WASHINGTON -- The easy part was getting the two companies to agree to combine. Now comes the real challenge: devising a strategy to get the biggest financial services merger in history through Congress and the Federal Reserve. With billions at stake, officials at Citicorp and The Travelers Group are amassing an army of lawyers and lobbyists to overcome the legislative and regulatory hurdles that stand in the way of the proposed $ 70 billion merger announced this month.

The lobbyists have a massive task ahead in tearing down the Glass-Steagall and Bank Holding Company acts, Depression-era laws that wall off the banking, securities and insurance industries.

The firms have already dispatched legions of advocates to the myriad state, federal, and international agencies that must sign off on the deal. But the ultimate target is Congress, which could quickly end many of the companies' headaches by passing legislation to deregulate the financial services industry. Consumer and banking groups are decrying the proposed merger and calling for greater government scrutiny. They argue that the combination would overwhelm small banks, pose financial soundness problems, and increase market concentration in financial services.

Citicorp and Travelers are betting that their lawyers and lobbyists can persuade the government to allow the birth of a single company that combines insurance, securities and banking -- a mix that has been banned since the 1930s. "Part of our assumption is that the time is ripe," says Roger Levy, who heads Travelers' in-house lobbying operation in Washington.

It is a brash assumption. By some counts, the industry has tried to repeal the two banking laws 11 times since the early 1980s. The most recent effort was pulled from the floor only a week before the merger was announced. Still, insiders say, Congress could actually go along this time, as merger mania sweeps the banking industry. If Congress doesn't, the two giants could still merge but would have to pull off a costly and complicated restructuring.

A fait accompli?

"It might be easier to just change the laws rather than force Citicorp and Travelers to spend millions trying to create a convoluted corporate structure in order to carry out all of their present activities," says James Hyland, staff director for the Senate Banking Subcommittee on Financial Institutions and Regulatory Relief, chaired by Sen. Lauch Faircloth, R-N.C., who favors overhauling the banking system.

"The market makes this a fait accompli," adds Hyland. "Congress is good at rubber-stamping what the market has already done."

The primary lobbying focus at this point is the Federal Reserve. Under the current plan, Citicorp would merge into Travelers, which would then apply to the Fed to become a bank holding company.

If approved, the new entity would enjoy an automatic two-year grace period - - and up to three one-year extensions -- during which it would have to divest its impermissible assets, including Travelers' huge insurance business. The companies hope to avoid divestitures, however, by getting Congress to pass deregulation.

To deal with the Fed, the companies have engaged high-powered talent. Leading the Travelers team is William Sweet, a D.C. partner at New York's Skadden, Arps, Slate, Meagher & Flom and a former staff attorney at the Fed. Sweet heads his firm's banking regulatory practice.

Citicorp is relying on New York's Shearman & Sterling, which has half a dozen lawyers working on the deal. Handling the Fed application is Bradley Sabel, who spent 18 years at the Federal Reserve Bank of New York.

Citicorp and Travelers also need approval from the Justice Department, state insurance and bank regulators, foreign bank regulators, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency (OCC).

"I'd be worried about the small glitch that slows it down," says veteran banking lawyer Cantwell Muckenfuss III, a former deputy comptroller at the OCC, now a partner at the D.C. office of Los Angeles' Gibson, Dunn & Crutcher.

Sweet says the companies believe the deal will be approved by the Fed and that some kind of financial services deregulation will go through Congress.

"We are focused on getting the deal done," he says. "Nobody is sitting around constructing alternative universes."

While the companies are not lobbying the Fed the same way they lobby Congress, their power of persuasion will still be key. After all, this is new to the Fed too.

"We have never seen something like this," says a Fed staff member. While other banks have applied to become holding companies even though they hold impermissible assets, the Citicorp-Travelers deal stands out because the assets form such a huge part of the combined operation. "That's what makes this one difficult," says the staffer.

Muckenfuss says the new entity's structure could set a major precedent.

"How the Fed chooses to look at and analyze and supervise the resulting beast is going to set the paradigm for the future," he says.

