Bloomberg, on Friday:
When New York-based private-equity firm Veritas Capital picked Jefferies Group LLC this month to manage a $1.4 billion buyout loan, it passed over some much bigger Wall Street firms. Names like Morgan Stanley and Barclays Plc and UBS AG.
Why? Because Jefferies dangled something in front of Veritas that none of the larger rivals could, according to people with knowledge of the matter: The ability to take on higher risk levels in the deal than regulators deem appropriate for the commercial banks they oversee.
Jefferies, a New York-based investment bank, isn’t beholden to those lending guidelines. The losing firms are. [Emph. added]
Another triumph for post-crunch banking regulation! You might be tempted (I know I am) to dismiss all this as just another example of unthinking legislators producing an outcome that’s the 180-degree opposite of what they had in mind when they wrote a given law. In this case, the law is Dodd-Frank, and the result of it has been, rather than a tightening of bank regulation, a steady flow of banking activity out of the banking system altogether, to what finance critics can be counted on to refer to as “the Wild West.”
The result, as I’ve said before, is that the net effect of all this is to make the financial system less stable rather than more so. This is not a good thing. Lightly regulated entities can sometimes be the source of chaos. The immediate cause of the financial panic, recall, came from the non-bank sector, money market funds, in particular, after the Reserve Primary Fund broke the buck and caused the entire commercial paper market to freeze up. Just ten years before that, Long-Term Capital Management, a lightly regulated hedge fund, was set to cause a full-scale market meltdown before it was bailed out at the government’s instigation by a consortium of Wall Street firms. And do you remember portfolio insurance?
If I were a policymaker, I’d be concerned. On the one hand, the big banks are still huge, and very well-capitalized. On the other hand, certain activities formerly undertaken by the banks have left the system in large measure and are being performed by entities that are beyond tough regulators’ oversight. You will tell me I’m being too nervous, and everything will work out fine. You will be right. Until you’re not.
What do you think? Let me know!