Bair & Bernanke join forces to curb banks’ growth

An interesting story from Bloomberg:

The FDIC will propose slapping fees on the biggest bank holding companies to the extent that they carry on activities, such as proprietary trading, outside of traditional lending.

It goes on to say:

“What we have suggested is financial disincentives for size and complexity,” Bair said in a July 9 interview. Fed Chairman Ben S. Bernanke told lawmakers last month that restricting size is a “legitimate” option.

You can read the entire story HERE.

In short, they are trying to make banks plain vanilla, boring.  Not that it’s completely wrong to be boring for these banks particularly after they almost brought (or did they already?) the whole system down.  It is a valid debate.  However, if we are going to reduce operations by banks such as JP Morgan, Goldman Sachs, Morgan Stanley and Bank of America to mere lending, it is like going against their very nature as banks. It eludes me how or why activities such as proprietary trading need to be separated from bank lending operations.

An analogy: why don’t you go ahead and ask investors to keep their investments in defense stocks and stay away from plays that expose them to riskier commodity/energy firms and other high beta plays in the market.  It might be a bad analogy as some might say since the type of investments depend on liquidity needs yadda yadda.  Point is, you cannot simply go ahead telling banks that bank lending is all there is for them (yes, slapping fees is one way of telling them that –  which although they are capable of paying them, is still a proposal that screams no to more complex activities).

When one advises an investor about his portfolio, you go ahead and warn him/her of the risks of taking on riskier investments.  You, being the financial advisor, manages the risk.  And that’s what the Fed/FDIC are there to do.  They manage the risks.  Now as to how risk is to be managed is perhaps another discussion.

Now, going back to Goldman and Morgan Stanley.  Both converted to bank holding companies in September to gain access to the Fed’s lending facilities.  A question that remains in my mind, would the two have actually fallen had they not converted? I’m also now interested to know something else.  Both converted prior to the TARP funds being available.  Had they gotten access to capital by means other than the Fed only by converting, would they have? Finally, if the Fed and the FDIC indeed are planning on killing the complex operations of banks such as the two, then are they not better off converting back to investment banks?


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