Bank charters may not be forever: President Barack Obama’s proposal to bar bank holding companies from proprietary trading and the alternative investments industry will give firms the option to return their bank charters and hold on to their own trading operations.
The potential out clause could give firms like Goldman Sachs and Morgan Stanley, with large trading businesses and big alternative investment operations, a choice that is currently denied them. Both firms became bank holding companies in 2008 to gain access to federal bailout funds; holding company status is generally not revocable.
But under the Treasury Department’s proposal, it would be. Neal Wolin, deputy Treasury secretary, indicated that banks without federally-insured deposits would be permitted to continue their own trading. Whether such an exit clause would survive through Congress remains to be seen.
If a firm chooses to give up its bank status, it would lose access to the Federal Reserve’s overnight lending program.
Even if Goldman—which earns 55% of its revenue on its own trading—or another firm abandons its bank charter, the Treasury says it won’t create a loophole that will allow large trading operations to escape regulatory oversight.
“There is no escape hatch,” Andrew Williams, a spokesman for the Treasury, told The New York Times. “There is nowhere to hide. Large, interconnected, highly-leveraged financial firms must be regulated on a comprehensive, consolidated basis, the same as those for big firms who run banks.”
Goldman, which has a large private equity business in addition to its lucrative proprietary trading desk, seems the most likely to take advantage of the proposal. Morgan Stanley has aggressively built up its federally-insured deposits since becoming a bank; Goldman has not. Morgan Stanley does hold large stakes in several hedge funds and owns FrontPoint Partners.
Goldman may have other options, as well. Speculation is rife that the firm may seek to go private to escape the government’s thumb. Or it may do what other bank holding companies would be forced to do under the Obama proposal and spin-off or sell its proprietary trading and alternative investments business.