Large banks were able to whittle down a provision of financial modernization legislation being proposed in the House that would have required a public hearing in every city involved in a bank merger for most acquirers– but the victory came at the cost of the goodwill that had previously marked the proceedings.

The provision, approved on March 4 by a 22-21 vote, would have required that the Federal Reserve Board hold a public hearing in all affected cities for mergers involving institutions with $1 billion or more in assets. Steven Blumenthal, an analyst at Schwab Capital Markets and Trading Group in Washington, said virtually all bank mergers involve institutions of $1 billion or more. The amendment was introduced by Rep. Bruce Vento, D-Wis., and was supported by the Democratic members of the committee.

The large banks promoting the legislation "went ballistic," in the words of one lobbyist, and went to Rep. James A. Leach, R-Iowa, chairman of the House Banking Committee, to warn that if the amendment stayed they would back away from supporting the bill.

Their arguments galvanized Leach, who allowed two Republicans to introduce an amendment to give the Fed "discretion" to hold hearings, rather than mandate them. The amendment passed on a partisan vote late March 10, but the fact that the amendment was out of order under committee rules enraged Democratic members of the committee. The tenor of the proceedings grew so intense that Leach called a halt to the markup for the day at the request of Rep. John LaFalce, D-N.Y., ranking minority member of the panel and a key player in facilitating the bipartisanship that marked the proceedings.

Their argument, as explained by the lobbyists for several money center banks, is that holding public hearings adds to the already huge cost of consummating mergers. They said that when all costs are added up, it costs $1 million or more for the institutions involved to put on each hearing, even though they are held under the auspices of the Fed. At the same time, sources said, a merger-in-progress leaves both institutions vulnerable to takeover by other institutions. The longer the merger is in limbo, the greater the uncertainty and risk.

The legislation is called the Financial Services Act of 1999. The bill would make broad changes in banking regulation, including repeal of the Glass-Steagall Act, and would allow banks, securities firms and insurance companies to affiliate. However, the bill has many controversial components because it seeks to give all current players an equal voice in regulating the new institutions.