Citicorp's Uncivil Corporate Disobedience

[Robert Weissman <rob@essential.org>]

The Big Boys play by different rules than the rest of us.

If major corporations don't like a law, they can invest millions in
campaign contributions, lobbyists and political advertisements.

If those efforts don't result in a change in the law, the corporations can
just ignore it.

Case in point: the just-proposed Citicorp-Travelers Group merger. The
merger is flatly prohibited by federal law that prevents banks, securities
firms and insurance companies from owning each other.

For years, the financial services industry has sought to tear down the
regulatory walls between banking, insurance and investment banking that
are mandated by the Glass-Steagall Act and the Bank Holding Company Act.
Earlier this month, the House of Representatives abandoned its latest
attempt to roll back the acts.

Now, in a strange kind of corporate uncivil disobedience, banking Goliath
Citicorp and megainsurer Travelers announced a merger that all parties
agree the law forbids. The two financial giants intend to exploit a
loophole that will let them proceed with the marriage while undergoing a
two-year "review" by the Federal Reserve -- a review that can be extended
for up to three years. The new "Citigroup" plans to use this two-to-five
year window to lobby to erase the federal prohibition on bank and
insurance company mergers.

Citicorp, Travelers and other financial services companies maintain the
50-year-old separation between banking, insurance and investment banking
is an anachronism. Rallying around the cry of "financial modernization,"
they say giant financial conglomerates would benefit consumers by
providing them with "one-stop shopping" for withdrawing cash, buying
insurance policies and trading in the stock market.

This is not exactly the same convenience as being able to buy milk and
bread in the same supermarket, however. Even the hypothetical benefits to
consumers are incidental at best.

By contrast, the new Citigroup and other giant financial houses would pose
enormous risks to consumers, taxpayers and democracy.

For consumers, the risk is that more concentration in the financial
services sector will result in less competition, higher charges (for
everything from use of ATMs to stock trades) and diminished choice. 

There is also a danger that banks will allocate credit on preferential
terms to allied companies, and deny it to competitor companies. That will
both raise the cost of loans to borrowers who do not have special ties to
banks and distort the proper functioning of the economy.

For taxpayers, the risks are even more grave. There will be a strong
tendency in down times for banks to infuse cash into affiliated investment
banks and insurance companies and the companies in which they invest.
(Insurance companies are major players in the stock and real estate
markets.) In the best case scenario, that will make credit relatively more
scarce for other borrowers. In the worst case, an insurance company's
insolvency will spread to its banking partner. 

Here's where taxpayers get hit: Since bank deposits are guaranteed with
federal insurance -- as they should be -- if a bank goes bad trying to
bail out an affiliated insurance company, taxpayers will foot the bill.
Deposit insurance will actually encourage banks to engage in more risky
behavior, because it shifts the cost of failure away from the bank and to
taxpayers.

The recent South Korean financial debacle can be traced in large part to
banks making bad loan after bad loan to affiliated industrial enterprises.
Most analysts in the United States criticized the close relationship
between the Korean banks and industrial companies -- but now U.S. banks
want to follow the flawed Korean model.

The most worrisome element of a Citigroup or similar financial behemoth is
the threat it poses to democracy. Corporate power already dwarfs people
power on Capitol Hill. When corporations reach the size of a combined
Citigroup, their sheer size gives them the ability to roll over opponents.

Citicorp and Travelers have implicitly acknowledged the political control
they expect to be able to exercise after their merger. In announcing a
merger that is plainly prohibited under current law, they are saying,
"After we merge, we're sure we can force a change in the law." The dollar
and ego costs of undoing a merger are substantial. The parties would not
have announced their marriage if they did not expect it to be consummated
successfully.

This kind of concentrated economic power poses grave perils for a
democracy already enfeebled by excessive corporate influence.

Federal and state regulators should quickly veto the merger proposal. The
message to Citicorp and Travelers should be: "Follow the laws like the
rest of us."

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor.

(c) Russell Mokhiber and Robert Weissman

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