Opposition grows

The fear that the merger could open a floodgate of similar combinations has sparked opposition from small banks and consumer groups -- which has grown after announcements of planned mergers by NationsBank Corp. and the BankAmerica Corp., as well as by Banc One Corp. and First Chicago NBD Corp.

Critics say the Citicorp-Travelers merger is pushing Congress toward enacting deregulation at a time when tighter controls are needed. They also complain that Citicorp and Travelers are planning to use the Fed's two-year grace period not to divest the impermissible assets but to push H.R. 10, which would deregulate financial services.

"H.R. 10 has really become the Citicorp-Travelers bailout bill," says Jake Lewis, a banking specialist at Ralph Nader's Center for the Study of Responsive Law.

Some banking officials agree. In an April 14 letter to Fed chairman Alan Greenspan, Kenneth Guenther, executive vice president of the Independent Bankers Association of America, questioned whether the Fed should be thinking about approving the merger now.

"It is highly unusual, almost unprecedented for the Federal Reserve to act like this when legislation is pending," says Guenther, whose group represents small banks. "It is a huge loophole ."

The House Banking and Financial Services Committee is having hearings on the merger Wednesday. Representatives of companies that have recently announced mergers are scheduled to testify, including Citicorp, Travelers, Banc One, First Chicago, BankAmerica, Nationsbank, the Beneficial Corp., Household International Inc., and Washington Mutual Inc. The committee has invited Citicorp chairman and CEO John Reed and Travelers chairman Sanford Weill.

But while some legislators have expressed concern about the companies' backdoor moves at the Fed, they also see the merger as a way to revive H.R. 10. House banking committee chairman James Leach, R-Iowa, in a speech soon after the merger was announced, said the merger underscores the need to get the banking deregulation bill through. Other House leaders have expressed similar sentiments, and even Senate banking chairman Alfonse D'Amato, R-N.Y., who has been reluctant to act on banking legislation, said he's interested in moving something this year. The bill is set to come up for a vote the week of May 4. The proposed merger is already paving over some of the differences that doomed financial services deregulation in the past. In the recent skirmish over H.R. 10, Citicorp and Travelers took opposite sides, with Citicorp opposing the bill because, among other things, it placed limitations on banks getting into the insurance business. Since the merger agreement, Citicorp is backing the bill.

Mobilizing lobby operations Citicorp's and Travelers' lobbyists began making their rounds the morning. Citicorp's and Travelers' lobbyists began making their rounds the morning the merger was announced on April 6. They gave a formal briefing to the House Banking Committee on April 14 and have met with Senate Banking Committee staff and Senate and House leadership staff, says lobbyist Levy.

Both Citicorp and Travelers already have substantial lobbying operations. In 1997, Citicorp spent $ 9 million on lobbying, Travelers spent $ 1.2 million, and Salomon Smith Barney, a Travelers subsidiary, spent $ 1.56 million, according to Roll Call.

Citicorp boasts 15 in-housers and has contracts with eight outside lobbying firms. Its outside lobbyists include James Sivon, former staff director of the House Banking Committee, and Robert Barnett, ex-chairman of the Federal Deposit Insurance Corp. Citicorp also uses the D.C. office of Cleveland's Arter & Hadden, including former GOP Chief Deputy House Whip Thomas Loeffler, ex- Democratic Rep. Jim Chapman and former Clinton adviser Jon Plebani.

Travelers employs three in-house lobbyists and several outside advocates. Among them: Akin, Gump, Strauss, Hauer & Feld's Kirk O'Donnell, who served as general counsel to then Speaker Tip O'Neill; Baker & Hostetler's Matthew Dolan, once an aide to then Sen. David Durenberger (R-Minn.); Merrigan, a former assistant to then Sen. Russell Long, D-La.; and Verner Liipfert's Andrew Eskin, a former attorney at the Federal Trade Commission and legislative director for Sen. Richard Bryan, D-Nev.

Levy says Travelers is also conducting a grass-roots operation on behalf of H.R. 10, mobilizing its employees, executives, and insurance agents. A public relations campaign could be in the offing, he says.

No decision has been made on when and how the two firms will merge their local operations or on who will head the D.C. office, says Levy. For now, he says, "we travel in pairs."