Thinking Out Loud About Our Government’s Turning Morgan Stanley and Goldman Sachs Into Banks

Monday, September 22, 2008

I’ve got to be careful here. Things are moving so fast in Washington that it’s hard to keep track of the specifics of what’s happening, let alone conduct a thorough analysis of the situation – all for what amounts to a hobby while I work, probably like you, 10+ hour days making a living doing something else. And then there’s the problem that, while my education and experience are helpful, I’m no world class authority on finance and banking. On the other hand, those shortcomings have never stopped me before, so, what the hell, here goes…

My gut and my brain both tell me that allowing Morgan Stanley and Goldman Sachs to function as banks may be a bad idea, certainly one that needs a lot more careful consideration on the part of the Bush Administration and Congress. True, as banks they will be more tightly regulated, and will have access to capital from depositors and from within the banking system itself the way commercial banks do. If only that was all there was to it.

1. Morgan Stanley and Goldman Sachs made some bad investment decisions. So, instead of allowing the economy to impose its own, naturally occurring penalties, we reward them by allowing them, in perpetuity, to be commercial banks.

2. In addition to allowing them to be commercial banks, are we also going to buy the bad subprime debt they’re carrying on their books?

3. There are other ways to regulate investment banking behavior other than turning the investment banks into commercial banks or “thrifts.”

4. In the process, we’re not only pulling the rug out from under Wachovia which was negotiating a merger with Morgan Stanley, we create two huge new competitors in a commercial banking system our own government tells us is already struggling. (Talk about interfering with the economy.)

5. I’m fairly certain our regular banks are constrained by law and regulation in their ability to also engage in investment banking and securities transactions. The idea is that we don’t want unacceptably high risks to be taken with our deposits. Doesn’t turning two of the world’s largest investment banks and brokerages into commercial banks fly in the face of that general principle? Are they no longer going to be allowed to do investment banking?

6. What about the other investment banking firms – such as Merrill Lynch and Lehman Brothers – who managed to save themselves without being allowed to be commercial banks? Are we penalizing them for having resolved their problems without public assistance?

Yes, I have more questions than answers, but the one thing I am sure about is that our government is moving way too fast. In what’s got to be the “bum’s rush” of the decade – any decade – the Administration is asking Congress to give our the Secretary of the Treasury what is basically unfettered authority to spend upward to $1 trillion dollars to resolve the current crisis – the extent of which, and the array of possible solutions for which, we have yet to confirm or debate. And they expect Congress to legislate this authority by Friday. One unnamed media contact in Congress went so far as to describe the legislation they have been asked to approve as a “Financial Patriot Act.” To quote from Senator McCain’s reaction, “We can’t solve a problem that has poor oversight with [a solution that has] no oversight.”

We need to calm down. Congress needs to stay all Administrative actions, including this conversion of investment banks into commercial banks, until it (Congress) has had time to study the situation more carefully.

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