VideoIt's 3 a.m. in Detroit. Having treated five of his most important bankers to dinner and a day at the North American International Auto Show, a finance executive invites them to a poker game in his hotel room — where he takes them for $220.
Call it the new face of relationship banking. Not dinner and the auto show (though they're an annual tradition for this executive, who asked that his name not be used), but the poker game — friendly perhaps, but marked by mutual wariness, bluffing, and careful conjecture about the other hands. And one with increasingly significant stakes, as regulators eliminate anti-tying laws and give banks greater control over capital reserves. Also in the cards: a California court case, ultimately bound for the U.S. Supreme Court, that may yet decide whether shareholders can hold banks liable for Enron-style skullduggery.
Not that the relationship hasn't already weathered decades of dramatic restructuring. "Twenty years ago, any bank would be totally state-focused," says Bank of America CFO Marc Oken. "We could tell you all day long how much we made in North Carolina, but we couldn't tell you a whole lot about private bank customers." Oken's historical milestone, the mid-1980s, was also when corporate customers began to discover alternatives to bank credit — notably commercial paper, securitization (see chart, below), and an increasingly efficient bond market.
It's no coincidence, then, that 1984 marked the start of the consolidation that all but wiped out state-based banking. From 1975 to 1984, the number of commercial banks insured by the Federal Deposit Insurance Corp. grew by 112, to 14,496. The following decade, however, it plunged by more than 4,000, to 10,452 in 1994. There are now 7,660, according to the latest available count.
Tie Me Up, Tie Me Down
In theory, these trends should have long ago put to rest the nagging 30-year issue of whether banks illegally make credit dependent on the purchase of other products. Under general antitrust laws, tying is illegal only if the perpetrator has sufficient market power to stifle competition.
But banks have been held to a higher standard since 1970. At the time, Congress feared that state-level dominance would let banks tie products to credit, and amended the Bank Holding Company Act with bank-specific prohibitions.
Banks have long argued that the capital markets and the large number of national and international banks deny them a monopoly. But tying charges have intensified as state banks have given way to megabanks. And the issue exploded in 1999 when the Gramm-Leach-Bliley Act formally repealed the separation of commercial and investment banking mandated by the Depression-era Glass-Steagall Act.
In a survey issued last June by the Association for Finance Professionals (AFP), in Bethesda, Maryland, more than half of 370 financial executives reported that they had been denied credit or had seen their borrowing terms altered in apparent retaliation for not awarding investment banking services to a commercial lender. Under existing rules, that's tying.
Not us, say the banks. "We don't tie," says a Bank of America spokesperson.
In fact, both the Federal Reserve and the Office of the Comptroller of the Currency have concluded that bank tying is not an issue. But the Government Accountability Office has complained that neither regulator contacted any corporate borrowers or analyzed loan pricing before drawing that conclusion.
Complicating the issue, clients themselves regularly (and legally) engage in tying — demanding, for example, syndicate participation in exchange for underwriting work. As one investment banker wrote to CFO, "I was in a meeting recently where a treasurer of a $50 billion-plus market-cap company told us that participation in its credit facility was a requirement to take part in related permanent financing to take out the drawn facility. So it clearly works both ways. Companies are clearly using the carrot of potential banking fees to get inexpensive loans."
Indeed, Greg Lyons, of the finance-services practice of Boston-based Goodwin Procter LLP, argues that at least some tying accusations may reflect corporate misunderstanding of banks' efforts to compete successfully against the capital markets by providing superior service. "Banks are increasingly working to understand their customers' industries and tailor products and services accordingly," observes Lyons, "and that could be perceived by a customer as pushing too hard. There are no bright lines between proper cross-marketing and improper tying."
But the debate may soon be moot. In November 2003, the Department of Justice sent a letter to the Fed urging the bank regulator to exempt all large corporate relationships from anti-tying regulations on the grounds that banks' market power is insufficient for tying to be anticompetitive. "Borrowers in [the syndicated loan] market are large corporations with well-trained and sophisticated staff fully capable of negotiating favorable terms," wrote assistant attorney general R. Hewitt Pate.
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