In the wake of a deluge of negative comment letters from the public, the Financial Accounting Standards Board decided last week to rethink how to account for goodwill in its business combination proposal.

The board heard an analysis of the public response to the recommendations of the G4+1’s position paper on business combinations at its March 24 meeting. The international body’s views on pooling and other aspects of business combinations, such as accounting for goodwill, are much stricter and more literal than those in practice in the U.S. today. FASB’s proposal for business combinations is similar, in an attempt to harmonize standards internationally. Currently, companies of virtually any size can merge using the pooling method of accounting, whereas in most other countries, the merging entities must have very similar market capitalizations.

Such was the corporate disapproval of the paper that the board decided to give all of its tentative decisions on goodwill thus far a re-think at the next meeting in which it addresses the issue.

Of the 124 respondents, approximately 40% did not support the G4+1’s position–primarily banks, securities firms and corporations. Almost 30% of the respondents expressed unqualified support for the positions–predominantly academics, public accountants and other corporations. Another approximately 25% of respondents had "qualified" support for the G4+1’s position paper, depending on FASB "fixing" the accounting for goodwill or on FASB retaining the pooling method for mergers of companies of approximately equal size. The re-think will come after the board decides when it is appropriate to use the pooling or purchase method of accounting. That meeting is tentatively scheduled for April 21, with the possibility of having an educational meeting before, perhaps on April 14, according to project manager Kim Petrone.

A House subcommittee passed a bankruptcy reform measure favorable to lenders last week that appears to be more of a vehicle for partisanship than a viable piece of legislation.

The House judiciary subcommittee headed by Rep. George Gekas, R-Pa., approved a measure March 25 after two days of work that has most of the provisions contained in a similar bill which went into conference late last year, but then failed to pass after getting caught up in partisan bickering and the threat of a presidential veto.

And, given the 5-3 partisan vote by which the legislation passed the subcommittee, more of the same lies ahead. A vote on a bipartisan measure scheduled for a Senate Judiciary Committee markup last week was postponed until after Congress returns April 13.

The Gekas bill contains a means test opposed by liberal Democrats and the Clinton administration and none of the consumer protection provisions sought by the administration and Democrats. It would require debtors who make more than $51,000–the national median income for a family of four–to enter into a prepayment plan. It also contains language intended to close a loophole that allows debtors in states with so-called homestead laws to shield cash invested in expensive homes.

However, Gekas did add an amendment that increased the homestead allowance to $250,000 from $100,000.

In the House, Democrats, prodded by the Clinton administration, are demanding strong disclosures and other protections for consumers taking on consumer debt. Sen. Charles Schumer, D-N.Y., a member of both the Banking and Judiciary committees, is leading the charge on the issue in the Senate.

Among the problems facing the bill are that Sen. Phil Gramm, D-Texas, who heads the banking committee, has voiced opposition to the consumer protection provisions.

Equally important, lobbyists said they have learned that the administration plans to embrace the credit card consumer protections as well as financial privacy protection provisions as their own. That would appear to doom both the bankruptcy bill and financial modernization legislation now being considered by both houses. These were scheduled to be announced March 25, but the press conference was postponed due to the bombing of Kosovo.

The House Banking Committee reported out its version of financial modernization legislation late March 23, and the House Parliamentarian apparently granted the House committee a 45-day sequential referral to May 14, obviously slowing the momentum for the bill its supporters are trying to create.

That would doom efforts to deal with the bill in May on the House floor, as optimists had sought. And, in the Senate, Sen. Phil Gramm, R-Texas, chairman of the Senate Banking Committee, told lobbyists at the second meeting in a week that Sen. Trent Lott, R-Miss., majority leader, had asked to meet with him, and Sens. Tom Daschle, D-S.D., minority leader, and Paul Sarbanes, D-Md., ranking minority member of the Senate banking panel, when Congress returns in April.

The purpose of the meeting, Gramm said, is to see what could be done to resuscitate Gramm’s version of the bill. His bill was passed 9-7 on a partisan vote in the Senate Banking Committee, and, as a result, had not been reported out of the committee as of March 25.

The ostensible objection of Democrats is Gramm’s efforts to water down the Community Reinvestment Act mandates imposed on banks. President Clinton wrote a letter promising a veto of the bill based on the CRA provisions in Gramm’s bill even before the panel voted on it.

