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The papers Friday morning were a real pick-me-up, particularly that guy in The Wall Street Journal who muttered that the credit markets hadn't improved since June -- that is, last June. Thanks, Mr. Sunshine.
But let us do what we always do in the bleakest moments before we crack open the hooch: Let us postulate that perhaps this is the bottom, the darkest hour of the darkest night, and that dawn is upon us like a hungry fox on a fat chicken. Hey, it's a Friday. And let us not be confused: Our leaders are still working for us. The biggest news, argued for in a Journal op-ed by Carlyle Group's Olivier Sarkozy and Randal Quarles on Thursday, then confirmed by a WSJ news story Friday (interesting how that works): The Federal Reserve is talking to buyout shops, including Carlyle, about easing the rules on PE investment in banks. Like everything else, you can look at this two ways: The Fed is really getting desperate again; or the Fed is being intelligently creative and forward thinking. Because it's Friday, I'll choose the latter, with the aside that, once again, the Fed seems to be the only governmental -- or semi-govenmental -- body that has a thumping heart. Step by step, move by move, crisis by crisis, the Fed is recasting the rules that govern finance. As New York Fed chief Timothy Geithner admitted a few weeks back, the Fed has no enabling legislation to allow it to essentially take over everything, and on the question of private equity and the banks, it probably doesn't need it -- or at least it can reinterpret its way past the rules. But with each sweeping reconsideration of regulation and practice, the Fed is reinforcing the increasingly de facto Paulson plan: the Fed as super-regulator. Which raises a longer-term question. Will there come a day when Congress rouses itself from its nap and asks: Who let the Fed get so high and mighty? Or, by that time, will the central bank have created its own unassailable reality, with itself at the center? Not that funneling buyout money into battered banks is a terrible idea. God knows, the banks need it in the worst way. And the buyout shops are stuffed with cash with nothing really interesting to buy. There is also a considerable amount of financial expertise in private equity, and a number of the firms have had considerable experience, and success, investing in banks in Japan and South Korea. In effect, the rule that owners of over 25% of the stock of banks must form a bank holding company (and as Sarkozy et al. said, that percentage falls further in the event of gaining real power, like a board seat), and thus be regulated by the Fed, goes back like nearly everything else to the 1930s and the Crash. So much of the reform legislation of the '30s, like Glass-Steagall, was involved in carefully compartmentalizing financial functions to deter the spread of speculative contagion or of nonbank problems into the banks. Commercial banks, with their big retail presence and economic clout, were viewed as the pillars of the system, and they traded heavy regulation for steady, stable, regulated earnings. Investment banks got a lot more rope and a lot less protection, short of Securities and Exchange Commission disclosure requirements. Corporations and private interests, beyond the reach of regulators, were kept out of the commercial banks. Those neat boxes have now converged in a jumble. The Fed over the past few decades encouraged some of this -- through the steady drip drip of reinterpretation freeing the banks to grow, conslidate and add new functions -- and, at other times, succumbed to larger realities; where that line is drawn is a mystery. Much of the Fed's decision to relax rules over time was based on the notion that it would make banks safer, sounder and, of course, more competitive. Oh well. Now, with the banks floundering, the Fed finds itself dragged in more deeply by the very logic of events it helped to orchestrate. To save Wall Street, the Fed opens the discount window to investment banks -- essentially arguing (at least for now) that there's little difference between banks and investment banks. If that's the case, then why shouldn't new forms of capital -- private capital -- be allowed to play in banking? If private equity can control a bank, what's next -- corporations? Hedge funds? What is essentially the difference among institutions that increasingly resemble each other? Meanwhile, private equity has been off on its own strange journey over the past few years. Growth, globalization and diversification among the largest firms produced a handful of public offerings, thus eroding what was once a clear public-private distinction. Voluntarily joining the orbit of the Fed will blur those lines further. So the urge to converge is coming from both sides. Of course the Fed will put conditions on the sale of bank stakes to private equity; that's clearly what's being discussed right now. But those conditions will be limited by the ability of the PE shops to make a buck on these deals: no profit, no play. What's not happening here, under the darkening cloud of crisis, is any real public debate about where this is all heading. Whether deliberately or not, the Fed is presiding over a dramatically less differentiated financial sector, essentially arguing that the kind of compartmentalization mandated in the 1930s was either a dumb idea or one that has long since become anachronistic or both. The new world is one market, one kind of "bank," one regulator. All that might be true. But it would be heartening to see the premises and presuppositions of that argument laid out, debated and discussed intelligently. Instead we have to read about it in the papers and wait for something to happen. - Robert Teitelman CategoriesPrivate capital video
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