Skip to main content

Wall Street, meet Fed

Are the Federal Reserve's recent efforts to stop investment bank failures, while providing credit to non-commercial banks, a sign of its future involvement on Wall Street?

Writers at the Financial Times and Barron's believe it is.

While doing a bit of weekend reading, I came across the following article in the weekend edition (March 22/March 23 2008) of the Financial Times.

Entitled, "Wall St detects shift in regulatory power", the piece outlined the possibility of a new "unified regulatory regime" that would involve closer Fed supervision over Wall Street investment banks:

"With the credit crunch worsening and public money at stake, the Fed and the Treasury are taking a hands-on approach to the oversight of Wall Street banks, whose primary regulator for the past 70 years has been the Securities and Exchange Commission.

Senior bankers say that officials from the Treasury and the Fed are in constant contact with Wall Street firms, checking on their liquidity and capital position, in an effort to avoid a repeat of the Bear disaster.

"There is a real sense that this group is now in charge," said a Wall Street banker. "They are committed to doing whatever it takes to sort this mess out, and feel they have real responsibility for dealing with global financial stability."

Fed policymakers acknowledge it is not ideal for them to lend funds to institutions they do not formally oversee and which are more lightly regulated than commercial banks.

And Wall Street observers note that the SEC is not equipped to deal with crises of this magnitude because its main role is to police trading and markets, not to supply liquidity to credit-starved investment banks.

The question is whether the increased involvement of the Fed in Wall Street's daily activities will raise the pressure for wholesale change in a US regulatory regime that dates back to the 1930s."

Barron's columnist Randall Forsyth was also on the trail of this new development, drawing parallels to the 1907 panic and the aftershocks which led to the creation of the Federal Reserve.

Here's an excerpt from his article, "Should the Fed regulate Wall Street?":

"JUST OVER A CENTURY AGO, THE PANIC OF 1907 LED TO the creation of the Federal Reserve, and with it, increased support and regulation of the U.S. banking system.

The Panic of 2008 has spurred a vast expansion of the Fed's powers and responsibilities, from traditional commercial banking to the entire financial markets. Already the calls are being heard for comparable regulation of institutions that now, effectively, have become the central bank's charges."

Meanwhile, today's FT Lex column wonders about the regulatory backlash that could come about if "private losses socialized by the public sector do become drastic".

"The severity of the fallout from today’s crisis partly depends on the scale of loss borne by the public sector. So far central banks can, just about, present their activity as that of lenders of the last resort: lending to banks (and now dealers) in return for good collateral. Even the UK Treasury says nationalised Northern Rock’s assets exceed its liabilities.

But it is easy to imagine scenarios in which the public sector bears large and explicit costs. The collateral’s value could fall; central banks might feel obliged directly to prop up the prices of risky assets; bailouts of clearly insolvent banks might occur. High inflation might conceivably be tolerated to cut the real value of private debt – as Professor Niall Ferguson puts it, a re-creation of the 1970s to avoid the 1930s."

Hmm. I thought this (central banks propping up risky assets, high inflation) was already happening.

Well, at least things are working out for JPMorgan. Despite having to raise their purchase price for Bear Stearns, they still have a little help from the Fed (and the taxpayers) in closing this deal.

It's no wonder that some at the investment banks are "relaxed" at the prospect of further Fed involvement on Wall Street.

Popular posts from this blog

The Dot-Com Bubble in 1 Chart: InfoSpace

With all the recent talk of a new bubble in the making, thanks in part to the Yellen Fed's continued easy money stance, I thought it'd be instructive to revisit our previous stock market bubble - in one quick chart.

So here's what a real stock market bubble looks like. 

Here's what a bubble *really* looks like. InfoSpace in 1999-2001. $QQQ$BCORpic.twitter.com/xjsMk433H7
— David Shvartsman (@FinanceTrends) February 24, 2015
For those of you who are a little too young to recall it, this is a chart of InfoSpace at the height of the Nasdaq dot-com bubble in 1999-2001. This fallen angel soared to fantastic heights only to plummet back down to earth as the bubble, and InfoSpace's shady business plan, turned to rubble.

As detailed in our post, "Round trip stocks: Momentum booms and busts", InfoSpace rocketed from under $100 a share to over $1,300 a share in less than six months. 

In a pattern common to many parabolic shooting stars, the stock soon peaked and began a…

New! Finance Trends now at FinanceTrendsLetter.com

Update for our readers: Finance Trends has a new URL! 

Please bookmark our new web address at Financetrendsletter.com

Readers sticking with RSS updates should point your feed readers to our new Finance Trends feedburner.  



Thank you to all of our loyal readers who have been with us since the early days. Exciting stuff to come in the weeks ahead!

As a quick reminder, you can subscribe to our free email list to receive the Finance Trends Newsletter. You'll receive email updates about once every 4-8 weeks (about 2-3 times per quarter). 

Stay up to date with our real-time insights and updates on Twitter.

Moneyball: How the Red Sox Win Championships

Welcome, readers. To get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter.

The Boston Red Sox won their fourth World Series titleof the 21st century this week.

Having won their first Series in 86 years back in 2004, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it?

Quick background: in late 2002, team owner and hedge fund manager,John W. Henry(with his partners)bought the Boston Red Sox and its historic Fenway Park for a reported sum of $695 million.

Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship.

This brings us to one of my favorite scenes from the 2011 film, Moneyball, in which John W. Henry (played by Arliss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pitt) over to Boston with an excellent job off…