Monday, September 22, 2008

Embracing Regulation

I was wondering when I would first encounter the "end of an era" cliché in the reporting of the ongoing financial crisis. My wondering has now been resolved by Associated Press Economic Writer Martin Crutsinger in this morning's dispatch:

It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.

The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.

The passing of the institution of investment banking has less significance to someone like myself, for whom "investment" has never ventured beyond the pale of dealing with a stockbroker, than the primary implication that comes from changing from an investment bank to a bank holding company:

The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.

It would appear that the primary virtue of what Paul Krugman had called "nondepository" institutions was to get away from the constraints of regulations (most of which had been introduced in response to previous financial crises) in the interests of making more money. However, to ring a change on an old rule of rising through the ranks, financial institutions should be kind to the regulations it encounters while it rises, because it will probably need them when it falls. The passing of the investment bank may well be remembered as yet another attempt to get rich quick that blew up the same way previous get-rich-quick schemes have done. In the language I recently invoked about the Cluetrain Manifesto (ultimately just another way to ring a change on trying to get rich quick), once again we are seeing some "conservative older values" triumph over "shiny new values." Presumably, in due course of time, those conservative older values will be able to undo the damage done by the shiny new ones; but that just reflects President George W. Bush's inclination to fall back on talking about "the long run," which does me little good as a reader of John Maynard Keynes! Nevertheless, there is still some virtue in seeing a pair of banks grasp the value of regulation faster than the workings of our Government!

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