Editor's note: Wal-Mart announced it was abandoning its bank application on March 15, 2007.

WASHINGTON -- When Wal-Mart Stores Inc. applied 15 months ago to get a banking license, it looked like a slam dunk.

The retailing giant applied for an industrial-bank charter in Utah -- the same type of permit the state had already given to many companies including Volkswagen AG, Pitney Bowes Inc. and even another big retailer, Target Corp. The Federal Deposit Insurance Corp., which insures deposits at banks, had blessed similar applications with nary a protest letter. To allay fears that it would compete with small banks, Wal-Mart promised not to open retail branches, saying it would use its bank to process card transactions.

Today, Wal-Mart's banking bid is on life support. The FDIC in July issued an unprecedented six-month moratorium on all applications for these specialized banks, freezing Wal-Mart's effort. Utah, which also must approve the application, has stayed mum. Powerful members of Congress are lining up to pass laws that would block Wal-Mart, or any nonfinancial company, from getting into the U.S. banking business.

That's bad news for the world's biggest retailer, which is already facing slowing growth in the U.S. and has stumbled in several overseas forays. It also affects 11 other companies that have applied for the type of permit Wal-Mart is seeking, including Home Depot Inc., DaimlerChrysler AG and Ford Motor Credit, part of Ford Motor Co.

Wal-Mart's effort to open a bank has galvanized a broad coalition of opponents: large banks, small banks, the Federal Reserve, unions, grocers, real-estate agents and congressmen of both parties. Some in the coalition are mainly interested in dealing a blow to Wal-Mart. Others are worried about the trend of allowing commercial companies into banking, which they fear could undermine the soundness of the financial system. That argument has been around for years, but it generated little political heat until Wal-Mart came along -- illustrating the power of the company's name to transform stalemated policy debates.

Wal-Mart believes its intentions are being twisted by its foes. People who claim Wal-Mart intends to open branches and compete with hometown banks for deposits "are simply misinformed or just wrong," says a spokesman. The Bentonville, Ark., company also says its bank, by focusing on processing credit- and debit-card transactions, would cut costs and lead to savings for consumers. Currently Wal-Mart must pay fees to other banks to process transactions.

Despite overhauling its lobbying efforts in Washington , Wal-Mart continues to make rookie mistakes. It retained a headhunter to look for a senior financial executive, fueling fears that its banking ambitions were broader than it said. Wal-Mart says it was seeking someone for an employee-mortgage program. It initially asked to be exempt from the Community Reinvestment Act, which forces banks to reinvest in communities where it does business. That angered some Democrats. More recently, Wal-Mart's Mexican unit applied for a license to conduct retail banking there, again raising doubts among critics, although Wal-Mart notes that the Mexican bank couldn't open branches in the U.S.

"You can say that Wal-Mart is actually tone-deaf," says Diane Casey-Landry, president of America 's Community Bankers, a trade group that has changed position on Wal-Mart over the past year and currently opposes its bank bid.

Banking Ambitions
Wal-Mart has been trying to get into banking since the late 1990s. It was thwarted in attempts to buy a savings-and-loan in Oklahoma and a bank in California. Since 1999 it has faced opposition to its banking ambitions from the United Food and Commercial Workers International Union, which has long sought to organize Wal-Mart workers, and the Independent Community Bankers of America. The two later joined with trade associations of grocers and convenience stores under the umbrella of the Sound Banking Coalition.

The unions have been active in battling Wal-Mart on a broad front, accusing it of underpaying workers and failing to buy American. That has turned the company into a lightning rod on national issues such as trade with China and the rising number of people without health insurance. Wal-Mart's defenders say that because of its size and prominence it is often criticized for doing the same things that smaller companies do without criticism.

Early last year, Wal-Mart started afresh by deciding to apply for a Utah charter to open an "industrial loan corporation." Despite the odd name, industrial loan corporations, or ILCs, are similar to regular banks. They can offer most of the same products and services nationwide, including consumer and business loans, mortgages and credit cards. They can take deposits. Under current law, they can set up new bank branches in 22 states.

