Goldman, Morgan to Become Full-Fledged Banks
dealbook.blogs.nytimes.com
dealbook.blogs.nytimes.com
* Economic That banks with the 'deal power' of Goldman and Morgan would set themselves up to the scrutiny of the Fed (adopting a commercial bank) is just amazing. These banks made the money they made and had the salaries/bonuses to go with it because they had little regulation with respect to commercial banks.
* Power Jobs / Career Tracks I don't know what the bulk of MBA's will aspire to now -- or Hollywood for the matter. Investment banking was regarded as a golden standard for 'making it'. So no more, now that investment banking has gone down the toilet.
* Regulation / Legislation Ironic, but the Glass-Steagall Act which was enacted in 1933 after the great depression was precisely the OPPOSITE: To separate commercial banking from investment banking! REF: http://www.fdic.gov/regulations/laws/important/index.html (So it looks like the cycle has started once again)
These companies will still be conducting Investment Banking activities. There are other bank holding companies who also own investment banks (Citigroup, and I believe JP Morgan, in addition to a host of foreign banks like UBS). What this means is that they will be forced to adopt capital requirements and other regulation in their portfolio business and take on two new regulators in exchange for more financial stability from deposits and access to Federal Reserve funds.
>* Regulation / Legislation Ironic, but the Glass-Steagall Act which was enacted in 1933 after the great depression was precisely the OPPOSITE: To separate commercial banking from investment banking! REF: http://www.fdic.gov/regulations/laws/important/index.html (So it looks like the cycle has started once again)
Preventing deposit-taking institutions from taking risky activities is of much less importance now that there is an FDIC. Also, having diversified business lines should make these firms less likely to fail. Glass-Steagal made firms more fragile. You don't see JP Morgan, Citigroup, Wachovia, or B of A getting bought out, yet.
"the FDIC’s reserves reported it had US$45.2 billion of reserves covering 1.01% of all deposits. This is considered historically low."
"FDIC Chairman Sheila Blair said yesterday that they may need to borrow money from the Treasury due to “short-term liquidity issues”"
Actually, all of the justifications I've heard seem to imply that Glass-Steagall was necessary to criminalize things like fraud and undisclosed conflicts of interest, which I thought were already illegal.
Frauds and undisclosed conflict of interest still occur, but that is a matter for the SEC, which oversees investments.
Frauds and undisclosed conflict of interest still occur, but that is a matter for the SEC, which oversees investments.
This tends to reinforce my "It was already illegal, so making it illegal again is at best a duplication of effort, and at worst a way to further restrict those of us who aren't criminals," point.
I wonder if they can reverse this status change in a few years.
2. This, from what I know, seems like a terrible move.
My understanding is that the Glass Steagall act in the 1930s was passed to separate holding banks (like WaMu etc) and investment banks (GS) because when they were combined certain risks popped up.
One of the first that immediately comes to mind is that now investment banks will be in charge of deposits. Securities trading is pretty risky (especially when you're leveraged) and if something should happen (tech bubble or the current mess) then the deposits are threatened. Since deposits are also insured by the government (FDIC), the government then is automatically on the hook for the money.
This means that there is a need for new restrictions placed on the hybrid banks. If the regulation is too low, then we run the risk of putting deposits in danger. If the regulation is too much, we run the risk of crippling the investment banking industry.
Then again other countries seem to work fine without such separation, so hopefully this will work out. From the article it seems new regulations will be imposed on the banks.
If anyone else has additional insight, feel free to correct me :)
>This means that there is a need for new restrictions placed on the hybrid banks. If the regulation is too low, then we run the risk of putting deposits in danger.
Regulators are way ahead of you. As bank holding companies they will be subject to a TON of regulation. Few firms are more regulated. Both the FDIC and the Federal Reserve will have authority over them.
It's good that Glass-Steagal was repealed since it allows them to take these risk-reducing moves. It also broadens the supply of capital that is capable of supporting the financial industry in hard times (see J.P. Morgan/Bear Stearns and BOA/Merrill Lynch). With Glass-Steagal, the default reorganization move would be failure rather than merger. More federal government money would be at risk in bail-outs rather than private money put at risk in mergers.
Also, diversified financial companies have weathered the storm far better than their more focused peers. Being big and diversified has its advantages in tough times, as one would expect.
It's weird that the Glass-Steagal Act keeps popping up as much as it is. As far as I know its repeal had nothing to do with the current crisis, and probably helped alleviate it. I thought this link had a good summary of the Glass-Steagal act as it pertains to the current crisis:
http://meganmcardle.theatlantic.com/archives/2008/09/clear_a...
I figured the capital requirements would indeed get stricter (I believe the article also mentions this), but I'm still skeptical as to how long the banks can rein in their greed. Capital requirements should technically force them to be more careful, but IIRC the big 5 had already managed to get their requirements increased before (from 12:1 to 40:1).
As for mergers alleviating risk, would it not also expose the system to a different risk: market consolidation? The reason given for the current bailouts is that if these handful of investment banks (or even just AIG for that matter) failed it would set off a catastrophe. If there were more consolidation wouldn't it just aggravate this risk of one failure causing a significant impact?
Like I said before, I'm not an economist, but it seems better to keep the WaMu's and Goldman Sachs' separate, in more or less mutually exclusive risk pools so that if GS fails, the deposits in WaMu don't go with it.
Anyway, good points! I'm sure if handled correctly the situation will work since it does seem to work elsewhere.
Independent investment banks are not subject to the capital requirements of FDIC insured institutions. The big 5 were previously under no regulation as to their leverage ratios.
>As for mergers alleviating risk, would it not also expose the system to a different risk: market consolidation? The reason given for the current bailouts is that if these handful of investment banks (or even just AIG for that matter) failed it would set off a catastrophe.
The financial markets are highly fragmented and competitive, or at least they were 18 months ago. The risk isn't so much that one big firm will go under, but that some firms going under will set off a panic that will force lots of firms to go under. There were hundreds of independent mortgage originators, and as far as I'm aware they are now all gone.
http://www.nysun.com/business/ex-sec-official-blames-agency-... That article suggests that the SEC enforced a 12:1 ratio for banks... or am I getting incorrect information?