2

Against this background of keen competition in the securities

industry, there are four broad public policy considerations which

must be weighed against any possible value of additional bank competition in securities activities:

(i) Basic conflicts of interest between performance of regular

bank functions and performance of certain securities
activities far outweigh any possible advantage of additional
competition from banks in an already highly competitive
securities industry. Some of these basic conflicts of
interest were primary reasons for the original adoption
of provisions in the Glass-Steagall Act prohibiting banks
from engaging in the underwriting of municipal revenue
bonds or corporate securities and recent experience with
New York City obligations has emphasized again the validity,
desirability and importance of continuing those prohibitions.V

The Supreme Court of the United States in ICI v Camp,
Comptroller of the Currency (1971), 2/ in concluding that

1/ After seven major New York City banks were among the co-managers in underwriting a $1 billion issue of bonds by the Municipal Assistance Corporation for the City of New York on July 2, 1975, subsequent reports indicated that those banks had been large buyers of the MAC bonds. An article in the August 28, 1975, Washington Post, reporting that representatives of a group of major New York City banks rejected a plan for major banks and other financial institutions to commit to purchase an additional $1 billion of MAC bonds from New York State, quoted a spokesman for one major bank:

"After the last underwriting, the baskets are pretty full
up with MAC bonds. We can't have New York securities in
our portfolio to the exclusion of everything else."

An article in the November 3, 1975, issue of the Wall Street Journal stated that New York City banks are estimated to hold $800 million of MAC bonds (in addition to $1 billion of New York City obligations).

3

bank operation of a collective investment fund would
violate the Glass-Steagall Act, specifically pointed

out that the Act reflected a determination that other
factors outweighed policies of competition and conve-
nience. The Court stated:

"The Glass-Steagall Act reflected a determination
that policies of competition, convenience, or
expertise which might otherwise support the
entry of commercial banks into the investment
banking business were outweighed by the "hazards"
and "financial dangers" that arise when commercial
banks engage in the activities proscribed by
the Act."

"Another potential hazard that very much concerned
Congress arose from the plain conflict between
the promotional interest of the investment banker
and the obligation of the commercial banker to
render disinterested investment advice."

"In sum, Congress acted to keep commercial banks out of the investment banking business largely because it believed that the promotional incentives of investment banking and the investment banker's pecuniary stake in the success of particular investment opportunities was destructive or prudent and disinterested commercial banking and of public confidence in the commercial banking system."

Basic conflicts of interest are apparent when banks diversify into securities activities (i) in underwriting securities, as seller against investor for investment or trust accounts and (ii) in automatic investment plans as buyer or seller for participants against sellers (or concurrent buyers) for investment or trust accounts. Even more fundamental there is a conflict of interest between the interest of the trust

- 4

department and the commercial department of a bank, as illustrated

by some of the situations described in "Conflicts of Interest:

Commercial Bank Trust Departments": 3/

One

"Accomodation may also be expected by a customer threatened
with a takeover or in need of assistance in connection with its
own takeover efforts. In the former case, the customer may
press the bank to refuse to tender its stock and even to
acquire more stock in order to head off the merger attempt;
and on a number of occasions, the banks have complied.
major trust bank, which managed the pension funds and held
about 5 percent of the stock of a good commercial customer,
was faced with the attempt of a conglomerate to take over the
customer. The bank bought the customer's stock for the
customer's own pension fund accounts, even though the trust
department did not like the stock. In several cases described
to the author, trust department tenderings of large blocks of
stock were "sweetened" by making the bank the exchange offer
agent in the transaction."

"In the 1969 effort of Electronic Data Systems (EDS) to acquire
Collins Radio Company, two large New York City trust banks
were in an unenviable conflict position, both being major cre-
ditors of Collins and together owning 23 percent of Collins'
outstanding shares in their fiduciary capacity. If the tender
offer had been advantageous to the trust accounts, as it often
has to be in order to elicit the necessary response from share-
holders, the simultaneous threat to the commercial relationships
would place the banks in a severe conflict situation. The
two banks cooperated with the Collins management in defea-
ting the takeover bid by refusing to tender and changing
the credit agreements so that the outstanding loans became
due immediately upon the acquisition of control of 30 per-
cent of Collins' stock by a single owner. The banks claim
that the commercial and trust departments operated in total
isolation from one another in arriving at their decisions
in this case, and that the trust decisions to reject the
offer were based on the disparity in size and price-earnings
ratios of the two companies."

3/ Conflicts of Interest: Commercial Bank Trust Departments, by Edward S. Herman, a Report to the Twentieth Century Fund Steering Committee on Conflicts of Interest in the Securities Markets, 1975.

- 5

(11) Concentration of economic power in banks and their

trust departments has grown alarmingly, not only in

total deposits,

assets and percentage of ownership

in large companies, but in impact of their orders to

buy and sell securities in securities markets.

Thus,

the 10 largest U.S. banking institutions at the end of

· 6

1973 held 29% of total bank deposits of $698 billion."/
Trust departments hold approximately $350 billion of
assets in various fiduciary capacities for the benefit

of individuals.5/ Seven large New York banks in 1972
held: 6/

17% of the common stock of Mobil Oil /
11% of the common stock of Ford Motor Co. 8/
9/
12.9% of the common stock of Union Carbide.
20% of the common stock of United Aircraft 10/
19.8% of the common stock of Xerox Corporation
11/
30% of the common stock of American Airlines 12/
17% of the common stock of Safeway Stores
13/

4/

Remarks by Senator Proxmire when he introduced S. 2721, proposed Competition in Banking Act. Congressional Record of December 1, 1975, p. S20790.

5/ Testimony by Ray F. Myers, President of Trust Division, American Bankers Association, before Securities Subcommittee of Senate Committee on Banking, Housing and Urban Affairs, December 10, 1975. 6/ Disclosure of Corporate Ownership. December 27, 1973. Prepared by Subcommittee on Intergovernmental Relations and Budgeting, Management and Expenditures of the Senate Committee on Government Operations. Based on responses by corporations to an inquiry from Senator Lee Metcalf. Holdings by trust departments of banks and other financial institutions indicate aggregate holdings without any indication as to the voting power inherant in such holdings.

17

Id. at p. 30.

8/ Id. at p. 35.

9/ Id. at p.

39.

10/ Id. at p. 44.