Glass-Steagall Redux: A Gift to M&A Bankers?


There are few things in business that are outright bad for everyone. Usually someone, somewhere is a winner when the rules change. In the case of proposed new bank regulations, merger and acquisition ("M&A") deal makers may be about to enjoy a bonanza.

On January 21, 2010, the White House issued a press release entitled "President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers" in which the 44th U.S. President proposes to limit banks from owning a hedge fund or a private equity fund or "proprietary trading operations unrelated to serving customers for its own profit." Additionally, unfettered deposit-taking growth would be strictly curtailed in order to avoid another federal bailout on the basis of "too big to fail." 

Another day, another mandate, another perverse outcome. 

  • Risk transfer requires a willing party to accept the uncertainty that is anathema to someone else. Companies cannot hedge unwanted price risk if there is no one on the other side of the equation. Restrictions on proprietary trading, otherwise referred to as Volcker's Rule, could arguably (and significantly) depress liquidity in numerous financial markets around the rule.
  • Lumping all hedge funds into one category is a mistake. Some hedge fund portfolios are highly liquid, with net asset values being reported to investors every day. Forcing a "one size fits all" solution to a financial market sector that varies in terms of strategy, scope and risk factors is a recipe for disaster.
  • Private equity funds tend to adopt a longer view than a trading operation. Is the suggested federal grab for power meant to discourage this source of  capital at the same time that bank credit is limited at best and cost-prohibitive at worst?
  • Why would Fannie Mae and Freddie Mac be exempt, especially given their stated track record in the area of risk-taking?

Not everyone is a sad sack. Think about all the equity carve outs and spin-offs that will result if banks are forced to shed their prop trading portfolios. This type of forced corporate restructuring will be a huge boon for investment banks, law firms and accountants who earn considerable fees for fairness opinions, buy-sell matchmaking and papering the deals.

Don't get me wrong. Excess in the trading room is bad news for everyone. Instead of binding limits introduced by regulators, why not encourage banks to increase capital reserves, evidence better risk management policies and procedures and let the market punish those organizations that get it wrong?

Perhaps not so coincidental, sales of Atlas Shrugged by Ayn Rand are skyrocketing. In its January 21, 2010 press release, the Ayn Rand Institute cites that more than seven million copies of this 1957 novel have been sold. The premise of this international best-selling book is that captains of industry who create wealth walk away from those who take, leaving the city of Gotham in the dark, unable to survive.