But that is just the beginning of the bill’s problems. While not directly linked, signals from the Clinton administration are that it will demand that Congress improve financial privacy protections as part of a package of consumer protection provisions it supports. That would virtually end banking industry support for the bill, because ability to use its customer base to market non-banking products is one of the key reasons money center banks are still supporting the bill. In fact, at a meeting of bank lobbyists earlier this month, the Washington lobbyist for Chase Manhattan Bank specifically linked his institution’s support for financial modernization legislation to Congress’s ability to maintain current provisions on financial privacy.

Lawmakers, still incensed by the blows financial markets absorbed from last fall’s near-failure of Long Term Capital Management, are warning that the current oversight system by the Federal Reserve Board may not go far enough to protect investors. Now they are hinting at direct regulation.

Sources said a forthcoming report on derivatives and hedge funds from the President’s Working Group on Financial Derivatives, plus the push toward financial modernization legislation, could encourage lawmakers to attach provisions requiring better supervision by the agencies in the form of a directive, or higher capital levels for banks who engage in hedge fund activities.

"The legislators don’t want blood on their hands," said a banking attorney. She said that House Banking Committee Chairman Jim Leach, R-Iowa, had long used hedge funds as a "soapbox," but now "had some real events to back his position."

The task force, headed by Treasury Secretary Robert Rubin, is expected to introduce its hedge fund report in six weeks, with a report on derivatives to follow this summer.

At a hearing last week of the House Financial Institutions Subcommittee, Leach admonished Federal Reserve governor Lawrence H. Meyer for not having a "cutoff" that would have brought regulators on top of Long Term Capital Management. Leach said the fund was dangerously over-leveraged by a ratio of 30-1.

He said that stress testing was not enough, hinting at restrictions on how much a fund can have leveraged in relation to its capital. "Things change so rapidly," he said. "I am still left with the feeling that there are (hedge fund managers) who are willing to take great risks for short-term profit."

Meyer countered, saying that "leverage is not the same as risk," and that additional disclosures would only give a "false sense of security," but Leach pressed the regulators for more concrete goals for dealing with overleveraged funds.

William J. MacDonough, president of the Federal Reserve Bank of New York, agreed, saying that LTCM got too big and too highly leveraged. He vowed stronger vigilance in the long term. "A new group (of executives) can make the same mistakes, so regulators need to have a longer memory," he said.

American Banker/Bond Buyer Despite all the shouting about e-commerce, electronically-driven financial services are still at a very early stage of their development, according to an official of a wholesale bank in the forefront of serving a full range of financial services providers.

A key component of providing that service is allowing the customer, whether a consumer, a company, a regulator or another financial services provider, to keep track of its money at all times, said Dale Carleton, vice chairman, State Street Corp.

Carleton was among a group representing regulators, academics and private industry who testified on the impact of technology on the delivery of financial services March 25 before the capital markets, securities and government-sponsored enterprises subcommittee of the House Banking Committee.

The most sobering testimony was by Arthur Murton, director, Division of Insurance, for the FDIC.

He said consolidation of the banking industry is blurring the distinction between financial services providers in general, but especially between banks and thrifts. And, he said, the consolidation is creating "megabanks." This has resulted in a concentration of assets and deposits in the country’s largest institutions. Specifically, he said, just seven banking companies hold 25% of domestic deposits.

Technological change is a key driver of this consolidation, he said, but that poses some risks to the FDIC as the deposit insurer. The deposit insurance funds face larger potential losses from the failure of a single large consolidated institution, he said.

"Larger institutions also are more complex and tend to be involved in more non-traditional activities," Murton said. "Very large banks also pose challenges when they are in danger of failing, both because of systemic concerns and because of the operational difficulty the FDIC would face in resolving them."

One key change of electronic banking is that it is spurring growth in cross-border investing, Carleton said. Another is that, "All over the world, finance is becoming oriented toward securities markets. Government control of industry is giving way to private ownership," Carleton said. "Closely owned enterprises that for decades have depended upon relationships with local commercial banks are increasingly going to global markets for finance capital."

Carleton made two other points. In the quest to achieve this end-toend information management and to be a trusted provider of financial information to the markets, a corporate culture of risk management and expertise is critical, he said. By risk management, "we mean traditional market and transaction risk, as well as information risk," he said. "Markets simply will not function unless all market participants have faith in the quality and veracity of the information on which their decisions are based."

