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December 1, 1999

Glass-Steagall: Traders Unfazed as Walls Come Down

By William Hoffman

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  • Glass-Steagall: Traders Unfazed as Walls Come Down
  • Page 2

The media hailed it as the most important financial reform since the 1930s. Bankers cheered, saying it will remove outdated shackles on American global competitiveness. Congress and President Clinton congratulated one another on the successful conclusion of a half-decade of battles and negotiations.

And how did traders greet the passage of the Financial Services Act of 1999? "I don't think we've had three telephone calls on the subject," said Lee Korins, president of the Security Traders Association.

Traders could be forgiven for being more concerned with Y2K and its summer's sequel: the conversion of stock prices from fractions to decimals. "We got some comment from people," Korins said, "but not a tremendous amount of concern. Because everybody knew Glass-Steagall was coming down; it was just a matter of when."

Glass-Steagall, the Depression-era prohibition on bank holding companies buying securities firms and insurance carriers, as well as the reverse, is among the best-known icons shattered by what Capitol Hill insiders refer to as the "Gramm-Bliley-Leach" alliance (for the three congressmen who shepherded the bill this year.)

But observers agree that traders in particular, and stock markets generally, will be profoundly changed by the huge new law, and sometimes in unexpected ways.

"There will be mergers" of banks with securities firms, said Catherine Pulley, spokesperson at the American Bankers Association, here in Washington. Banks will be able to broker, trade and deal securities, noted Sally A. Miller, general counsel at the ABA Securities Association, an affiliate in Washington of the American Bankers Association. Banks currently buy securities through networking arrangements and as trustees for depositors, Miller said. Some have merged with large equity trading houses and investment banks. Soon, more customers will be able to buy securities at the same bank where they arrange car loans. And, as U.S. finance firms begin to flex their competitive muscle in international markets, the Securities Industry Association said foreign companies might move into newly competitive U.S. markets.

Traders in some fields can expect their numbers to be reduced once the expected wave of mergers takes hold, said Robert W. McLeod, professor of finance at the University of Alabama in Tuscaloosa. McLeod has followed the modernization debate through its many twists and turns.

Most analysts agree that bank holding companies will be among the most aggressive filers for the new financial holding company' status that enables consolidation, McLeod said. "If commercial banking is the dominant culture that is created [by mergers], there will be a move toward that type of culture" in the securities firms that have merged with a bank entity, McLeod said.

That means an acceleration of the trend in broker compensation away from commissions per transaction, and toward fees based on assets under management, the finance professor observed. (Brokers will record fewer commissions per transaction, but do more fee work, he predicted.) Brokerages are already advertising "one fee

for all transactions," McLeod noted.

As reforms are phased in over the next 18 months, barring last minute surprises, traders' compensation arrangements could be subject to change, according to McLeod.