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]