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Corporate Research E-Letter No. 9, February 2001

by Philip Mattera

Once the epitome of security and stability, the U.S. banking industry has undergone a remarkable transformation over the past three decades. It has faced a series of crises but managed not to fall into the abyss. It succeeded in shattering federal regulations that limited its activities, opening the way for banks to morph into financial supermarkets. The big bank holding companies have been gobbling up their rivals at an amazing rate, while trying to deflect criticism of their policies in poor communities.

The safe and comfortable life of banks started to disappear in the 1970s, with events such as the collapse of Franklin National Bank and the growing realization that third world countries might not be able to make good on the huge volume of bank loans that had been bestowed on them by their first world benefactors. The 1980s saw the virtual meltdown of the savings and loan industry and of numerous commercial banks that had gone overboard in their real estate and energy lending. The huge bailout launched by the administration of Bush I saved the day while rewarding many of those wheeler dealers who had caused the problems in the first place.

Once the crisis atmosphere was lifted, the banking industry moved full speed ahead in its quest for the holy grail: the abolition of federal regulations barring banks from entering the securities business. This rule, embodied in the Glass-Steagall Act of 1933, was not an arbitrary exercise of government power. It was an attempt to restore stability to the financial world after the 1929 stock market crash--the culmination of a speculative boom fueled in large part by bank lending for margin-account stock purchases.

Despite the enormous financial instability of the 1970s and 1980s, the banking industry argued that the Glass-Steagall restrictions were no longer necessary. It took a while, but federal policymakers finally bought this notion. In October 1999 Congress and the Clinton Administration reached agreement on a plan to repeal Glass-Steagall and other rules, giving banks access to the insurance as well as the securities business. That step in effect legitimized the $72 billion merger of Citicorp and Travelers Group (parent of Salomon Smith Barney) in 1998, which had brought together a huge bank holding company, an insurance giant and a major securities firm. Pressure from Citigroup, the company created by that merger, played a significant role in getting the federal government to act.

One of the sideshows in the overhaul of federal financial regulation was a battle over the future of the Community Reinvestment Act. Since its passage in 1977, the CRA had been an invaluable tool for community activists in pressuring banks to end the practice of disproportionately denying loans to customers in poor and minority areas. Rather than expanding the scope of the CRA, as activists had proposed, the Financial Services Modernization Act of 1999 cut back on oversight and imposed new reporting requirements on community groups.

As bank holding companies and securities firms move into new areas of business, many of them have ended up in some of the most unsavory parts of the financial services industry. Once they shunned poor customers, but now they are flocking to what is euphemistically known as sub-prime lending: the business of providing money at exorbitant interest rates to low-income borrowers with less than perfect credit ratings. Over the past year consumer advocates have been highlighting the growing sub-prime lending role of companies such as Citigroup and Bank of America, which obtain capital for these activities from underwriting carried out by the likes of Lehman Brothers and Merrill Lynch. Citigroup's purchase of Associates First Capital, a large sub-prime lender that has been the subject of a great deal of criticism for its business practices, has heightened the controversy. Some sub-prime lending falls into the category of predatory lending: fraudulent (or at least deceptive) marketing of high-interest mortgage loans, mainly to elderly customers who often end up losing their homes.

Another dubious initiative of the financial services industry has been the campaign to "reform" the laws governing personal bankruptcy. The industry, arguing that it is too easy for consumers to declare bankruptcy and wipe out their debt, has been calling for changes that would expand the ability of creditors to recoup their money. Congress passed such a measure last year, but it was vetoed by President Clinton in December. The new Administration is likely to be much more sympathetic to such legislation.

In the meantime, merger mania continues unabated in the banking world. Two of the most prestigious names among the New York money center banks--Chase Manhattan and J.P. Morgan--recently completed their union. Large regional banks are rushing to swallow their competitors to avoid becoming takeover bait themselves. Bank of America and Wells Fargo, each with retail banks in more than 20 states, are well on their way to achieving the industry's dream of true national banking. (The 1999 purchase of Bankers Trust by Germany's Deutsche Bank shows that the trend is international as well.) The dream of many low-income people--to have access to a full range of financial services at a reasonable cost--seems a lot less imminent.

25 Largest U.S. Bank and Thrift Holding Companies 
Ranked by Total Assets as of 9/30/00 
(in thousands of dollars)

1. Citigroup Inc.	804,286,000
2. Bank of America Corp.	671,725,000
3. Chase Manhattan & Co.*	425,816,000
4. Bank One Corp.	283,373,000
5. J.P. Morgan & Co.*	281,681,000
6. First Union Corp.	246,640,000
7. Wells Fargo & Co.	241,119,000
8. Washington Mutual	190,780,150
9. FleetBostonFinancial Corp.	179,093,000
10. SunTrust Banks	100,546,052
11. HSBC USA	87,064,425
12. U.S. Bancorp**	86,349,000
13. KeyCorp	85,500,000
14. National City Corp.	85,045,875
15. Bank of New York Co.	75,409,000
16. Firstar Corp.**	74,506,369
17. Wachovia Corp.	72,020,228
18. PNC Financial Services Group	69,884,000
19. State Street Corp.	64,979,000
20. Golden State Bancorp	60,560,411
21. BB&T Corp.	56,671,181
22. Golden West Financial Corp.	52,365,381
23. Mellon Financial Corp.	45,337,000
24. Fifth Third Bancorp	44,395,900
25. SouthTrust Corp.	44,326,262

