Public Meeting Regarding Fleet Financial Group, Inc., and BankBoston Corporation
Wednesday, July 7, 1999
Transcript of Panel Three
11 MR. REILLY: Good morning. My name is Tom
12 Reilly. I'm the Attorney General for Massachusetts.
13 I want to thank you for the opportunity to offer
14 comments to this panel today on the proposed merger.
15 I know you have a long day ahead of you and I will
16 certainly do my best to not make that day any
17 longer.
18 There are a number of important issues that
19 you have to consider. We've heard a lot about CRA
20 issues. They certainly are important. I have
21 submitted a letter, and I would ask with your
22 permission on those issues to have that letter be
23 made part of the record.
24 I would like to focus my attention and my
25 comments on competition, the need to replace the
0080
1 competition that will be caused by this merger.
2 By way of background, my office has done an
3 extensive investigation that is not yet complete on
4 this proposed merger. We've done it along with the
5 Department of Justice. We've administered several
6 investigative demands, market surveys, retained the
7 services of a respected economist, Dr. Kalamaris,
8 from Columbia University. We've conducted scores of
9 interviews with all the affected communities and
10 businesses and people that are involved in this
11 process. Now, that investigation, as I said, is
12 still ongoing, but we have identified certain
13 problems and certain major concerns that I would
14 like to share with you today.
15 First, as you well know, this is
16 unprecedented in terms of this merger. The one and
17 two major players for key sectors of our economy are
18 merging, and the key sector I want to focus on today
19 is the middle market. And that creates problems
20 whenever that competition is lost.
21 Secondly, this merger has national
22 implications, because there are other markets
23 throughout this country that are looking at this in
24 order to determine and foresee what the rules are
25 going to be. So I think this is important that we
0081
1 take the time in terms of doing it right.
2 Now, the problem, and the major problem
3 that we have identified, is the problem that this
4 merger creates risk, and I believe that risk is
5 unnecessary and I believe that that risk can be
6 avoided and perhaps prevented if this is done right.
7 Now, the major area that is at risk as a
8 result of this merger is the middle market, the
9 so-called middle market, and that's not some elusive
10 term. I mean, these are real companies. These are
11 real people. A textile manufacturer in Fall River,
12 maybe 30 million in revenues, maybe 250 employees.
13 Real people that depend upon the success of this
14 company. Metal fabrications plant maybe in the
15 central part of the state, Worcester, with 200
16 people, $60 million in revenues, does business in
17 the Far East, needs sophisticated banking services,
18 international letters of credit. A paper
19 manufacturer in the western part of the state or the
20 trucking companies throughout the state.
21 This is a major part of our economy.
22 Perhaps at least 1,000 companies that are affected
23 by this merger. A hundred thousand people that are
24 impacted. They have a stake in this, too, and they
25 need to be heard as well.
0082
1 Right now in the current state of our
2 economy, they're doing well. They're benefitting
3 because of the competition between BankBoston and
4 Fleet. They have a demand for credit. As I said,
5 letters of credit, international letters of credit,
6 currency centers. They're getting all that and
7 they're getting it at a price that they can afford,
8 a competitive price, and certainly we are all the
9 better for that. And I just want that to continue
10 and I want a major competitor to come in and replace
11 this competition.
12 Now, it's going well now, but what happens,
13 even in good times, if the price of credit goes up
14 and the price of borrowing goes up? I don't care
15 whether it's a quarter or a half a point or a full
16 point. What happens? It effects an increase in the
17 cost of doing business in this state and this
18 region. We don't need any more of that. We want to
19 keep competitive pricing.
20 What happens in a downturn? What are the
21 protections there? What about the loss of jobs if
22 there's a credit squeeze and a tightening of credit
23 and the job growth is lost? What's the impact that
24 has? What is the impact of putting all our eggs in
25 one basket? There's no other competitor. What
0083
1 happens to our economy? Certainly these are good
2 institutions and strong institutions and wise
3 institutions, but if there's only one of them and a
4 series of mistakes happens, what happens next?
5 I believe that all this can be avoided. I
6 believe that this merger can be done, and it can be
7 done right. It can be done by playing by the rules.
