Is it a coincidence that the first public statement from a chief of a Wall Street supporting extending the Federal Reserve's discount window for securities firm came from Merrill Lynch, which enjoys the lowest leverage ratio on the Street?
There's no question that any move to make the new Fed borrowing facility a permanent feature of our financial infrastructure will be accompanied by a new regulatory framework. Whoever pays the piper calls the tune, as they say. One feature of the new regulations will likely be a cap on leverage for firms with access to the facility.
Especially when compared with banks, securities firms are heavily reliant on leverage to boost returns. But some are more reliant than others. John Thain, who yesterday called for the window to be extended beyond its scheduled expiration in September, runs Merrill Lynch, which just happens to have one of the lowest leverage ratios--the measurement of how much a firm borrows compared to its equity--on Wall Street. He even indicated that he'd be willing to accept a cap below the 23.8 ratio his firm reported at the end of the last quarter.
Merrill's competitors have higher ratios. Lehman's leverage ratio, which was recently as high as 32, is now down to 25. (But the firm stressed it did not want to go any lower). Morgan Stanley's last reported leverage ratio was 33. Even Goldman Sachs has a higher leverage ratio, at 24.
In short, Merrill may believe that it stands to gain from new regulations that push its competitors to adopt the kind of conservative ratios it has already put in place.