Citicorp's Uncivil Corporate Disobedience

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."