Bank cats loose among broker canaries
The cat is loose in the canary cage. This is the reaction on Wall Street to the banking industry's entrance into the brokerage business. The excitement grew last week when Bank of America and Security Pacific Bank announced their entrance into the world of brokerage services. Brokers quickly claimed it was a violation of the Glass-Steagall Act of 1933. The act prohibits banks from offering services related to securities or investment banking.
But both West Coast banks claimed they would not be violating the law, since they would only offer brokerage services - not underwriting or investment banking services. Bank of America will do this through the purchase of Charles Schwab Corporation, parent of Charles Schwab & Co., the nation's largest discount broker. Security Pacific has made an arrangement with Fidelity Brokerage Services Inc., part of the Fidelity Group of Boston.
Initially, Security Pacific will offer brokerage services only at its 600 branches. Bank of America, through a bank holding company, will own Schwab outright.
Adrian L. Banky, senior vice-president and general manager of the Securities Industry Association, commented, ''Although we continue to be in favor of quite open competition on equal terms, we think this is against the spirit and intent of the Glass-Steagall Act.'' Mr. Banky said the actions by the West Coast banks are signs that Congress needs to look at Glass-Steagall as a whole.
The reaction was negative at Merrill Lynch, too. Roger Birk, chairman and chief executive officer of the big broker, said: ''Philosophically we are inclined to favor more competition and less restriction. But we would want to make sure that any move was made under equitable ground rules applicable to anyone, and that we don't get a further tilting of the playing field.''
Harry Jacobs, chairman of Bache Halsey Stuart Shields Inc., says he believes that over the next few years the Glass-Steagall Act will crumble. ''The lines of demarcation between all kinds of institutions, commercial banks or savings banks or securities firms, will erode,'' he predicts. The firm is now owned by the Prudential Insurance Company. Like Banky, Mr. Jacobs believes that either the courts or Congress should look at Glass-Steagall again.
But not everyone views banks getting into the brokerage business in a negative light. The entrance of the nation's largest bank ''doesn't bother me,'' admits Leslie Quick Jr., a partner in Quick & Reilly, a discount brokerage house. He continues: ''I think the brokerage business is a personal business, and it's been my experience with the banks that I've had a tough time getting a check cashed, let alone get some stock. Unless they change their modes of operations, it won't work too well.''
The intended purchase of Schwab highlights a number of trends in the securities business. First, there is the purchase of securities firms by larger, more diversified financial services companies. Examples of this are Prudential's purchase of Bache, the American Express acquisition of Shearson Loeb Rhoades, and Sears' purchase of Dean Witter Reynolds.
Second, there is a trend toward broker-banker cooperation. For example, Fidelity, a Boston mutual fund management company, and MasterCard are jointly developing an account that automatically sweeps surplus funds into a money market fund. And Fidelity is also working with the Mid-America Bankers Service Company, a consortium of 6,700 banks, to create a financial management account similar to Merrill Lynch's cash management account. In its latest arrangement with Security Pacific Bank, Fidelity will provide the back office services, trading abilities, and computer systems. The bank, in turn, says it will compensate the broker for its services.
Finally, the Schwab purchase is part of a trend toward an amalgamation of the discount brokerage business. According to Mr. Quick, there are 137 discount brokers in the United States. Most of them are single-office discounters, operating in one city. Fidelity recently purchased Source securities, however - reportedly for about $5 million - and Kelly Services, a Houston-based discount broker. These moves were to expand Fidelity's national network.
The maturing of the business has made things a little rougher. Quick says: ''It's not as easy as it was the first few years. Now, I don't know how much growth there will be in the business, particularly when the market is down and volume dries up.''
Despite such concerns, Banky says he is ''100 percent certain'' that if Bank of America and Security Pacific are allowed into the securities business, other banks will follow. And, he believes, the banks with their potential access to low-cost funds will have an advantage over the securities industry.
As could be expected, the initial reaction of the banking industry was positive. Citibank told the Monitor: ''We applaud the move as entirely logical. It should clarify a legal point that could be helpful in achieving a little better parity among companies of all types seeking to provide consumers with financial services.''
Are stocks poised for a big year-end rally? A lot of traders began asking themselves this question last week as the market started to show some signs of life again. The Dow Jones industrial average closed the week at 885.94, a net gain of 33.01 points. Trading was active during the rally.
Behind the surge were falling interest rates. The prime rate was lowered to 153/4 percent by many banks, and analysts expect rates to fall again this week as the economy continues to sag.
Most traders focused on the Marathon takeover last week. Although Mobil topped US Steel's offer with a $126-a-share bid for 51 percent of Marathon, analysts said they expected US Steel to make another offer early this week. Rumors persist that others will enter the high-stakes bidding, which is now worth $6.5 billion.