One Toe over The Line

The Fed is on its way to giving banks an invitation to shoot craps with the taxpayer's money." So said Michigan Democrat John Dingell, chairman of the House Energy and Commerce Committee, with a touch of hyperbole. The object of his barb: a Fed ruling last week that will permit five leading bank holding companies -- Bankers Trust New York, Chase Manhattan, Citicorp, J.P. Morgan and Security Pacific -- to buy and sell corporate bonds. The decision will enable the financial institutions to move, within strict limits, onto the turf of Wall Street firms, which have been encroaching on the banking business. Said Richard Huber, an executive vice president at Chase Manhattan: "We're very pleased. We applaud it."

The Fed acted in part because Congress failed last year to pass legislation that would reform the 1933 Glass-Steagall Act, which erected walls between the banking and securities businesses. The landmark statute is widely viewed as outdated, but many legislators, including Texas Democrat Henry Gonzalez, chairman of the House Banking Committee, contend that the Fed has wrongly usurped congressional powers to oversee the banking industry.

Leading the outcry against the Fed's move is the Securities Industry Association, which represents most investment firms. One reason is that the increased competition will probably reduce profits in an industry that already operates on thin margins.

What particularly alarms the Wall Streeters is the likelihood that the Fed will unleash the banks even more. Says Edward O'Brien, president of the Securities Industry Association: "It represents piecemeal dismantling of the appropriate separation that exists in the financial-services industry -- a system that has worked exceedingly well for more than 50 years." Within a year, the Fed plans to consider whether to allow banks to venture deeper into Wall Street's business by selling stocks as well as bonds. The securities industry may try to block the Fed in court, although previous challenges have failed.