At the same time, Carleton said, "The electronic delivery of financial services and information promises great things for U.S. and world capital markets." For example, the development of automated trading systems could enable even more efficient securities trading than is possible today–and more efficient allocation of capital by enabling investors to execute trades that are inhibited today by existing market structures. "Another benefit could be to reduce intra-day volatility by allowing a greater number of intended trades to take place more rapidly and efficiently."

American Banker/Bond Buyer TransPoint, the bill payment and presentment joint venture between Microsoft Corp., First Data Corp. and Citibank, garnered yet another big bank to pilot its Internet bill delivery program: Wachovia.

Under the pilot, 100 of the North Carolina-based bank’s Internet customers will receive and pay their bills on the bank Web site. The bank joins Bank One, Citibank, First Union Corp., InterWest, Key Bank, Mellon Bank Corp., Merrill Lynch, Norwest and Wells Fargo in the pilot. The venture aims to give market leader, Checkfree, a run for its money. Wachovia already uses Checkfree for electronic bill payment, and is reportedly considering piloting bill presentment with the firm also.

In related news, PNC reportedly will also be offering bill presentment to all of its customers through Checkfree by the end of the year. That would make PNC only the second or third bank after First Union Corp. to have on-line bill presentment, depending on if it can beat Bank One Corp. to the market, as reported in Financial Modernization Report’s sister publication, the American Banker. PNC is also getting ready to test bill presentment software from TransPoint.

Analysts have said that although Checkfree has a good product, banks are willing to give TransPoint a shot so as not to be "beholden" to Checkfree. One phrased the situation as banks wanting Checkfree–which has 80% of the market in bill payment with the all-important pay-anyone capability that TransPoint is still working to perfect–not to think it is the only game in town. Pay anyone means a customer can get all of his or her bills on-line through the bank Web sites whether the bank has a connection with the vendor or not.

Earlier this year, Checkfree announced its impending merger with Internet portal Yahoo! Analysts said the combination would be a potent one and tough to beat if banks didn’t have the cash to go out and strike a deal with another major Internet portal to grab the traffic. Although TransPoint’s program is still being piloted, and may develop even better bells and whistles than Checkfree’s, until it can master the pay-anyone technology, it will not be able to compete effectively, sources said.

American Banker/Bond Buyer Hibernia Corp. has just been granted approval by the Office of the Comptroller of the Currency to establish a de novo operating subsidiary to raise funds to invest in companies.

The new entity, called Hibernia ACP, LLC., is structured as a general partnership and has a goal of raising $20 million from corporations and wealthy individuals to invest in mezzanine debt, according to a company spokesman. The companies to be invested in will be located in the Gulf-area states, especially Louisiana, home base of Hibernia.

While commercial banks are not strangers to these types of funds, they have largely been the domain of investment banks. Nevertheless, the fund represents an opportunity for Hibernia to start up a new business and please its existing clients at the same time.

"Here’s an opportunity to stay with that (existing client company) that may be looking to go public at some point. It provides "angel" funding for a company with maybe $10 million in sales. They tend to be operating companies–not start ups–that need some capital to grow," said R. Harold Schroeder, an analyst and Keefe, Bruyette & Woods Inc. He added that the fund also provides the bank’s corporate and wealthy individual investor clients with another investment opportunity.

"First Commerce, which was Hibernia’s competitor across the street, had a fund like this before Hibernia bought it," Schroeder said. o J.H. & E.W.

A decision by the Office of the Comptroller of the Currency to allow Fleet Financial Group to provide services for its small-business customers over the Internet reopens an issue that was believed to limit the authority of national banks to offer data processing services to retailers.

The 11-page approval letter to Fleet by OCC Chief Counsel Julie Williams reopens an issue long thought to be closed by a court decision.

David W. Roderer, a Washington lawyer with Goodwin, Procter & Hoar, said that in approving the application, the agency noted the so-called "subordination requirements"–which generally limit non-banking data processing services–are not applicable. The agency said that the level of revenues from "associated traditional bank products" offered through the Web site are expected to greatly exceed those relating directly to the Web site services, and so the limits don’t apply inasmuch as "the Web site hosting activity is part, rather than incidental to the business of banking, and is thus not subject to scope limitations that apply to some incidental activities."