Source: American Banker, February 15, 2001

* Chase Manhattan and J.P. Morgan merged on January 2, 2001 to form J.P. Morgan Chase & Co. 
** U.S. Bancorp and Firstar are scheduled to merge in late February 2001

Top Ten Originators of U.S. Residential Mortgages in the 3rd Quarter of 2000, Ranked by Market Share

1. Chase Manhattan Mortgage	7.12%
2. Wells Fargo Home Mortgage	6.45%
3. Countrywide Home Loans, Inc.	5.64%
4. Washington Mutual	4.75%
5. Bank of America Mortgage	4.43%
6. Cendant Mortgage	2.27%
7. ABN AMRO Mortgage	2.26%
8. Fleet Mortgage	2.23%
9. PNC Mortgage*	2.17%
10. CitiMortgage, Inc.	2.12%

* PNC Mortgage has been acquired by Washington Mutual.

Source: National Mortgage News, November 13, 2000

Thumbnail Sketches of the 15 Largest U.S. Bank Holding Companies

CITIGROUP INC. (headquarters: New York City) 
2000 profits: $13.5 billion 
Citigroup is the financial powerhouse formed by the 1998 merger of Citicorp and Travelers Group. Its Citibank subsidiary claims 20 million customers in 42 countries. In addition to being the largest U.S. bank holding company, Citigroup is a major force in money management, insurance, credit cards and stock brokerage (the latter through its subsidiary Salomon Smith Barney). Citicorp was a pioneer in the expansion of commercial banks into new businesses and new parts of the world, but it needed a capital infusion from a Saudi prince in the early 1990s to regain its stability after being hit with a wave of problem loans. Citigroup, already the subject of frequent criticism for lax controls on alleged money laundering by its banking customers, has come under increased scrutiny by community activists because of its acquisition of Associates First Capital, a controversial consumer finance company.

BANK OF AMERICA CORP. (Charlotte, NC) 
2000 profits: $7.5 billion 
Bank of America Corp. is the latest incarnation of an institution that began as a neighborhood bank in San Francisco in the early 1900s and by the 1950s was one of the country's largest financial institutions. The current company is the result of the 1998 takeover of BankAmerica Corp. by upstart NationsBank Corp., which during the 1980s transformed itself from a modest North Carolina institution to a leading force in interstate banking. Under the brash leadership of Hugh McColl Jr., NationsBank swallowed up the likes of C&S/Sovran, Boatmen's Bancshares and Barnett Banks before turning its sights to BankAmerica. McColl adopted the Bank of America name but kept the combined company's headquarters in Charlotte, which is now one of the major banking centers of the country. With more than 4,000 banking offices in 21 states and the District of Columbia, the new company claims to have a business relationship with one out of three U.S. households and 80 percent of the Fortune 1000 businesses.

J.P. MORGAN CHASE & CO. (New York City) 
2000 profits: $5.7 billion 
This new holding company was created when the merger of two of the legendary names of U.S. banking--Chase Manhattan Corp. and J.P. Morgan & Co.--took effect at the beginning of this year. The combined company has assets in excess of $700 billion and operations in more than 60 countries. Chase Manhattan, long known as the Rockefellers' bank, had previously merged in 1996 with Chemical Bank, which had taken over another major New York bank, Manufacturers Hanover Trust, in 1991. Chase acquired Silicon Valley investment bank Hambrecht & Quist in 1999. J.P. Morgan, parent company of Morgan Guaranty Trust, blazed the way for commercial bank holding companies to move into investment banking functions such as underwriting, but it did not play a significant role in the initial public offering boom of the 1990s.

BANK ONE CORP. (Chicago) 
2000 loss: $511 million 
Bank One Corp. was created in 1998 as a result of the merger of Banc One Corp. and First Chicago NDB Corp. The company provides retail banking services in 14 states in the Midwest, Southeast and Southwest. Through its subsidiary First USA Bank NA, it is a leading issuer of credit cards throughout the United States, but this part of the company has been a major trouble spot in recent years.

FIRST UNION CORP. (Charlotte, NC) 
2000 profits: $92 million 
First Union, which provides banking services along the eastern seaboard from Connecticut south to Florida, has branched out from its North Carolina roots by means of some 80 acquisitions since 1985. It expanded its reach into the northeast through the purchase of Philadelphia's CoreStates Financial Corp. in 1998. That same year it acquired The Money Store, a consumer finance company, and the Wheat First Butcher Singer brokerage firm. The Money Store turned out to be an albatross for First Union, which last year dismantled the operation.