ILCs began as niche financial players in the early 1900s, offering consumer credit to low-income workers. In recent years, ILCs, also called industrial banks, have proliferated in a few states, particularly Utah and California , and their assets have soared to about $155 billion. That is because they offer a way for nonfinancial companies such as Volkswagen and General Motors Corp. to own a bank without being subject to regulation as a bank holding company. These companies often use a bank to complement their main business: Home Depot, for example, wants an industrial bank to make home-improvement loans. Some of the biggest Utah-chartered ILCs are controlled by financial institutions that aren't banks, such as Merrill Lynch & Co.

Utah politicians consider industrial banks an engine of growth, providing more than 1,000 jobs and tax revenue. The state accounts for more than half of the nation's 61 ILCs. Utah 's usury laws are more favorable to banks than laws elsewhere.

Former Sen. Jake Garn, a Utah Republican, helped create the modern ILC niche and said in April at an FDIC hearing that he asked Wal-Mart executives not to apply in his state. "I was afraid it would affect the whole industry," Mr. Garn said. "And it's even worse than I thought it would be.... They're causing exactly the trouble I thought they would."

Long before Wal-Mart's Utah application, the growth of ILCs worried some in Washington including the longtime chairman of the Federal Reserve, Alan Greenspan. They felt that problems at an ILC's parent company could spill over into the bank, and they feared that regulators lacked a way to examine the parent's soundness.

Wal-Mart disagrees. In a 50-page document submitted to the FDIC last week, the company said "ILC risks are no greater than other banks' risks" and contended that "no evidence supports differential treatment of 'commercial' affiliations."

Opponents of industrial banks at first thought Target's application for a Utah charter in early 2004 could revive interest in the issue, but "there didn't seem to be much alarm," says Camden Fine, president of the Independent Community Bankers of America. Target's application sailed through Utah regulators and the FDIC. The retailer has since used its Utah ILC to create the Target Business Card, a credit card that small businesses and others can use at Target stores.

Wal-Mart tried to forestall opposition to its Utah application. In February 2005, executives paid a visit to Mr. Fine's community-bank group, which fears that if the retailer were given an opening in banking, it would eventually go head-to-head with small banks and crush them.

Over pastries, the Wal-Mart delegation proposed a deal: If the bankers' group didn't oppose Wal-Mart's application for a Utah banking charter, the company would promise Congress in writing "never to get into retail banking," recalls Mr. Fine.

"If you file, we will oppose," Mr. Fine says he responded. He added that he simply didn't buy Wal-Mart's pledges. "As we say in Missouri, I was born at night but not last night," says Mr. Fine, a longtime banker in Jefferson City. Wal-Mart confirms the meeting took place and says it was also part of an effort to recruit more banks as tenants in Wal-Mart stores.

Pretty quickly, the bankers came to believe their suspicions were justified. Despite Wal-Mart's rhetoric that its banking ambitions were narrow, the company was circulating, via an executive-search firm, a job opening for a senior business-development executive in financial services. The search firm's email said the executive would have "direct contact with Lee Scott, the Chmn./CEO of Wal-Mart." The email quickly circulated through the banking industry. Wal-Mart says it was seeking an executive to manage a program that offers mortgages to store employees.

Powerful Ally
By late last year, Mr. Fine drew in a powerful ally: the American Bankers Association, which represents both large and small banks. On Nov. 7, 2005, Ed Yingling, the association's president, sent a "CEO alert" to 4,000 members vowing to fight for a law to bar nonfinancial firms, including Wal-Mart, from owning a bank. Wal-Mart's "reach and influence would be significant," Mr. Yingling wrote. "Now is the time to act."

Mr. Greenspan chimed in two months later, in one of his last official acts as Fed chairman. He wrote a long letter to Congress strongly opposing industrial banks owned by nonfinancial companies. He said these banks leave the financial system exposed to risk because financial regulators don't have oversight over the parent company. The FDIC, which regulates industrial banks, said before the current brouhaha that it had all the tools it needed to supervise these entities. Some scholars noted that Mr. Greenspan was defending the supervisory turf of the Fed, which oversees bank holding companies.

