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Revolutionizing finance

April 24, 1981



For an industry that not so long ago was considered the problem child of US financial institutions, the sudden wooing of brokerage houses by major corporate suitors must seem heady indeed. During recent weeks now, two major mergers have been announced. In March, the Prudential Insurance Company, the nation's largest insurance firm, acquired Bache Group Inc. in a transaction valued at around $385 million. This week American Express, the nation's leading credit card firm, announced a merger with Shearson Loeb Rhoades Inc. in a stock swap valued at around $865 million.

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The mergers clearly stand to revolutionize the American financial system, with the combined firms able to provide customers a broad assortment of transactions, ranging from credit cards to insurance, banking services, and stocks. The concept of "one-stop" financial shopping is now truly around the corner --someday affect almost all American families as home computers become widespread.

While noting the many benefits that will result to the public from such mergers, one would be remiss not to at the same time ask whether such linkups may not also involve larger public policy questions. For that reason, we would urge Congress and the appropriate federal regulatory agencies such as the Securities and Exchange Commission to consider whether new legislation is needed , as (presumably) more mergers of this nature occur in the months and years ahead.

The reasons for urging this scrutiny are twofold. First, we are dealing here not just with mergers of competing brokerage houses. Rather, the consolidations represent something unique to Wall Street -- major mergers of nationally based "full-service" financial firms with leading brokerage houses. As such, the combined firms growing out of the mergers will possess tremendous clout in lending and other money decisions throughout the US economy. Second, as is now happening, this type of merger puts pressure on Congress to remove existing restraints on the US banking industry, which argues that it would not be able to compete against these new forms of full-service companies. Banks would like to end restrictions (mandated under the Glass-Steagall Act of 1933) that prevent them from underwriting corporate securities. Yet, these restrictions were imposed in the first place because of the often calamitous issuing of securities by banks in the 1920s, resulting in a number of bank failures as the nation moved into depression.

Thus, we are not here passing judgment on either the Prudential or american Express mergers. The companies involved are known for their innovation and responsibility. And there is much to be said for public accessibility to the broad range of financial services that will result. Rather, we would hope that in their analysis the nation's lawmakers not overlook the larger question of how to insure maximum competition among financial institutions. The United States is diverse nation, spanning a continent. For that reason, national policy should ensure that there are the largest possible number of competing lending and financial institutions, and that financial power -- control over the nation's money and credit -- be as broadly dispersed as possib le.