It seems to me that one of the consequences of the financial reform efforts (unintended, I assume) is the benefits which may redound to Wall St. As I see what could happen, these efforts could be called The Wall St. Full Employment Act.
Let's start with getting our definitions straight. Wall St. refers to investment banks; firms like Goldman Sachs, Morgan Stanley, Merrill Lynch( now owned by Bank of America), Lehman Bros. (gone) and Bear Stearns (now owned by JP Morgan Chase). They all are (or were) headquartered in the Wall St area of New York City; ergo the name.
Big Banks are large commercial financial institutions that used to just basically take deposits and makes loans. They don't even primarily reside in Wall St, but rather are headquartered in Charlotte, San Francisco, Minneapolis, Pittsburgh and Mid-Town Manhattan.
As a result of the financial crisis, investment banks also became commercial banks because it entitled them to many of the government benefits employed to fight the financial panic. It was the smart thing to do, and it was allowed since the repeal of Glass Steagall.
Commercial banks, also as a result of that repeal, have been allowed, for some time, to act as investment banks.
If Glass Steagall is repealed, they will have to choose sides. The true investment banks will just drop their bank charters. They really don't care much about taking deposits and making loans. Have you ever seen a Morgan Stanley branch bank or a Goldman ATM? Me neither.
For the commercial banks, it's not so easy. If they are forced to leave investment banking, the field will be wide open for Wall St. to capture all of that business (very profitable albeit risky) the commercial banks will be required to abandon.
Talk about unintended consequences. In one fell swoop, Wall St. will have eliminated it's strongest competition. They will have to scramble to handle all of the new business.
By the way, I'm not sure allowing the Banks to do just non-proprietary investment banking will solve this problem in the long run.
All in all, getting rid of Glass Steagall may be bad for Banks, but great for Wall St.
Eric
When Glass Steagal originally happened it seems to me that, for example, the House of Morgan became split into an investment bank and a commercial bank. So the solution will not necessarily eliminate competition, but perhaps make it more competitive. Splitting AT&T, splitting the Standard Oil Trust,all made for more competition.
ReplyDeleteSecondly there are many forms of banking institutions and always have been, with especial diversity on the investment banking side. Merchant banking, private equity funds, REITS, mezzanine lenders, venture capital funds, hedge funds, can all be variants of investment banking. As long as there is investment capital, there will be competitive investment banking entities, each with their own angle on funding commercial companies and ventures.
I think Citicorp and their ilk oversold the public policy that mega-sized institutions were needed to compete with foreign investment banking companies to keep the U.S. dominant in finance. Foreign banking has always been different, with a limited number of institutions in each foreign company, acting as a single source for depositories, investors, and investment bankers. We can do it, and always did achieve our financing needs without having these quasi-public financial institutions that are always too big to fail for their respective countries. We achieved size by consortiums of bankers each being part of a tombstone listing for financing a given deal. Remember financing packages with 15 investment houses all part of a deal. It probably made for better financing.
Marc/commercial banker