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.”

How?


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.

Not socialist

Harvard law professor Cass Sunstein









Harvard law professor Cass Sunstein cruised through Tuesday's Senate confirmation hearing on his nomination to be White House regulatory czar, heartening business interests who see him as a potential ally in an administration expected to step up rule making.

They still haven't figured out President Obama; all they see is a liberal Democrat, and they pigeonhole him into their own paradigm of what that means.

"Certainly, Cass is a very smart guy and understands the regulatory process as well as anyone," said William Kovacs, vice president for regulatory affairs at the U.S. Chamber of Commerce. "That is the most you can hope for in this kind of administration.…If we have a chance anywhere [in the administration], it's going to be there."

This kind of administration? Being what, precisely?

Behind the Boom and Bust in Real-Estate

This is a case of business people yelling ot the government: "save us from ourselves."

A firm that acted as a middle man in a popular real-estate-investment strategy has closed its doors, leaving investors scrambling to recover millions and pointing to flaws in the largely unregulated industry.

Emphasis added to make a point. Here's another point:

Vesta was founded in 2004 by Chicago businessman John Terzakis and his partner, Robert Estupinian. Prior to starting Vesta, Mr. Terzakis had a history of failed real-estate deals and soured relationships -- information Mr. Terzakis isn't required to disclose to potential clients.

Not required to disclose he had a history? Why? Should not that be considered material?

Californian Christina Pappas was seeking to carry out a 1031 exchange when, on the advice of her escrow company, she handed over $2.5 million to Vesta in April from the sale of a property. She soon found another building to purchase within the IRS-mandated 180-day time frame. But a Vesta representative failed to wire her money to complete the property exchange by the June 16 closing, and still hasn't done so, she says.

The 57-year-old Ms. Pappas filed suit against Vesta last month, but she fears she won't recoup the money, which accounted for much of her retirement savings. "If I would have known any of this, I would have paid my taxes instead" of attempting a 1031 exchange, she says.

If she had known? She handed over 2.5 million, and didn't know? Ouch.