8 In my opinion, the way to do that is to bring in --
9 that all of the assets that are going to be divested
10 go to one buyer for the entire region. One buyer
11 comes in and picks up this package, it ensures
12 competition. It ensures that there's going to be
13 regional competition in Massachusetts and throughout
14 this region. That is what I believe should happen.
15 Now, there are those -- and certainly I
16 respect their opinions and I value their opinions --
17 that we should carve out for some community banks.
18 I support community banks. Everyone supports
19 community banks. They don't service the middle
20 market. And they won't service the middle market
21 when this is all said and done.
22 If a major competitor picks up this piece
23 and someone with the size and scope and scale and
24 the expertise to service this middle market, it is
25 my opinion they will divest. They will not need all
0084
1 these branches, particularly some of the smaller
2 branches, and that divestiture will occur in an
3 orderly fashion and they'll be making good business
4 decisions as to what they can divest, and that is
5 the way that I certainly would urge and recommend
6 that the Board adopt the direction that I think we
7 should go.
8 In the end this is about preserving
9 competition and maintaining the competition that
10 exists and filling that gap and filling that void
11 that is in that middle market. If we do that, and
12 we do it right, we'll set the standard to make sure
13 the flow of affordable credit and competitive credit
14 flows to the businesses of Massachusetts and this
15 region that depend upon them for their survival and
16 the economic future and health of this region.
17 Thank you very much.
18 My colleague Richard Blumenthal from
19 Connecticut is next. (Applause)
20 PRESIDING OFFICER SMITH: Mr. Blumenthal?
21 MR. BLUMENTHAL: Thank you very much. I
22 want to join my colleague, Attorney General Tom
23 Reilly, in thanking you for this opportunity and say
24 that I also join in sympathizing with the arduous
25 day you're devoting to this subject. I want to make
0085
1 it clear I think you need to devote another day, if
2 you choose to do so, in Hartford, which we've asked
3 you to do, and you're always welcome, as you were
4 some years ago.
5 I want to say that my comments have been
6 submitted formally in writing, and I will just
7 briefly summarize them. And I want to say that
8 we've appreciated the cooperation and the help that
9 we've received from the Commonwealth of
10 Massachusetts, General Reilly and his staff, who
11 have done excellent work. We've done much the same
12 kind of investigation and ours, too, is ongoing
13 involving documents that we've subpoenaed from the
14 banks, which are in confidential form and submitted
15 to you in excerpt.
16 We've also spoken to customers,
17 competitors, other banks that will be affected. We
18 have reviewed the complaints that we've received
19 over the years, not only in my office, but the
20 banking department, and we have benefitted from the
21 economic analysis done by Charles Cavanaros.
22 And today's situation brings me to somewhat
23 different conclusions than my colleague, General
24 Reilly, but we share a similar view of the enormous
25 peril and threat to competition and consumer
0086
1 interests that are inherent in this merger.
2 You will remember that four years ago I
3 spoke to you in Hartford regarding the proposed
4 merger of the Fleet Financial Group and the Shawmut
5 National Corporation, and we had high expectations
6 at that time that Fleet Bank would provide superior
7 services to consumers and small businesses as well
8 as to larger customers and that its community
9 investment commitment would be a model to the
10 nation. In fact, we negotiated a package of
11 divestiture and community commitments that we
12 believed offered tremendous promise for our region
13 and for the nation.
14 The record since 1995, I say regrettably,
15 offers warning for grave caution. The record has
16 been at best mixed. I expressed concern then that
17 large banks often do not give sufficient priority to
18 smaller customers, and we've seen throughout the
19 industry a limitation in competition, unceasing ATM
20 litigation and voluminous consumer complaints.
21 At least in 1995 one of the reassuring
22 thoughts was that Fleet would still face meaningful
23 competition and BankBoston was a viable remaining
24 rival. Now Fleet is again before this Board seeking
25 approval to acquire its largest New England
0087
1 competitor, BankBoston. And this proposed merger
2 would create a behemoth of more than 200 billion
3 dollars in assets, dwarfing its next largest New
4 England competitor by more than ten fold.
5 To counter this economic and competitive
6 threat, Fleet offers to sell less than one half of
7 BankBoston's Connecticut presence; really an offer
8 that would create a mere shadow of the competitive
9 force that premerger BankBoston offered.