The data processing issue deals with a 1979 decision by a panel of the 9th U.S. Circuit Court of Appeals, based in San Francisco. Williams said in her interpretation that a 1995 Supreme Court ruling superseded the 1979 decision. The 9th Circuit decision limited the authority of national banks to offer data processing services to retailers.

The 1995 Supreme Court decision dealt specifically with annuities, but added that the OCC should be granted deference in determining whether a specific product was banking or closely related to banking. Williams argued that the 1995 ruling held that the "business of banking" is an evolving concept not limited to the powers enumerated under the National Bank Act.

The decision, which allows Fleet to help its small business customers to market their services through the Internet, is seen as allowing the majority of retail firms to do business on the Internet relatively inexpensively. It also opens an avenue for banks to expand their service offerings and increase their value to customers.

"The latest ruling acknowledges the ability of national banks to offer their small business customers a package of electronic services consisting of three components: retail Web site housing; retail payments processing; and business checking accounts," said Roderer. He also said that in holding that the business of banking encompasses a wide range of "informational services, the OCC "further opens the ever-expanding world of electronic commerce to banks.

"As full participants in developing and providing e-commerce capabilities to their retailer customers, banks might be expected to play a major role in affording efficient access to electronic markets for small businesses that might otherwise be beyond their reach," he said.

"Numerous concerns still need to be addressed, including tying, customer privacy, security and the full array of issues confronting electronic commerce," he said.

Under the approved product program, the bank will charge a one-time set-up fee and a monthly maintenance fee for a package of services that bundles traditional merchant credit card banking services with the software, hardware and technical support necessary for a small business to have its own Web site "able to accept credit card payments in a secure environment," Roderer noted, citing language in the letter.

"Significantly," Roderer said, "the Web site product, with related system support, will not be available as a separate product offering and cannot be purchased without the entire package of associated banking products and services, such as the checking account and merchant credit card relationship."

A true believer in Internet banking and commerce, Marshall & Ilsley Corp. not only seeks to replicate its banking services on-line but the immediacy of a branch and even a neighborly environment in Cyberspace where customers can talk with one another.

M&I’s own banking Web site has all the bells and whistles provided to the banking clients of its technology outsourcing arm, M&I Data Services, as well as the clients of Security First Technologies, the providers of the cutting-edge Internet banking software. What differentiates M&I’s site, however, is its effort to build an on-line community. The bank sees its Web site as a means to get to know its customers better, rather than simply replicating services on-line and cutting down on customer contact.

A year-old program has given 10,000 bank customers their own home pages that can be accessed through the bank’s Web site, a process Garry McCann, manager of on-line banking for M&I Corp., described as "the start of building an on-line community with customers like you would at a branch level." And, although it might seem the point of the Internet is to bring all customers the same level of service, the bank plans to roll out its first site for an individual branch by the end of the year.

"The virtual branch will take them (bankers) down to a level where the customer is communicating with their branch only," McCann said. The benefit of this arrangement is to strengthen relationships, and tie the customer to a banker who can work with his or her individual financial goals. Also, through the virtual branch, customers can learn about events going on at their local branch that they might have only found out about before through fliers in the building itself.

Another new bell the Web site will be rolling out by the end of the second quarter is its on-line brokerage, called MIBROKERONLINE, which will enable customers to trade on-line and see quotes in real-time.

M&I, which is a major outsourcer to community banks, not only sees getting into e-commerce as imperative for its own survival, but for its bank customers, too.

"The primary reason is delivery channels change over time," said Mike Hatfield, senior vice president and secretary of Marshall & Ilsley Corp. "The volume of traditional channels is declining, but Internet and telephone are growing at tremendous rates. If you want to continue to be in the business, we feel that if we get that hookup with e-commerce we can be viable," he said.

The $21-billion-asset bank is not only the biggest independent bank in Wisconsin, but it may become one of the leaders in home banking, following its recent acquisition of Moneyline Express, the e-payment component of Traveler’s Express, which has 20% of that market.

The company is the only other significant e-payment provider besides industry leader Checkfree, which provides a "pay anyone" service. Pay anyone means that a consumer can enter any biller onto his or her bank’s Web site and that party will be paid. Many systems now can only pay parties the bank or provider already have a relationship with.

Add to that last month’s acquisition of ADP’s electronic banking division, expected to close at the end of this month, and M&I has the business banking piece of the e-commerce puzzle. The three products it acquired from ADP, Business Express, FORTExpress and Cash Express, are cash management programs for businesses that are used by 120,000 corporate clients.

