Ever since the Federal Reserve began allowing investment banks access to a special borrowing facility, there have been predictions and calls for the Fed to start regulating investment banks. Now it seems the investment banks are split about whether access to the emergency window is worth the price of new regulations.
More after the jump.
The Financial Times reports that the split falls along predictable lines. "Investment banks such as Goldman Sachs that have been less affected by the credit crisis are said to be leaning against accepting any significant new limits by the Fed, while those that have been somewhat more affected, such as Lehman Brothers, are seen as more eager to maintain access to the Fed facility even if it means new limits on risk-taking," the FT writes.
The choice will likely need to be made quickly. The next Congress is likely to be dominated by Democrats, many of whom advocate regulation. The big commercial banks are lobbying for regulation of the investment banks, arguing that the limitations on debt and leverage should apply to commercial and investment banks. Allowing the investment banks to have the advantage of an emergency borrowing window without further regulations could result in serious capital dislocations, as the investment banks will be able to achieve higher returns for investors and clients while enjoying a government safety net.
The arguments we've heard for lighter regulation of the investment banks are unlikely to persuade regulators or lawmakers. According to the the FT, one executive at an investment bank argues that the investment banks should be required to bring down leverage somewhat but not to the levels of commercial banks. Why should investment banks enjoy the advantage of higher leverage?
"The fundamental difference is that they play with depositors' money, while our clients are professional investors," he says. But that's sounds more like an argument for denying the investment banks access to the window at all, letting them fail instead of bailing them out with emergency measures, rather than an argument for lighter regulation plus a Fed bailout facility.
In short, lawmakers and regulators are likely to decide that investment banks can't have the safety net unless they lower the high-wire of leverage.
Investment banks split over Fed loan facility [Financial Times]
Posted by guest , May 28, 2008 1:32PM
"But that sounds more like an argument for denying the investment banks access to the window at all, letting them fail instead of bailing them out with emergency measures, rather than an argument for lighter regulation plus a Fed bailout facility." As always, your bullshit detector is set to max. Thank you.
Posted by guest , May 28, 2008 1:54PM
Ah, the Union States of America. If the democrats turn us socialist, can we drink vodka for breakfast, lunch, and dinner?
Posted by guest , May 28, 2008 2:01PM
The i banks play with taxpayer money. What is this guy smoking. Did he miss the bear stearns debacle...
Posted by guest , May 28, 2008 2:44PM
Yeah, I'm sure I-Banks will behave much more conservatively if the Fed is willing to provide a taxpayer cushion.
Even with commercial banking regulatory measures in place, they will always be 3 steps ahead of regulators....and blow-ups will continue to happen, but not at the cost of shareholders/investors...John Q taxpayer will pick up that tab...
Posted by guest , May 28, 2008 2:46PM
@2.44--back to the salt mines, we need more tax money to bail out our friends.
Posted by guest , May 28, 2008 3:14PM
I don't see how even the most red-blooded American capitalist can argue with the basic premise. If you're using someone else's money, they have a right to influence over your actions. This is true whether it's a bank extending a revolving credit line, a husband with a spendthrift wife, or the Federal Reserve providing a liquidity backstop / safety net.
There's nothing socialist about telling private enterprises that they can't have free money with no strings attached. They can do whatever they want with their own capital, OR gain access to taxpayers' capital while following guidelines deemed appropriate by the Fed to protect said taxpayers' capital.
What's the issue here?
Posted by guest , May 28, 2008 3:17PM
"If you're using someone else's money, they have a right to influence over your actions"
You clearly do not understand the concept of debt vs equity.
Posted by guest , May 28, 2008 3:32PM
You've clearly never heard of a negative covenant.
Posted by guest , May 28, 2008 3:32PM
You've clearly never heard of a negative covenant.
I didn't say "control", I said "influence".
Posted by guest , May 28, 2008 4:13PM
@3:14pm. Also, no one has ever told you that the Federal Reserve is not the "taxpayers capital." Not now, not ever. National banks pay a statutorily determined percentage of their reserves to the Fed and get in return shares in the Fed. They can't do anything with these shares, but they get yearly interest and a dividend. They also get the financial security provided by a well-run national financial system that protects their functioning. Money paid from the banks forms the basis of the Fed's capital. On top of it, the Fed charges interest on the money it loans, and fees on essential services it provides banks in the U.S. The Fed usually makes a nice profit every year. No taxpayer money is involved. No appropriations from Congress go to the Fed.