10 Essentially talking about the rules as
11 General Reilly did, talking about the antitrust
12 rules that I am bound to enforce as Connecticut's
13 chief antitrust official, Fleet and BankBoston have
14 attempted to justify this result with an antitrust
15 argument that is simply out of touch with those
16 rules and with economic reality. They divided New
17 England into numerous artificial municipal and
18 metropolitan markets and they have argued that even
19 the smallest of banks and credit unions compete on
20 an equal footing, despite the fact that they have
21 recognized themselves in other contexts, the
22 importance of size and scale in economies that drive
23 down costs.
24 The key flaw in this case is that it
25 persists in mistakenly using the same incorrect
0088
1 formula in antitrust terms to determine that
2 competition won't be harmed. Artificially defining
3 those markets with municipal boundaries rather than
4 seeing them as statewide or regional.
5 I urge that there be a package of larger,
6 more extensive divestiture, a more satisfactory sale
7 of assets that is necessary to counter the
8 anti-competitive effects of this merger. In a sense
9 that kind of larger-scale divestiture would enable
10 various kinds of purchasers to use those assets to
11 increase themselves as competitive, pro consumer
12 forces in the marketplace.
13 A sufficient number of branch banks,
14 deposits, ATMs, other assets must be made available
15 to our growing regional financial institutions,
16 including the community bank, so that they will grow
17 from the ground up.
18 At the same time I urge that a substantial
19 block of assets -- not all, but a block -- from all
20 three states that are affected be sold on a combined
21 basis to a strong major purchaser that has economies
22 of scale and scope to directly and immediately
23 compete with Fleet-Boston.
24 In contrast to this approach, what Fleet
25 offers is what it has called a clean sweep of
0089
1 BankBoston assets. But their broom, it seems to us,
2 is really a worn-out brush applied to one or two
3 cities; not to the relevant market as a whole.
4 BankBoston doesn't operate out of Hartford alone or
5 out of Torrington alone in the State of Connecticut.
6 It has a statewide presence. The mid market is key
7 and will be the victim of less competition, tighter
8 credit, higher rates and lower quality service if
9 this merger is permitted to go forward as it is
10 structured now.
11 And as General Reilly has said so well,
12 this mid market really is the engine that fuels our
13 economic growth in the State of Connecticut and
14 throughout the region. These are small and middle-
15 sized businesses that employ tens of thousands of
16 our citizens and, most importantly, most critically,
17 even in good times, they are the economic forces
18 that employ new workers and create new jobs.
19 Let me just say finally that I urge the
20 Board to require Fleet-Boston to make good on the
21 commitments that it has articulated more
22 specifically this morning by further defining them,
23 by stating them even more specifically, but most
24 important, saying explicitly what it will do to make
25 sure that the community investment commitments are
0090
1 actually realized. What we found in the last
2 go-around on community investment is that they are
3 completely dependent on community outreach and
4 promoting aggressively the kind of opportunities
5 that are made available. The numbers mean nothing
6 unless they are backed by a solid, aggressive
7 program of community outreach. (Applause) And that
8 is what I urge the Federal Reserve Board to require.
9 I very much appreciate this opportunity to
10 be with you this morning and for you to give me this
11 chance to talk to you.
12 PRESIDING OFFICER SMITH: Thank you very
13 much. Ms. Nappier.
14 MS. NAPPIER: Good morning. My name is
15 Denise Nappier and I am treasurer of the State of
16 Connecticut. I am pleased to join with Attorney
17 General Richard Blumenthal from my State of
18 Connecticut and his counterpart here in
19 Massachusetts to share with you some serious
20 concerns about the proposed merger as it stands
21 today. I would also like to thank you for the
22 opportunity to testify, although I must express my
23 disappointment in your decision not to hold a
24 hearing in Connecticut on a matter that will
25 effectively remake the financial landscape in
0091
1 Connecticut.
2 The Connecticut State Treasurer's interest
3 in the proposed merger are substantial. We are a
4 shareholder and a major customer of both banks. The
5 combined shares of both banks held by the state
6 treasury is in excess of 630,000. For the past two
7 years the state treasury has spent nearly $6 million
8 on banking service fees, of which 90 percent has
9 been spent or paid to Fleet and BankBoston, Fleet
10 representing the lion's share of roughly 77 percent
11 of all fees paid, and BankBoston 15 percent.
