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Special Report

Bank, Broker...Big Brother?

Bank investors probably wouldn't have predicted they would have Congress to thank for one of the highlights of their investing year.

News that lawmakers reached an agreement to remove 60-year-old industry regulations last month has brought some of the largest gains for the banking sector in 1999.

Now that Glass-Steagall Act reforms seem to be a certainty, let's examine what this means for the sector.

At first glance, the answer is "not much."

The new law takes away restrictions that separated powers in the financials-services industry. Glass-Steagall required banks to stick to what they did best--taking deposits and making loans--and to leave securities sales and insurance underwriting to someone else.

The idea behind the Depression-era law was to make the banking industry safer. If the stock market crashed a la 1929 or the country was hit with a natural disaster, banks would not be exposed, life savings would be spared, and widespread bank failures would be minimized.

Regulators, Not Congress, First to Reform
But, you say, my bank already does those things that Glass-Steagall said it couldn't.

True. In recent years, bankers have been doing an ace job convincing their regulators, especially the Office of the Comptroller of the Currency, that Glass-Steagall restrictions were old fashioned. The banks were motivated because deposits were flowing out of banks into the bull market via stocks and mutual funds. Bankers wanted to keep their hands on your money by selling those securities. And for an extra boost to their bottom lines, many banks started selling insurance policies as well.

 Recent Cross-Industry Mergers
Merger Year Combination
Chase Manhattan CMB & Hambrecht & Quist HQ *1999 Bank & Broker/dealer
BankBoston & Robertson Stephens 1998 Bank & Broker/dealer
Citicorp & Travelers Group 1998 Bank & Insurance Co.
KeyCorp KEY & McDonald & Co. Inv. 1998 Bank & Broker/dealer
NationsBank & Montgomery Sec. 1997 Bank & Broker/dealer
* indicates merger is pending. BankBoston is now part of FleetBoston Financial FLT,
Citicorp and Travelers are known as Citigroup C, and NationsBank has since merged with
Bank of America BAC. Source: Companies