MERGER HELPS BREACH GLASS-STEAGALL’S WALLS

What’s in the Citicorp-Travelers Corp. merger for the average consumer? In the short run, not much. In the longer term, the elimination of the inefficiencies caused by the Glass-Steagall Act, a broader array of financial services under one roof, and maybe competition bringing prices down.

Most Wall Street watchers pondering the $83 billion merger of Citicorp and Travelers Corp. wonder how soon the respective chief executives, John Reed and Sandy Weill, will be at each other’s throat. But the more important question is: What’s in it for customers and clients of each organization, and other financial service consumers?

The customer is unlikely to see any significant benefit from this merger for at least a year, or possibly two. First, there are likely to be many difficulties yet to be ironed out in combining the two companies. The deal was negotiated in only six weeks, so there are no doubt myriad details yet to be settled.

Outside of mutual funds, the two companies offer relatively few overlapping products and services. That means there may be fewer layoffs and therefore fewer economies of scale.

This does not bode well for immediately lower prices from the new Citigroup.

On the other hand, this merger may be the last nail in the coffin of Glass-Steagall, which has artificially hampered the delivery of financial services for 60 years, putting U.S. institutions at an unfair competitive disadvantage to European heavyweights. Glass-Steagall reform seemed dead for at least this year until this merger was announced. Now it may have a second chance in Congress.

The critics of Glass-Steagall reform argue that removing its barriers between banking, investment banking, insurance and mutual funds will make the financial system less stable, and may expose unsophisticated savers to pressure to buy unsuitable investments.

But it is not Glass-Steagall’s barriers that have given the U.S. a stable financial system, it is careful oversight by the Federal Reserve, the Securities and Exchange Commission and state insurance commissioners. And the average saver today is far more sophisticated than the saver of 60 years ago when the law was passed.

The reluctance to repeal Glass-Steagall has more to do with limiting competition — and politicians’ desire to preserve campaign contributions — than with any danger to the financial system.

The demise of Glass-Steagall would be the merger’s long-term gift to the consumer. It would make possible a broader array of products and services offered at financial supermarkets. That is, greater convenience of the kind found in grocery supermarkets, greater choice for the consumer, and lower prices. You can’t knock that.