohen, who has been involved with most of the major bank mergers during the past two decades. Already, MetLife Inc. said Aug. 16 that it would acquire Grand Bank, a Kingston, N.J., institution with $80 million in assets. The bank is tiny, but the deal will mark the first use of Gramm-Leach-Bliley to marry an insurer and bank. Though yet to be fully exploited, Gramm-Leach-Bliley was intended to return the financial services industry to its pre-Great Depression roots. During the heyday of J.P. Morgan, banks were the source for financial services. They underwrote stock, sold insurance and lent cash to businesses. The stock market crash and ensuing bank panic changed all that. Congress worried that banks were using deposits to support companies whose stock they had underwritten. As part of laws in the 1930s that created federal deposit insurance and strengthened the Federal Reserve system, Congress barred banks from underwriting stocks or insurance. These laws forced J.P. Morgan to spin off his underwriting business into Morgan Stanley. The three industries pretty much remained separate until the 1980s. The Federal Reserve Board took the lead in 1987, ruling that a special securities subsidiary of a bank holding company could legally earn up to 5% of its revenue underwriting corporate securities. The threshold was later raised to 10% and then to 25%. Around the same time the comptroller of the currency was giving national banks permission to sell insurance and annuities even when state laws banned such sales. In a series of rulings in the mid-1990s, the Supreme Court upheld this power for national banks. As a result, many states dropped bans on bank insurance sales. Both regulatory decisions fundamentally altered the political landscape. No longer were banks, insurers and securities firms three distinct industries. Citicorp and Travelers were the first to seize on this new reality. Their 1998 merger established Citigroup, the first large financial institution since the Great Depression to be a major player in all three industries. The deal gave lobbyists the final push needed to get financial reform enacted. Copyright (c)2000 TDD, LLC. All rights reserved.

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