
DATE: Sunday, May 4, 1997                   TAG: 9705030859

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY TOM SHEAN, STAFF WRITER 

                                            LENGTH:  162 lines

DEPRESSION-ERA WALLS ARE BEGINNING TO CRUMBLE: COMMERCIAL AND INVESTMENT BANKING

By 1933, the carnage was everywhere. Tens of millions of Americans were out of work. Thousands of banks had closed their doors. Business was grinding to a halt.

Trying to rejuvenate the economy, President Franklin D. Roosevelt's administration struggled to bolster confidence in the banking system.

Congress cooperated by passing the Glass-Steagall Act. The landmark measure barred commercial banks from underwriting and trading securities to counter some of the speculative excesses that had led to the stock market crash of 1929.

Sixty-four years later, the once-solid wall between commercial banking and investment banking is crumbling.

As banks seek footholds in the securities industry, businesses and individual investors are likely find a broader array of services from companies offering checking accounts, certificates of deposit and loans. But the erosion of the Depression-era distinction between commercial banks and investment banks raises questions about the way financial institutions should be regulated.

What sorts of safeguards will be needed to protect the deposit-insurance system?

Should commercial banks be allowed to pursue nonfinancial activities?

Should nonfinancial companies like Microsoft and General Motors be allowed to buy commercial banks with federal insurance of their deposits?

The nation's banks aren't waiting for Congress to come up with a replacement for Glass-Steagall. Southern National Corp. mounted the latest assault Thursday. The Winston-Salem-based parent of BB&T banks in Virginia, North Carolina and South Carolina announced plans to buy the Richmond-based securities firm Craigie Inc.

That came on the heels of a much larger deal. In early April, New York-based Bankers Trust agreed to buy Alex. Brown & Sons., a Baltimore-based investment banking firm known for its work with health care and technology companies. Bankers and analysts say they expect to see many more of these combinations materialize.

Several banks, including some in North Carolina and Virginia, have already established themselves in securities underwriting and trading.

NationsBank Corp., which has assembled a large securities operation in Charlotte, said earlier this year that it would like to buy an investment banking firm.

First Union Corp., another Charlotte-based banking company, said it plans to expand into the underwriting of corporate stocks later this year. Like NationsBank, First Union already underwrites several types of debt securities for corporations and municipalities.

Crestar Corp., the Richmond-based parent of Crestar Bank, received permission from the Federal Reserve in April to begin underwriting certain types of debt securities. Crestar said last week that it hopes to gain broader underwriting powers from the Fed and hasn't ruled out acquiring a securities firm.

``We're interested in any avenues to grow,'' said Thomas D. Hogan, group executive vice president for the company's Crestar Investment Group.

KEEPING CUSTOMERS

One reason for this interest in securities underwriting and trading is bankers' determination to hold onto corporate customers that would otherwise use investment banking firms.

By expanding their menus of securities-related services, banks also expect to generate additional fee income. With the spreads between what they pay for deposits and what they earn from loans narrowing, banks have been pursuing sources of non-interest income more aggressively.

At First Union, fee income from capital markets activity has quadrupled since 1994 to $479 million last year, said spokesman Mark Folk.

Commercial banks have complained for years that their industry has steadily lost lending opportunities to unregulated, nonbank competitors, such as General Electric Co.'s GE Capital subsidiary.

Proposed revisions to the Glass-Steagall Act have failed to emerge from Congress, but bankers have gotten a favorable reception from the Federal Reserve. Since the late 1980s, the Fed has allowed more than three dozen financially healthy banks to engage in limited amounts of securities underwriting. Last October, the Fed raised its limits, which prompted some banks to begin shopping for securities firms.

LOOKING TO GROW

One that has been looking is NationsBank. In an interview with a banking newsletter earlier this year, NationsBank Chief Executive Hugh L. McColl Jr. described his expansion plans.

``Our preferred route is to buy small and build on it,'' McColl told the SNL Securities' newsletter Bank Mergers & Acquisitions Scoreboard. ``The second route would be to create a very strong alliance with somebody. . . . We'd like to buy an equity house. Ideally, it would be a house inside our region.''

It wouldn't be the first time that NationsBank has attempted to expand its securities activity by buying an existing operation. Four years ago, it paid $225 million for Chicago Research and Trading Group Ltd., a Chicago-based concern that traded options and futures contracts on exchanges around the world.

First Union, meanwhile, has concentrated on building its securities underwriting and trading operation by hiring veterans of Wall Street securities firms. To handle the underwriting of corporate and municipal debt and asset-backed securities, its capital markets unit has doubled the 1,800-person work force during the past three years, First Union's Folk said.

Over the next 18 months, First Union's capital markets unit will add another 60 people to handle the underwriting of corporate stocks, he said.

When announcing its plans to buy Craigie, Southern National said last week that it needed a securities firm because some of its corporate and municipal customers were being courted by investment bankers with services that Southern National's banks didn't have.

By acquiring Craigie, Southern National also will have another source of investment products to sell to individuals, said Vernon Plack, a banking analyst with the securities firm Scott & Stringfellow Inc. in Richmond.

UNREALISTIC EXPECTATIONS'?

Plack, however, questioned whether the pursuit of securities underwriting and trading will produce the results that banks expect. Investment banking, he said, remains a cyclical activity, and the hefty profits generated in recent years won't be sustained.

``Banks have plenty of money to spend,'' Plack said, ``but in my opinion, there's a level of unrealistic expectations.''

Before accepting the offer from Southern National, Craigie's board of directors had entertained overtures from several prospective buyers. One reason the board decided to consider the offers and to sell the company was the intense competition that Craigie faced from much larger investment banking operations, said Allen Mead Ferguson, its chief executive.

One problem for an acquisition-minded bank is finding a suitable partner at a reasonable price. Another is integrating a line of business with a more aggressive and freewheeling culture. NationsBank gained a presence in the futures-and-options trading arena with Chicago Research & Trading but later acknowledged that this unit hasn't produced the results it expected.

Bankers, analysts and others predict that some of the banks rushing into the securities industry will have difficulty integrating the operations they buy.

``It's not at all certain that everything will be an uproarious success,'' said William W. Sihler, a banking professor at the University of Virginia's Darden Graduate School of Business Administration.

``Even with more consolidation, there will still be plenty of opportunities for niche players. There's still a question as to whether the public wants one-stop banking.'' ILLUSTRATION: Color drawing by JOHN EARLE, The Virginian-Pilot

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DEFINITIONS\

BANKS take deposits from the public, make loans, pay checks and

perform other financial services. By offering savings accounts,

checking accounts and certificates of deposit, banks gather funds to

lend to businesses and consumers. They derive much of their income

from the spread between what they pay for money and what they earn

from lending it.

SECURITIES BROKERS are intermediaries between buyers and sellers

of stocks, bonds and other securities. Much of a brokerage firm's

income comes from the commissions it charges when buying or selling

a security. Some banking companies have brokerage subsidiaries.