Financial pact fuels stock gains
Pact means consumers will see more mergers
By Rex Nutting and Emily Church,
CBS MarketWatch
Last Update: 7:39 PM ET Oct 22, 1999
Bank Stocks
Personal Finance
White House reaction
NEW YORK (CBS.MW) -- Financial stocks surged while consumer
groups cowered Friday after a back-room agreement in Congress raised
the likelihood of blockbuster mergers between banks and brokerages.
The compromise "sent a clear message to
investors" that financial companies will "squeeze
efficiencies" out of their assets by merging, said
Kim Wallace, a political analyst for Lehman
Brothers. Bank stocks rose 4 percent, and
brokerages climbed nearly 8 percent, as investors
cheered the prospects of more blockbuster
mergers.
It now appears likely the Glass-Steagall Act, the
Depression-era law that separated the banking and
securities companies, will be scrapped within days.
The change would allow banks, insurance companies and securities firms
to merge and enter each other's core business areas.
"The legislation ... will give consumers one-stop shopping for their financial
services," said Hjalma E. Johnson, president of the American Bankers
Association and the CEO of East Coast Bank. "The legislation will give
consumers more choice and convenience and lower prices."
However, the National Community Reinvestment
Coalition, representing disadvantaged consumers,
denounced the "back-room" deal and called for a
veto of the bill by President Clinton. "The bill
weakens vital protections against discrimination and
redlining," said John Taylor, president of the
NCRC. "The big financial interests got what they
wanted but the common folk got left behind."
Financial rally
Stocks in Wall Street powerhouses ($XBD: news,
msgs) soared. Merrill Lynch (MER: news, msgs)
was one of the biggest gainers, rising 4 13/16 to 72
1/8. Merrill is long believed to have been interested
in expanding via acquisitions in the banking sectors,
once the rules changed. Lehman Brothers (LEH:
news, msgs) rose 6 3/4 to 67 15/16. Morgan
Stanley Dean Witter, Goldman Sachs (GS: news,
msgs), and J.P. Morgan (JPM: news, msgs) also
notched strong gains on the news.
Mellon Bank (MEL: news, msgs) rose 1 3/4 to 35
1/16. The bank seen as one of the "prime
beneficiaries of greater focus on the financials by
investors in light of the expected passage of HR-10," said Henry "Chip"
Dickson, analyst at Salomon Smith Barney, in a note to clients.
Washington Mutual, the nation's largest thrift, rose 2 1/4 to 31 5/16. Over
the long-term, financial companies which are technologically advanced will
be the gainers, Wallace said. Citigroup (C: news, msgs) -- the mega
merger between Citicorp and Travelers last year -- is an example of the
deals that can take place.
Among insurance companies, Lincoln National (LNC: news, msgs)
charged up 5 1/2 to 47 3/16. American International Group (AIG: news,
msgs) jumped 5 15/16 to 91 13/16, while the group ($IUX: news, msgs)
rose 6.3 percent.
"Look at Lincoln
National, look at all of
the asset managers and
investment houses.
They're all well
outperforming the
Dow," said Kim
Wallace, a political
analyst for Lehman
Brothers.
David Komansky, Merrill's chief executive, said in a statement the
compromise gives financial services companies "the strategic flexibility to
compete and win in the global marketplace. We look forward to swift,
final action by Congress and President Clinton."
Long debate
The debate over reform of the industry had dragged on for decades
before this week's compromise. In the past few years, the industry groups
had mostly agreed on a new structure for the industry, but a turf battle
between the Treasury Department and the Federal Reserve stalled
progress.
The final stumbling block was over whether to
require community reinvestment and tough privacy
restrictions on segments of the financial services
industry. The Clinton administration won an
agreement from Senate Banking Committee
Chairman Phil Gramm, R-Texas, on community
reinvestment, but Republicans refused to budge on
privacy regulations.
"The Financial Services Act will allow and
encourage greater competition,
which will greatly benefit consumers, the industry,
and the economy. The
bill will also strengthen the ability of U.S. firms to
compete in the global
marketplace," said Marc Lackritz, president of the
Securities Industry Association.
The late-night pact didn't surprise Wallace. This
time, the industry was united in supporting reform,
he said. "They had just maxed out on their ability to
grow within their own sectors."
Rex Nutting is Washington bureau Chief. Emily Church is the New
York bureau chief.
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