The company plans to integrate Moneyline Express’s pay-anyone capability with the ADP products to provide its bank customers with a business-to-business electronic payment service to offer business customers. Before this year’s Moneyline Express purchase, the bank already had 200 banks outsourcing this service, and it’s working to keep the 500 belonging to Traveler’s Express. The two acquisitions are components of M&I Data’s recently created electronic banking division. The business from the ADP purchase is estimated to bring in $40 million in revenue this year; estimates were unavailable for revenue generated from Moneyline Express.

The only piece of the puzzle missing is e-bill presentment, and industry watchers are eagerly watching to see which way M&I goes.

Mike Hayford, executive vice president of corporate development at M&I Data Services, the bank’s technology arm, said the company, for now, is going to focus on absorbing its new purchases. However, it is thinking ahead to develop an e-billing component. "But I don’t believe it will be via the acquisition route. It could potentially be an alliance or partnership, or we’ll build it ourselves," he said.

So why is the ability for a customer to pull up bills on-line all at once important, since only a small number of billers have relationships with e-bill presenters, and the rest of the consumer’s bills must be acquired over time from the paper mail? Because, as with all things tech, it’s the wave of the future, bank officials said. They believe bill payment service, which is gaining popularity with consumers now, will become even more popular when more billers present their bills on-line. Hayford said he thinks billers will start to provide the service more when they see the economic benefits.

"We think banks have a real opportunity to participate (and) we think banks should be aggressive in pursuing relationships with consumers through electronic banking means. The reason we believe that is we do think the payment system is going through changes and banks have the risk of somebody else coming in and providing those services. We try to make sure we have those products to offer," Hayford said.

A relatively inexpensive source of funding for banks, which an amendment to a new accounting standard appeared to threaten, was secured last week when the Financial Accounting Standards Board decided against a move that would have inflated the funding provider’s balance sheet.

The decision affected so-called repurchase agreements, or repos, in which a bank or other borrower pledges collateral in the form of securities in order to receive a relatively inexpensive loan. In what was expected to be its last meeting March 24 on the controversial amendment to Statement 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the board decided against making the party holding the collateral book it as an asset.

The board had been leaning toward that method, which caused a flurry of protest letters from Wall Street (see FMR 3/15/99 p. 5). The board reasoned that if the collateral holder–usually broker/dealers and large commercial banks–could use the securities and profit from them, the collateral should be accounted for somehow.

Firms complained that making banks and others record the collateral as an asset and the obligation to return it as a liability would create unforeseen effects on other types of collateral arrangements that the board had not considered. Further, "grossing up" the balance sheet would deplete capital, perhaps limiting repo lenders’ ability to do the transactions and tightening an inexpensive source funding for many banks.

"It would make everybody’s balance sheet look larger and more leveraged," said Patricia Brigantic, senior associate general counsel for the Bond Market Association. She explained that besides limiting repo lenders lenders’ ability to do the transactions, a bigger balance sheet would cause frowns among rating agencies, counterparties, and others analyzing the credit.

The board reconsidered the issue last week and after looking at seven different options, decided the holder of the collateral–the "secured party"– would have to report the value of the right to use the collateral during the period it has been pledged. Halsey Bullen, FASB project manager, explained that the amount to be recorded will be relatively small under the new plan, compared with having to book the entire asset.

Several bankers were pleased to hear of FASB’s change of heart, saying that the new accounting should mean a big difference in their repo market activity. John Spiegel, chief financial officer of SunTrust, said the change sounded positive and added that he thought the collaboration of the FASB staff and the banking community is "a good thing."

Although staffers have some draft language for this section of the amendment, the board asked them to check with the Wall Street community "to see how the ideas might best be articulated," Bullen said. Brigantic’s accounting committee and representatives from many Wall Street firms will meet this week to discuss how to allocate a value to the gains from using the collateral for the period it is held. Brigantic added that the new guidance doesn’t just apply to repo transactions, but securities lending, margin loans and collateralized derivatives transactions–in short, any situation in which financial instruments are used as collateral.

Bullen added that apart from possible minor language changes to the proposed amendment, which could result in another meeting, the board now only must review the amendment in its entirety. Five board members indicated at the meeting they would support the statement.