The recent announcement of a series of financial megamergers, headlined by the Citicorp-Travelers deal, has Wall Street jumping. But the average citizen should think twice before applauding this latest merger mania.
Proponents of the trend argue that bigger and more diversified financial-services firms will be more efficient and profitable, providing greater benefits to their stockholders and customers. But that view ignores some hard questions.
Will this new $700 billion financial institution be covered by the implicit government guarantee that the largest institutions, like Continental Bank in 1983, are “too big to fail”?
This doctrine assumes that if these institutions get into trouble, the government will rescue them to prevent shock waves from endangering the entire financial system. Another example, the 1980s savings and loan bailout, cost the taxpayer $180 billion in an era of much smaller institutions. If the new giant institutions fail, the cost to the taxpayer will be devastating.
It also is not clear that any federal regulator is up to the job of regulating such complex firms, and there is evidence from countries as diverse as France and South Korea that mixing financial institutions and commerce is very risky business.
As individual corporations gain market-dominating power over flows of capital and credit, capital markets tend to break down. Even Japan, with its huge investments in technology and education, is now suffering from the unwise decisions of a financial industry corrupted by size and overextension.
Many industry “experts” conclude too hastily that all of these new conglomerates will be profitable. A recent conference of economists at the New York Federal Reserve Bank turned up precious little evidence that the financial industry mergers of the last 10 years have produced greater returns. And recent attempts at financial-industry consolidation by Sears Roebuck and American Express were massive failures.
What will this merger mean to consumers and small businesses? Will the supposed advantages of cross-selling turn into diminished market opportunities for ordinary customers who will end up being pressured to get their home mortgage and home insurance from the same firm?
With diminished effective competition, they will certainly pay more for the supposed added convenience. Some banks already require small firms to hold all their accounts at the bank before they can be considered for a loan. Will the new conglomerates withhold credit unless small firms move insurance policies and other business to the conglomerates? If small firms don’t need other products, will they be able to access reasonably priced credit?
The blurring between banking and commerce also carry potentially grave consequences for our cities and older suburban communities. The Community Reinvestment Act requirement that banks do business throughout their service area, including lower-income neighborhoods, has resulted in almost $400 billion in investments in those neighborhoods.
Will that reinvestment umbrella get shredded as the new giants move assets out of insured depository institutions into affiliates not covered by the Community Reinvestment Act? That act has been instrumental in sowing the seeds of revitalization in formerly abandoned neighborhoods throughout the country.
All this progress could be destroyed by consolidation, especially if CRA is not expanded to cover all of the activities of these new financial powerhouses. Inter-industry mergers could even weaken efforts to make insurers more responsible to their communities. Do we want international insurance conglomerates regulated by state insurance commissioners who recently pressured their national association to stop researching discrimination by insurance companies?
The Citicorp-Travelers deal is a direct challenge to Congress’ failure to pass bank “modernization” legislation, legislation that would permit financial-services firms of all kinds to merge and engage in significant commercial activity. The legislation failed largely because the legislators receiving campaign contributions from bankers disagreed with legislators receiving campaign contributions from insurance companies and securities firms.
Despite the efforts of a national network of community reinvestment advocates, the public interest was absent from much of the debate. Citizens deserve to know where their elected representatives stand on the issues. At the same time, they should ask Federal Reserve Chairman Alan Greenspan whether he is going to approve the merger without giving the public satisfactory answers to the same questions.