12 I believe that a sense of responsibility
13 for the well-being of the citizens of Connecticut
14 can and must go hand in hand with the fiduciary
15 responsibilities of the state treasurer's office,
16 and it's within that context that I express my
17 concern.
18 Let me say from the onset that I believe
19 that this merger could be a tremendous opportunity
20 for Connecticut and New England. There could be
21 great promise in the establishment of a strong
22 regional bank, a great player on the national stage,
23 but that's not the blueprint we see today.
24 My office is taking a look at Fleet's track
25 record in lending in the communities, and I am
0092
1 concerned. Fleet has claimed that the merger will
2 generate greater capacity for the bank to provide
3 superior services to customers. It sounds good, but
4 I believe in checking the record, and so far the
5 record tells a different story.
6 For example, Fleet's history of post-merger
7 performance demonstrates a declining level of
8 commitment in providing better access to banking
9 services, home mortgage and small business loans, as
10 well as other forms of community investments.
11 (Applause) Now, I do understand the art of
12 statistics, but the facts speak for themselves and
13 as a fiduciary, I don't typically engage in those
14 forms of tactics. So I am here to say to you that
15 in Connecticut we know that the amount of loans to
16 low and moderate income households before the merger
17 of Fleet and Shawmut was twice the level it is
18 today. (Applause) I understand that the CEO of
19 Fleet was recently quoted as saying that the merged
20 bank will be for everyone. Well, my concern is over
21 just who is being left out here. (Applause) I am
22 generally concerned that the big losers in the
23 merger, the people being left out, may be the
24 consumers and businesses of Connecticut. That is,
25 people who are trying to get a small business up and
0093
1 running or expand a growing business and need a
2 reasonable loan. Or the low or moderate income
3 family living in our rural communities or in the
4 inner city trying to afford their first home and
5 need a mortgage at an affordable rate. And
6 consumers depend on reasonable rates, healthy
7 competition and banking parties that respond to
8 their needs.
9 Let me briefly highlight nine critical
10 areas of concern. First, due in large part to the
11 competition for business between Fleet and
12 BankBoston, the state treasurer's office here in
13 Connecticut has saved nearly $1 million reduction in
14 banking service fees from 1994 to 1998. While I can
15 speak only for the business relationship of the
16 state treasury, it would not be unreasonable to
17 assume that Fleet may possess substantial
18 competitive control over other business
19 relationships in our state.
20 We are concerned that the savings achieved
21 by my office may well be eroded as competition is
22 eliminated. Adequate capital is frequently cited as
23 the major barrier to growth and development of small
24 businesses. Undercapitalization is the largest
25 contributor to business venture failure. Therefore,
0094
1 the economic stability and well-being of small
2 businesses in our state is directly tied to the
3 availability of choices of banking services and the
4 fair lending practices of the financial institutions
5 serving our state. That's why reduction in
6 competition is of concern here. (Unintelligible)
7 bank is a program that helps small Connecticut
8 businesses that are unable to obtain conventional
9 financing with an emphasis on minority and women-
10 owned businesses.
11 As part of the Fleet-Shawmut merger Fleet
12 was required three years ago to maintain a high
13 level of urban loans. Once meeting its obligations,
14 under the agreement Fleet's participation with
15 (unintelligible) dwindled considerably, from 1.2
16 million in fiscal 1998 to 295,000 in fiscal 1999.
17 That track record is cause for serious concern.
18 The Community Reinvestment Act has fought
19 discrimination in lending practices and increased
20 access to capital for home mortgages and business
21 start-up for more than two decades. Any entity
22 emerging from a merger between Fleet and BankBoston
23 should be a leader obligated to formulate, promote
24 and implement unfolding principles of community
25 investment.
