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Citigroup Inc.’s $25 billion acquisition of Irving, Texas-based Associates First Capital Corp. is getting a rough reception from community activists, but sources familiar with the transaction said federal regulators are on target to clear the deal by year’s end. “There is no question it will get done,” one source involved in the review said. “It will be done in the fourth quarter.” The transaction has become a battleground for activists because it is the first contested deal to be reviewed under a revised approval process that appears to exclude community reinvestment issues. Activists have been unwilling to accept the narrow scope of the revised process and have demanded that regulators also consider whether the deal is in the public’s best interest. Were regulators to accept this standard, it would make it substantially harder for banking companies to acquire credit card banks and other specialized institutions from finance companies. “If things go poorly here you will have people thinking long and hard about closing these banks or selling them only to the General Electrics of the world, which are not banking companies,” said one New York lawyer who frequently works on bank mergers. Federal law required Citigroup to file a notice informing regulators that it planned to buy Associates. Sixty days later it was supposed to be allowed to proceed with the deal unless regulators moved to block the transaction. Regulators Nov. 16 extended that period by another 30 days because they have been flooded by complaints from activists upset at what they contend is predatory lending by Associates. In its letter demanding the extra time, the Federal Deposit Insurance Corp. specifically asked Citigroup how it plans to resolve problems with discriminatory practices at Associates. The banking agencies can impose up to two delays of 45 days each on the deal. However, these only may be triggered if Citigroup failed to provide regulators with all the information requested, a prospect several sources involved with the deal said would not happen. While activists have succeeded in slightly delaying the deal, they appear to have little chance of getting the FDIC and the Office of the Comptroller of the Currency to reject the merger. The problem for the activists — and the saving grace for the companies — is the odd set of laws that governs how this regulatory review is conducted. When one bank buys another, regulators must consider whether the deal meets the “convenience and needs” of the community. And the merging institutions must have adequate records under the Community Reinvestment Act, a federal law that requires banks to lend money in all areas where they accept deposits, including low-income and minority communities. Combining these two standards gives activists a strong hand in influencing bank mergers. Though few deals are ever killed because of them, the two standards give activists leverage to force banks to commit millions of dollars in loans to low-income and minority areas. The Associates-Citigroup deal, however, is not covered by CRA or by the “convenience and needs” provision. This is because the three banks Associates owns are not allowed to accept local deposits. Instead, they are specialized institutions that primarily handle credit card transactions. As such, they are called CEBA banks after the law that created them, the Competitive Equality Banking Act. Associates also owns a Utah-chartered industrial loan company, which is a state-chartered version of a CEBA bank. The OCC regulates 42 CEBA banks; FDIC officials were unable to determine how many CEBA banks they oversee. Acquisition of CEBA banks is governed by the Change in Bank Control Act, a 1978 law intended to ensure criminals could not buy a bank. The act says regulators look at the acquirer’s financial condition, “competence, experience or integrity” of senior management and the bank, and risk to the deposit insurance fund. Regulators are not allowed to look at the target bank. Prior to 1999, this was not a major problem for activists because these deals also had to be reviewed by the Federal Reserve Board, which under section 4(c)8 of the Bank Holding Company Act had the authority to consider whether the deal was in the public interest. But last year, Congress enacted the Gramm-Leach-Bliley Act of 1999, one part of which eliminated the Fed’s role in reviewing acquisitions of CEBA banks unless they are owned by institutions that the Fed already regulates. Because Associates is not a bank holding company, it is exempt from the Fed’s authority. Two government officials said the narrow standard for review in the Change in Bank Control Act ensures this deal will close. One official said it is extremely unlikely that a federal banking agency could rule that Citigroup lacks either the “competence,” “integrity,” or “experience” required to buy Associates. Besides not being supported by facts, it would be grossly misleading to the public and could spur an unjustified run on Citigroup’s banks, the official said. Activists, however, are not persuaded. “They have a lot of jurisdiction as regulators,” said Sarah Ludwig, executive director of the New York-based Neighborhood Economic Development Advocacy Project. “They can condition the merger on all sorts of things.” Ludwig argues that Citigroup should fail the experience and integrity tests because it has not yet resolved predatory lending problems at other finance companies acquired in recent years. Matthew Lee, executive director of the Bronx, N.Y.,-based Inner City Press Public Interest Law Center, said banking regulators have broader safety and soundness powers that would let them use Associates’ record on predatory lending to sink the deal. “(If) they wanted to take a look at what was being acquired, they would be the first ones that would come up with a reason,” Lee said. “There is no lack of legal ingenuity over there.” Regulators and banking lawyers, however, contend that activists are seeking to distort the law. “It does not allow us to pursue CRA issues,” said Robert Garsson, a spokesman for the OCC. The refusal of activists to back off is not surprising, said Gilbert T. Schwartz, a partner in the Washington law firm of Schwartz & Ballen. “It is like the Republicans and Democrats,” Schwartz said. “Do you expect one of them to throw up their hands and give up?” Citigroup agreed Sept. 5 to exchange 0.7334 of its shares for each Associates share. The deal was initially valued at $31.1 billion, but has fallen as Citigroup’s stock has dropped more than 15% since September. Skadden, Arps, Slate, Meagher & Flom LLP is advising Citigroup on regulatory issues involved with the acquisition. Copyright (c)2000 TDD, LLC. All rights reserved.

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