WELLS FARGO & CO. (San Francisco) 
2000 profits: $4.0 billion 
The company now known as Wells Fargo is the product of the 1998 takeover of the old Wells Fargo--which started as a Pony Express operation in the mid-19th Century--and Norwest Corp., which began as a regional bank in the Upper Midwest and embarked on an aggressive acquisition drive in the early 1990s. Although Norwest was technically the surviving entity, it adopted the Wells Fargo name and its stagecoach trademark. The new Wells Fargo provides banking, insurance, investment, mortgage and consumer finance services from almost 6,000 stores and other distribution channels. It provides retail banking services in 23 states, mostly west of the Mississippi, and home mortgage services throughout the country. Last March Wells Fargo purchased Ragen MacKenzie Group, a Seattle-based full-service brokerage firm, and last October it completed the purchase of First Security Corp., one of the two leading bank companies in Utah.

WASHINGTON MUTUAL (Seattle) 
2000 profits: $1.9 billion 
Washington Mutual is the largest thrift holding company in the United States. Though based in Washington State, the largest portion of its business is in California, thanks to two huge acquisitions: Great Western Financial Corp. and H.F. Ahmanson & Co. (parent of Home Savings of America). The company's other main areas of operation are Washington, Oregon, Florida, Texas, Utah and Montana. Its commercial banking business operates in Washington and Oregon under the name WM Business Bank (formerly Western Bank). Washington Mutual recently completed the acquisitions of Bank United Corp. of Texas and the residential mortgage banking operation of PNC Financial Services Group.

FLEETBOSTON FINANCIAL CORP. (Boston) 
2000 profits: $3.4 billion 
This New England financial behemoth is the result of the 1999 merger of Fleet Financial and BankBoston. The combined company operates about 1,200 branches in the Northeast and is in the process of acquiring Summit Bancorp, which has some 500 branches in New Jersey, Pennsylvania and Connecticut. FleetBoston also owns discount brokerage Quick & Reilly and Robertson Stephens, a San Francisco-based investment bank specializing in high-tech initial public offerings.

SUNTRUST BANKS (Atlanta) 
2000 profits: $1.3 billion 
SunTrust operates more than 1,100 branches in six states--Alabama, Florida, Georgia, Maryland, Tennessee and Virginia--plus the District of Columbia. SunTrust subsidiaries provide mortgage banking, commercial and auto leasing, credit-related insurance, asset management, discount brokerage and investment banking services. In 1998 SunTrust acquired Equitable Securities and Crestar Financial Corp., a regional banking powerhouse in the mid-Atlantic and Southeast.

HSBC USA (New York City) 
1999 profits for parent company: $5.9 billion 
HSBC USA (formerly Marine Midland) is the U.S. subsidiary of London-based HSBC Holdings PLC, one of the world's ten largest banks, with 6,000 offices in more than 75 countries, including those of the Hongkong and Shanghai Banking Corp. The U.S. operations, focused in New York State, ballooned as the result of the acquisition of Republic New York Corporation in December 1999.

U.S. BANCORP (Minneapolis) 2000 profits: $1.6 billion U.S. Bancorp operates some 1,000 banking offices in 17 states in the Upper Midwest, Northwest and West Coast. In 1997 it acquired Piper Jaffray Companies, a brokerage and investment management firm. Later this month U.S. Bancorp is scheduled to complete its merger with Firstar Corp., a Milwaukee-based bank holding company with 1,200 banking offices in 13 states in the Midwest, Arizona and Florida. The combined company will take the U.S. Bancorp name.

KEYCORP (Cleveland) 
2000 profits: $1.0 billion 
This company has retail banking operations in 13 states. It also provides brokerage and investment banking services through McDonald Investments. Last year Keycorp acquired Dallas-based Newport Mortgage Co.

NATIONAL CITY CORP. (Cleveland) 
2000 profits: $521 million 
National City operates more than 1,200 banking offices in Ohio, Pennsylvania, Indiana, Kentucky, Illinois and Michigan as well as more than 350 mortgage offices throughout the United States. In 1999 National City acquired First Franklin Financial Companies, an originator of non-conforming mortgages. Its subsidiary National City Processing provides credit card and airline ticket processing services.

BANK OF NEW YORK CO. (New York City) 
2000 profits: $1.4 billion 
Bank of New York is a force in the suburbs around New York City, with a network of about 350 branches in the tri-state area. It is also a leader in fee-based businesses such as securities servicing. In 1998 Bank of New York made a hostile takeover bid for Mellon Bank Corp., but it dropped the idea after being spurned by the Pittsburgh bank holding company.

WACHOVIA CORP. (Atlanta and Winston-Salem, NC) 
2000 profits: $832.3 million 
This holding company's principal subsidiary, Wachovia Bank, has 700 offices in Florida, Georgia, North Carolina, South Carolina and Virginia. Within the next few weeks Wachovia is scheduled to complete the acquisition of Republic Security Financial Corp. of Florida.

Information sources: To obtain financial and ownership information on any bank in the country, consult the National Information Center website at <www.ffiec.gov/nic/default.htm>. To obtain information on the Community Reinvestment Act ratings of banks, consult the Interagency CRA Ratings page at <www.ffiec.gov/cracf/crarating/main.cfm>.