0095
1 We have seen just the opposite. For
2 example, the 1998 CRA rating report showed that
3 Fleet made nine community development loans totaling
4 just over $16 million in Connecticut while they made
5 19 community development loans totaling nearly 157
6 million dollars in Massachusetts. Of the 200
7 million in community development loans,
8 Massachusetts received 72 percent of the loans to
9 Connecticut's 7.5 percent, even though Connecticut
10 has 25 percent of the bank's branches to
11 Massachusetts' 33 percent.
12 Obviously every potential borrower in
13 Connecticut is concerned about those stats. In
14 Connecticut we understand the value of community
15 banking, where the bankers know all the
16 businesspeople and are aware of potential business
17 problems before they become critical. BankBoston
18 has developed an internationally recognized model
19 for community banking. Fleet has not. And even the
20 BankBoston model has worked more effectively in
21 Massachusetts than in Connecticut.
22 Any approved merger plan should include the
23 preservation of the banking relationships developed
24 by First Community Bank and a commitment to the
25 continued success of the First Community Bank. Now,
0096
1 we're concerned that won't happen. Connecticut's
2 urban and rural communities have traditionally been
3 underserved by financial institutions. Yet nearly
4 half of the branches targeted for sale in connection
5 with the proposed merger are located in the rural or
6 urban areas of our state. Location is particularly
7 important to low and moderate income families where
8 transportation is frequently limited. We're
9 concerned that service to these communities will be
10 disrupted at best and perhaps in some cases will be
11 eliminated.
12 Fleet and BankBoston have recently
13 announced a $14.6 billion commitment for
14 lower-income borrowers, small businesses, community
15 development programs over a five-year period of
16 time. Our internal analysis indicates this is only
17 a slight increase from the current lending patterns
18 and we have no idea from Fleet how this will affect
19 our state. Given the uneven distribution of Fleet's
20 attention to community development efforts in the
21 past, it would not be unreasonable to assume that
22 Connecticut would not fare as well as Massachusetts.
23 We remain concerned about that and would much prefer
24 that Fleet show leadership in all jurisdictions in
25 which it operates. Thank you very much. (Applause)
0097
1 PRESIDING OFFICER SMITH: Thank you.
2 Questions from the panel?
3 MR. McDONOUGH: I have a question for Mr.
4 Reilly. Your remarks today have centered around the
5 antitrust implications of this merger, particularly
6 your concern about middle market lending, and you're
7 advocating a solution where a large institution
8 would come in and acquire all the assets in all
9 three states?
10 MR. REILLY: Yes.
11 MR. McDONOUGH: Whereas, Mr. Blumenthal was
12 suggesting that maybe a large institution could
13 acquire some assets, a sufficient number, toehold or
14 whatever, to meet the middle market. Is that a
15 potential solution to this issue or do you still
16 believe -- obviously you believe -- but would it be
17 sufficient if a large institution acquired
18 sufficient assets in the three states rather than
19 acquiring everything?
20 MR. REILLY: I think the key for me would
21 be whether or not the bank that acquired the new
22 buyer was sufficient in size and scope and expertise
23 to meet the competitive demands or competitive needs
24 of that middle market. That's the focus. Once that
25 was satisfied, certainly I'm open to other
0098
1 considerations. But that's the main focus. That's
2 the main consideration. And I am concerned about in
3 terms of carving out a piece, who's going to do the
4 carving out? Is it going to be Fleet-Boston? Isn't
5 that a conflict? What about the inevitable
6 cherrypicking that's going to go on? It's going to
7 make it all the more difficult for a new, viable,
8 strong competitor that I'm looking for to come in
9 here and be willing to come in here under those
10 circumstances, if there are going to be carveouts in
11 the first stage regionally or carveouts individually
12 within the states.
13 I think it makes it more complex. It makes
14 it more difficult. Is it impossible? No, but I
15 think it's a real challenge to put on the table.
16 It's a problem that I think can be solved by the
17 solution that I'm proposing. Are there other
18 solutions? Perhaps, but we need to be very, very
19 careful here and proceed with caution. This can be
20 done I believe, but it has to be done right and I
21 believe that complicates it the more layers of
22 carving out that there are. But it could be solved.
