Tie-In Sales May Have Strange Consequences

One of my favorite aphorisms states, “You should never tear down a fence until you know why it was put there in the first place.”

Fences are torn down all the time, some by accident, others through ignorance insofar as their purpose is understood and while they are still useful. In such cases, the act of tearing down the fence or wall is usually one of defiance or arrogance.

Such an event occurred two years ago when the wall separating banking and commerce was torn down. The reasons for that wall being there were well known and its placement had served the country well for 66 years. Despite alarms that were cited at the time, the wall came down when Congress enacted the Gramm-Leach-Bliley Financial Services Modernization Act.

One testament to the arrogance associated with this act was the merger of Citicorp and Travelers. Under the provisions of the law at that time, this was a merger that could not legally have existed on a permanent basis. But the merger took place anyway, and then the powerful banking lobby (along with Travelers) bullied Congress into passing legislation to make the transaction legal.

Many of the concerns expressed when GLB was under consideration centered around the concentration of economic power and how it might be used, or more importantly, misused. Assurances that tie-in sales would be kept in check helped to dampen the cries of critics, and the legislation went forward with Congress trusting that banks would use restraint in wielding their economic power and “do the right thing.”

Now, in the Nov. 30 Wall Street Journal, an article entitled “Enron’s Collapse Raises Questions about ’99 Bank Deregulation Act,” the downside risk of the act is exposed.

The article states: “J.P. Morgan Chase & Co. and Citigroup Inc. were both lenders and investment bankers in the failed Enron-Dynergy Inc. deal. Today, ‘you get the worst of both worlds,’ said Eugene Putnam, the chief financial officer of Sterling Bancshares Inc., of Houston.”

The article continues: “Some industry experts add that the 1999 law heightens the risk that banks may make a loan to win a deal and that both can sour. Banks, in fact, have made little secret that they are using their balance sheets to win investment banking business. Bank of America Corp., for one, has made it clear that if a borrower wants a loan, that company better be able to ante up when it comes to choosing an advisor on a merger.”

So much for avoiding tie-in sales.

It has always been my view that the typical banker would not know a tie-in sale if he fell over it. I say that because tie-ins are so much a part of bankers’ everyday operations. Just let a small business or an individual apply for a line of credit and the first thing the banker says is, ‘Do we have your checking account and do you have any trusts that we can handle?’ Tie-ins are second nature to bankers.