A few days ago, on CNBC, guest Steve Crawford, late of Morgan Stanley, advanced the notion that current Senate regulatory efforts to shove risky trading out of regulated banks and into a "shadow banking system" won't keep the federal government from bailing out that sector, too.
This seemed to be an unsubstantiated claim.
Crawford didn't name names, but alleged that "shadow banks" had already been bailed out in the recent crisis, so there was no real discrimination, new legislation, or not.
I wonder which companies he considered to be shadow banks which were saved?
To me, any publicly-held, private sector entity which has material regulation of some sort is not a "shadow bank."
For example, I'd say that hedge funds and private equity groups are "shadow banks." Private equity lends, does leveraged buyouts and, at the upper end, can engage in significant proprietary trading.
Hedge funds clearly meet the trading units of heavily-regulated banks in the marketplace. But the hedge funds enjoy notoriously lighter regulatory burdens than their publicly-held competitors.
I'm not aware of any private equity or hedge fund groups being rescued in late 2008, are you? In fact, a few hedge funds went under, though I can't recall specific names. Other than LTCM, in 1998, no hedge fund, to my knowledge, has been the subject of a coordinated, government-led action to preserve markets.
Even in the case of LTCM, the firm wasn't saved. Rather, there was concern for counterparty losses due to the lack of bids for assets held by the firm, causing financial markets to crater as a by-product.
Counterparties and other large institutions contributed to the orderly unwinding of LTCM positions, but the firm's owners lost everything.
So I confess to not really understanding why Crawford is so worried about shadow banks. Existing hedge funds and private equity firms would pose risks due to unwise levels of leverage. But surely their lenders are capable of judging for themselves what those balance sheets can handle. At least better than an army of civil servants who have yet to forestall a financial crisis due to their exercise of their lawful supervisory powers.
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2 comments:
When Crawford said there had been bailouts of the shadow banking system, he may have been referring loosely to hedge funds that were acting akin to lenders by investing in asset-backed securities, and had their investments propped up through the Fed's, FNM's, and FRE's security purchases.
I doubt Crawford was referring to private equity, since they haven't really focused on credit investments. Although their portfolio companies did benefit from Congress' change in the tax rules allowing deferring of cancellation of indebtedness income.
Joe-
Thanks for your comment.
You may be correct, but, if that's what he meant, I don't think it was accurate. By that meaning, you'd include China, as well, right?
In fact, it was for China that Paulson rushed to assure that Fannie bonds would be guaranteed.
Crawford was very credible on other topics, so this one left me very puzzled.
-CN
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