At the time Wal-Mart filed its Utah application in July 2005, the chairman of the FDIC was Donald Powell, who said publicly that Wal-Mart's application ought to be treated like any other. But in November 2005, Mr. Powell left the FDIC to help coordinate the cleanup of the Gulf Coast in the aftermath of Hurricane Katrina. The new temporary chairman -- a Democrat and former aide to Sen. Paul Sarbanes, a foe of commercial companies owning ILCs -- agreed to public hearings on the issue.

The hearings gave the Sound Banking Coalition -- the collection of Wal-Mart opponents -- a chance to roll out a big gun, former Rep. Thomas Bliley. He was co-author of landmark 1999 legislation that overturned the Depression-era Glass-Steagall Act and allowed banks, brokerages and insurance companies to enter each others' businesses. Mr. Bliley is now a lobbyist for the coalition. He argues that his legislation left a loophole by continuing to allow commercial companies to own industrial banks.

"This is not just about Wal-Mart," Mr. Bliley testified. "A showdown over fundamental principles of banking policy has been in the making for at least 20 years." He said Wal-Mart didn't measure up on many of the criteria used by the FDIC to judge applications, such as the needs of local communities and the "general character and fitness" of the applicant's management.

Meanwhile, liberal politicians on Capitol Hill took notice of Wal-Mart's desire to have its bank be exempt from the Community Reinvestment Act. "By seeking a CRA exemption, Wal-Mart reinforces its indifference to the economic health of local communities," Rep. Stephanie Tubbs-Jones, a Democrat from Ohio, wrote in early March to the FDIC. Under fire, Wal-Mart amended its application prior to the public hearings and said it would observe the act within Utah .

Unions used the hearings to retail a laundry list of Wal-Mart's perceived "character" flaws. "The largest gender-discrimination case in the nation's history, child-labor-law violations, paying fines to allow undocumented workers within their stores overnight, the list goes on and on," said Michael Wilson, international vice president of the UFCW union.

During a May "fly-in," 300 community bankers called on their individual members of Congress and urged them to press the FDIC for a moratorium that would delay Wal-Mart's application. Other groups worked Capitol Hill making the same case, and 98 members of Congress signed a June 8 letter to the FDIC asking for a moratorium.

They got it the next month, shortly after a new chairman, Sheila Bair, took over at the FDIC. Ms. Bair, a former Treasury Department official and professor at the University of Massachusetts Amherst's management school, says the moratorium made sense because "it's a very complex issue, from a legal standpoint, a policy standpoint, and a safety and soundness standpoint."

"I was like a giddy kid," says Mr. Fine about the news. "I thought the odds were very long."

It's uncertain what will happen after the moratorium expires in late January. Ms. Bair says she "wants to make decisions." The FDIC could issue a flat yes or no to Wal-Mart, or it could approve insurance for a narrow banking charter packed with restrictions. It could also extend the moratorium and wait for Congress to take up the issue. Wal-Mart says it is "committed to work constructively with the FDIC...to move forward with our application."

Rep. Barney Frank, a Massachusetts Democrat, has co-sponsored a bill with Republican Paul Gillmor of Ohio that would knock out Wal-Mart and other commercial companies from owning ILC banks, although existing owners could keep theirs. Mr. Frank hopes Congress will take up the legislation early next year but it faces a hurdle in Utah 's Sen. Robert Bennett, a powerful member of the banking committee. Sen. Bennett says he has told Wal-Mart executives there is no "legal or moral reason" why the company ought to be denied a Utah ILC charter.

© 2006 Wall Street Journal

More on this topic:

Transcripts from FDIC hearings

Shackling Wal-Mart (FDIC Bank Application)

The Argument for Allowing a Wal-Mart Bank

The Argument Against a Wal-Mart Bank

Wal-Mart Official Lied to FDIC Officers About Bank Leases

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