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Untying the knot
Commercial banks are closer than ever to blunting the federal law preventing them from tying the provision of corporate credit to underwriting and advisory mandates.
Commercial banks have long wanted to muscle in on Wall Street's lucrative securities underwriting and merger advisory activities. They received a huge boost in that battle in 1999 when Congress repealed the Glass-Steagall Act, which for more than six decades had legally separated the banking and securities businesses. Since then big banks like Citigroup and J.P. Morgan Chase & Co. have steadily gained market share -- displacing Wall Street firms to become the top underwriters of investment-grade corporate bonds, for example (see table).
Now the banks are mounting an assault on one of the final legal barriers to their quest for investment banking supremacy: the so-called antitying amendment to the U.S. Bank Holding Company Act. Among other features, the 1970 provision prevents banks from forcing customers to accept unwanted products to obtain loans.
Those who support changing the law argue that what separates coercive, illegal tying from the legitimate bundling of services is in fact a gray area that exposes banks to liability for acceptable conduct. Citing the entry of securities firms (which aren't subject to the antitying law) into lending in recent years, the banks assert that keen competition and the availability of abundant credit give corporations the upper hand in their relationships with lenders.
"Most clients who are looking for the right adviser will make their decision based on the perceived quality and skill set of those they want to use, as opposed to who is willing to lend them money, particularly in an environment where access to money is fairly broad," notes Eduardo Mestre, a vice chairman of advisory boutique Evercore Partners. Mestre knows both sides of the debate: Before joining Evercore last year, he chaired Citigroup's investment banking unit. Bank lobbyists are pushing the Federal Reserve Board to issue rules that would introduce an exemption to the law for investment-grade corporations with at least $500 million in annual revenues and companies owned by private equity firms with more than $1 billion under management.
Seeds of the current push were planted nearly three years ago after U.S. Representative John Dingell, a Michigan Democrat, demanded that regulators investigate what he called rampant violations of the tying statute. The Fed found scant evidence of lawbreaking, but commercial banks were irritated and inconvenienced enough to organize an effort to modify the provision and remove the legal uncertainty associated with it.
"All we want to do is be able to walk into the room and negotiate in the exact same manner that our increasingly powerful competitors do," argues John Walker, a partner with law firm Simpson Thacher & Bartlett. Walker is representing Bank of America Corp., Citigroup, Deutsche Bank, J.P. Morgan and UBS in the matter.
A 2003 Fed proposal soliciting comment on how the law should be interp-reted is still open. The bank group is pushing the agency to act on it -- and to adopt the proposed safe harbor -- before Ben Bernanke succeeds Alan Greenspan as Fed chief in January. (Changes in leadership at regulatory bodies can often slow the progress of pending rules.) A Fed spokes-man declines comment.
The Fed's authority to essentially nullify a provision of federal law is open to question. But the Supreme Court's June decision in an unrelated case, National Cable & Telecommunications Association v. Brand X Internet Services, which supported the Federal Communications Commission's jurisdiction in imposing regulations on cable Internet services, is interpreted by some lawyers as broadening the power of regulatory agencies in such instances.
It's also far from clear whether corporate clients truly have negotiating leverage over banks. In a 2004 survey by the Association for Financial Professionals, two thirds of respondents from companies with revenues greater than $1 billion annually said they had been denied credit or had received unfavorable terms after failing to award securities business to their commercial banks. Some critics also note that when the credit cycle turns and the number of distressed companies expands, banks will be in position to dictate terms to their clients.
"The banks are trying to get away with murder," says Timothy Naegele, a Washington-based lawyer who authored the antitying provision as a Senate committee counsel. "They don't want any scrutiny at all. They want to be able to engage in predatory practices with respect to large, medium and small corporations."
Best in bonds
The ranks of the top underwriters of U.S. investment-grade bonds, measured by the revenue generated from underwriting fees this year, are dominated by the investment banking units of commercial banks.
J.P. Morgan, Chase & Co.
Goldman, Sachs & Co.
Merrill, Lynch & Co.
Credit Suisse First Boston
Banc of America Securities
* Data represents deals completed through October 25, 2005.