23 If there is one strong competitor, wherever that
24 competitor comes from or evolves that can meet the
25 competitive needs of have middle market, I'll be
0099
1 satisfied, and I think this merger would ultimately
2 be a good thing for this region and for the state.
3 MR. McDONOUGH: Thank you.
4 MR. ALVAREZ: I have a question for Mr.
5 Blumenthal and Mr. Reilly. Do you find, in looking
6 at the middle market, that there is much competition
7 from banks or other lenders outside the market in
8 the contiguous area? The middle market tends to be
9 a larger geographic market than some retail markets,
10 and I'm wondering what kind of competition you're
11 finding outside the particular State of Connecticut
12 or the State of Massachusetts.
13 MR. REILLY: In Massachusetts we're finding
14 that there is some competition, but there is no
15 question that the two major competitors are
16 BankBoston and Fleet. At the lower end of that
17 middle market you'll find some competition at the
18 very higher ends. Obviously there are already more
19 options. But right smack in the middle there, these
20 are the two major competitors, and essentially the
21 only major competitors, and that's the void that
22 certainly I'm very concerned about. There's a
23 little bit of competition, but these are the primary
24 players here, and they're competing, and it's a good
25 thing. I just want to keep it going.
0100
1 MR. BLUMENTHAL: Much the same is true in
2 Connecticut. There is now competition, we find,
3 talking to customers, between BankBoston and Fleet
4 for mid-market business, and one of the key
5 differences, disagreement between ourselves and
6 Fleet-BankBoston, is on precisely that point. They
7 have in essence said they are doing enough now in
8 terms of divestiture, and going to the first
9 question that was asked, I think the focus ought to
10 be on the clean sweep. Let's really use a broom.
11 Let's sell more of those assets so that they can be
12 made available not only to a major purchaser who can
13 offer competition in the mid market, but also to
14 community banks and regional financial institutions
15 that are grown from the ground up and can also begin
16 to offer competition for that mid market.
17 These solutions are by no means mutually
18 exclusive. If the broom sweeps clean and hard
19 enough and assets are really made available, both
20 can be done. But the competition that now exists is
21 very much on a regional and statewide basis, and
22 ought not to be defined artificially and
23 unrealistically and inaccurately by municipal
24 boundaries or metropolitan areas, as the submission
25 from Fleet-BankBoston essentially does.
0101
1 PRESIDING OFFICER SMITH: Other questions?
2 MR. KWAST: A follow-up with Attorney
3 General Blumenthal for a moment. Do you have a feel
4 for how large a bank needs to be to serve
5 effectively the middle market in Connecticut or the
6 rest of New England?
7 MR. BLUMENTHAL: I can't put a precise
8 number on its assets. I would be glad to get back
9 to the Board with that kind of estimate. Part of
10 what we're doing now essentially is working with our
11 economist on exactly that question, which obviously
12 is an core one for you as it is for all of us. But
13 our feeling is that the sale of assets can be done
14 realistically and aggressively so as to enable a
15 major competitor, a large purchaser and at the same
16 time the community banks to both be involved. And
17 what exactly the size is I would be happy to submit
18 in further written testimony if the Board will
19 permit me to do so.
20 MR. REILLY: I thought a little bit about
21 that, and I don't have a hard figure, but the
22 starting point is that this merged bank is going to
23 have what? 170 billion dollars in terms of assets,
24 and certainly the closer you get to that figure, the
25 better off you're going to be. I don't know whether
0102
1 it's 30, 40, 80, 100, but the closer you get to that
2 figure, certainly the more comfortable I think we're
3 all going to be if we reach that kind of competitive
4 size and dimension that's going to provide real deep
5 pockets, real competition.
6 PRESIDING OFFICER SMITH: Thank you very
7 much for coming this morning.
8 MR. BLUMENTHAL: Thank you.
9 PRESIDING OFFICER SMITH: We'll move on to
10 Panel Four. We're ready to start and we have Ms.
11 Campbell reading a part of the statement from Ms.
12 Hurd, and I have assured her that the entire
13 statement will be part of the record.