Like a warehouse worker sweating over a well-sealed crate, the banking industry is slowly prying open the lid on the securities business so it can seize a greater role in brokerage activities. And any day now a long-awaited court decision could insert a crucial wedge in an eight-year-old gap created by Bankers Trust Company.
The Securities Industry Association (SIA) is locked in a legal tussle with Bankers Trust of New York over whether a bank can underwrite commercial paper -- short-term corporate IOUs. Bankers Trust has been selling commercial paper since 1978.
Bankers Trust says it isn't an underwriter but merely an agent for the corporation issuing the commercial paper. ``We serve the issuer . . . and place [the commercial paper] directly with investors, rather than own it as principal,'' says Tom Parisi, a senior vice-president at Bankers Trust.
Still, many observers see this as a form of underwriting. If Bankers Trust wins the case now pending in a Washington, D.C., circuit court of appeals, it could set an important precedent. Commercial banks would get ``a foot in the door to broader underwriting powers,'' says Almarin Phillips, a professor of economics and law at the University of Pennsylvania's Wharton School.
``This is the most significant case brought to date, because it goes to the heart of Glass-Steagall -- the underwriting of securities,'' says William Fitzpatrick, general counsel of the SIA.
The Glass-Steagall Act forbids banks in the United States from trading or underwriting certain municipal revenue bonds, mortgage-backed securities, stocks, and corporate bonds. Glass-Steagall is a depression-era law that separates commercial banks from investment banking. In the early 1930s, Congress blamed bank speculation in financial markets for the banking collapse.
But since the mid-1970s, deregulation of the securities industry has allowed brokerage firms to offer banklike services. Banks in turn have pushed regulators to allow them to be more competitive.
``The continued invasion of each other's turf has been going on for some time, and I see no stopping it,'' says Robert D. Shay, a banking and finance professor at Columbia University.
One of the first direct attacks on Glass-Steagall came in 1983, when BankAmerica entered the securities business by buying Charles Schwab & Co., a discount broker. The courts upheld the purchase, since BankAmerica was a holding company and discount brokers just took orders for securities but did not dispense advice.
Even that distinction is being tested. The SIA has filed suit with the Comptroller of the Currency, because that agency is allowing American Bank (now MBank) of Austin, Texas, to operate two subsidiaries -- a discount broker and an investment advisory service -- under the same roof. Each is in the same office, the SIA asserts.
The bolder moves of late are not in the retail securities arena, however, but in the broad, lucrative field of investment banking.
Banks have already legally established some beachheads in certain investment banking practices: the Eurobond market, US government bond trading, and the new market in currency and interest-rate swaps.
Apparently, that's not enough. Banks are seeking ways around Glass-Steagall to get into underwriting and trading. Citicorp has filed with the Federal Reserve Board for permission under the Bank Holding Company Act to deal in municipal revenue bonds and mortgage-backed securities. Under this act, the Federal Reserve has given subsidiaries of bank holding companies permission to do things that commercial banks per se are not allowed to do.
Last month, J. P. Morgan & Co. created the nation's 16th-largest securities firm by injecting $250 million in equity capital into a new subsidiary, J. P. Morgan Securities Inc. Morgan is filing a petition with the Fed seeking permission for investment banking activities similar to those of Citicorp.
``I don't think they'll get permission from the Fed until there's been a court test. I think the Bankers Trust case will determine how the Fed stands,'' says Dr. Shay.
``Messrs. Glass and Steagall would turn over in their graves if the Fed permitted such activities,'' comments James Weidner, a partner at Rogers & Wells, the law firm representing the SIA. The group sees inherent conflicts of interest: Is the bank that lends money to a company a disinterested party when it comes to pricing and selling securities?
If Bankers Trust loses this case, it could bring to a halt the trading of commercial paper by all banks. Commercial banks have scooped up less than 5 percent of the $300 billion commercial paper market. But it's considered a key growth area, since corporate borrowers have been turning away from short-term bank loans to the commercial paper market.
Corporate customers would lose, too, points out Ernest Bloch at New York University. ``The competition brings the cost of capital and transaction costs down.''
Separate from the Bankers Trust case, but indicative of the trend, the parent company of Chemical Bank is moving into the arbitrage business. The Chemical New York Corporation hired a top trader from Kidder, Peabody & Co.'s merger arbitrage department in February. The holding company reportedly plans to form a unit to speculate on stocks involved in mergers. Chemical has not sought clearance from the Fed, and it may set up shop in London, where there is no Glass-Steagall law.