A Banker's New Best Friend?

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The day after a pro wrestler was elected governor of Minnesota and a dead man received one third of the votes in a California sheriff's election, the race with the most wide-ranging implications for the market was

Alfonse D'Amato's

loss in the New York state Senate race.

With D'Amato gone, Texas Republican

Phil Gramm

(perhaps the only person in

Congress

more ornery than D'Amato) is now chair of the powerful

Senate Banking Committee

.

How ironic. It was Gramm, remember, who spoiled the fragile, bipartisan compromise brokered by D'Amato and ranking Democrat

Paul S. Sarbanes

of Maryland to effect bank reform. The bill would have effectively allowed banks, securities and insurance companies to merge in what would have been a complete overhaul of the 1934 Glass-Steagall Act.

Market strategists say that banking reform -- a long bantered subject in Congress -- is not necessarily dead by virtue of this election outcome. But the 106th Congress will now have to cobble together legislation for financial-services reform with the caustic Gramm at the helm -- and he is not noted for consensus building.

"D'Amato's loss does not bode well for the prompt enactment of this legislation," said Marty Farmer, lobbyist for the

Independent Bankers Association

, which supported the reform bill.

The basis of Gramm's opposition was the bill's provisions that require commercial banks to comply with the

Community Reinvestment Act

, or CRA, which directs banks to invest in the low- and middle-income areas they serve. His position was supported by the

Texas Bankers Association

.

"Gramm and D'Amato have the same philosophy toward over-regulation," said Micah Green, executive vice president at the

Bond Market Association

. And yet, "Gramm's positions are much more ideologically based and are probably more difficult to move in the legislative process."

That was evident when Gramm succeeded in killing a provision in another banking bill that would have forced credit unions to comply with the CRA. Gramm is also opposed to most regulation of the securities industry. Gramm will attempt to move banking legislation forward, but on his own terms. The reform legislation he is likely to spearhead might involve dumping Glass-Steagall altogether -- if he can accomplish all the necessary horse-trading.

"The chair still has to find a consensus and cut deals to reflect that consensus," said Thomas Gallagher,

Lehman Brothers'

head of political strategy. "Gramm will be constrained as to where the other Senators are -- he still has some room to maneuver but not too far to dictate changes to what's going to be in the bill."

However, the bipartisanship that marked the process of reforming existing bank legislation isn't going to arise easily again. D'Amato didn't always side with Republicans. He worked well with Democrats, notably members of the banking committee, at times to Gramm's dismay.

Gramm, chairman of the Securities subcommittee, is thought to have a good relationship with Connecticut's

Christopher Dodd

, ranking Democrat on the subcommittee. But it remains to be seen whether Gramm can work well with Sarbanes, for whom CRA is a priority and who had a good relationship with D'Amato.

In addition, now the House, which passed its version of banking reform by one vote the first time around, will deal with a new version from Gramm, a former House Democrat. "Gramm's never been good at talking to the House anyway," says Chuck Gabriel, political analyst at

Prudential Securities

. "If he is going to turn this into a referendum on CRA, in a lot of ways we are starting over. This bill is so overdue for Congress it's not revolutionary at all."

Citigroup

(CCI) - Get Report

, which would have been the direct beneficiary of the proposed financial-services overhaul because it allows them to fully complete their merger, was a key contributor to D'Amato's campaign, donating $130,000. Citigroup also donated $70,000 to eventual winner Democrat

Charles Schumer

, also a member of the banking committee.

For the 1998 campaign, D'Amato received $4.5 million from the financial, securities and real estate industry, according to the

Center for Responsive Politics

, with the greatest contribution of $240,000 coming from

MBNA America Bank

(KRB)

. Both

Goldman Sachs

and

Equitable Companies

(EQ) - Get Report

also made substantial donations to both Schumer and D'Amato, but predictably gave more to the incumbent's campaign. Contrast that with Gramm, who received $3.3 million in campaign contributions from the finance, insurance and real estate sector for his 1996 election. The largest contributor in the banking industry was

Chase Manhattan

(CMB)

, which donated $33,000 to his 1996 campaign fund.

Industry groups had a mixed response to D'Amato's loss. While the Independent Bankers Association was not excited over the prospect of reform, the

American Bankers Association

quickly rallied around the new man. Its statement said it believes "commitment to financial modernization will be pursued early in the next session under the leadership of Senator Phil Gramm."