Saturday, January 23, 2010
Bank, or banana?
Banks May Get Help to Escape Risk Limits
By LOUISE STORY and ERIC DASH
Only a year after the government stepped in to aid Goldman Sachs and Morgan Stanley by granting them access to the federal safety net, policy makers are developing an exit path that would allow them and others to escape limits on banks being proposed by the Obama administration.
President Obama wants to limit the scope of risk-taking by barring banks with federally insured deposits from trading securities for their own accounts and from owning hedge funds and private equity funds. The plan, policy makers said on Friday, would effectively require bank holding companies — which Goldman and Morgan became at the height of the financial crisis — to divest themselves of these lucrative operations.
But Treasury Department officials are also seeking to give banks that do not like the proposed rules the option of dropping their status as holding companies to keep their trading and other investment businesses.
Don't like the rules? We'll change 'em fer ya. No probelma.
The move is likely to turn the spotlight on Goldman, which could be one of the biggest potential beneficiaries because it makes sizable profits from proprietary trading and runs many private equity and hedge funds. Goldman traders are known for taking large trading positions, even as they manage trades for clients. It is less clear that Morgan Stanley would consider such a step, because it has aggressively raised deposits and reduced trading operations since its big losses during the crisis. Officials from each bank declined to comment on Friday.
Allowing Goldman, or other institutions, to abandon their bank charters carries risks. Such a plan could create a two-tier system, where Goldman could pursue business activities different from its bailed-out peers like JPMorgan Chase. Goldman would lose access to the Federal Reserve’s overnight lending program, which provides emergency financing. But investors may still assume that the government would bail out Goldman if it had trouble, elevating the risk of moral hazard.
Simon Johnson, a former chief economist at the International Monetary Fund, said allowing either bank to revert to a securities firm would do little to address the underlying problem. They are so large and interconnected that a collapse would imperil the global financial system, he said. “You can call them an investment bank, a hedge fund, or a banana, but they are still too big to fail,” Mr. Johnson said.
Who could put it better?
Andrew Williams, a Treasury spokesman, confirmed that the proposal would allow the banks to reverse their decision to become bank holding companies. But he said the Fed would still closely regulate companies like Goldman because they would still be systemically important. “There is no escape hatch,” he said. “There is nowhere to hide. Large, interconnected, highly leveraged financial firms must be regulated on a comprehensive, consolidated basis, the same as those for big firms who run banks.”
While bank holding company status is generally permanent, investors have speculated for months that Goldman might seek a way to unshackle itself from some of the additional government regulation that goes with it. Goldman officials have said privately it would like to shed its holding company status, although they have stated publicly that they do not plan to change the company’s charter. On Thursday, David A. Viniar, the bank’s chief financial officer, said the topic was not under discussion. “I just think it’s unrealistic,” Mr. Viniar said in a call with reporters. “I think we’re living in a world where basically every major financial institution is going to be regulated by the Fed.”
But Goldman could change its tune if the Treasury created guidelines for banks to shed their holding company status. The first step for Goldman would be to dispose of its debt, which is backed by the government, or wait until it expires in about two years, the person with knowledge of the plan said.
In addition to the federal bailout, the government agreed that the Federal Deposit Insurance Corporation would back some bank debt issued when the markets were frozen and banks could not otherwise raise money. Goldman has issued $21 billion of the debt.
The Treasury will include the exit strategy in the legislative proposal it is preparing to send to Congress, Mr. Williams said. Lawmakers could make significant changes to the proposal. The plan does not now clarify what proprietary trading activities would be limited. Officials said banks would not be permitted to use their own capital for “trading unrelated to serving customers.” They also said that the rules would require banks that own hedge funds and private equity funds to dispose of them over several years.
Mr. Obama called the ban on trading “the Volcker Rule,” in recognition of the former Fed chairman, Paul A. Volcker, who has championed the proposal to prohibit bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds and from engaging in proprietary trading. Big losses by banks in the trading of financial securities helped fuel the credit crisis in 2008.