Physical Commodities: Fed Governor Tarullo Talks Capital Hike for Morgan Stanley, Goldman (GS; MS)
From The Street, July 6:
The central bank
chief said an advantage the two institutions receive from a 1999 law is
'anomalous' and it would be better to 'phase that out.
Federal Reserve Board Governor Daniel Tarullo on Wednesday targeted Morgan Stanley (MS) and Goldman Sachs (GS)
with comments suggesting that big banks that own physical commodity
businesses will be hit with more capital restrictions once a rule
governing their business is completed.
"We
do have capacity to change capital requirements with respect to certain
activities related to commodities and that is the direction which we
will be headed," Tarullo said at a Wall Street Journal event at the
Newseum in Washington.
Tarullo
(pictured) specifically suggested that Goldman Sachs and Morgan Stanley
could be hit with particularly tougher restrictions over their physical
commodity businesses.
Those measures could force the two big banks to divest commodity
businesses. Lawmakers on Capitol Hill have put pressure on the central
bank to hike capital and install other restrictions on big bank
commodity units, arguing that the institutions don't have anywhere near
the capital they need to offset potential catastrophic risk associated
with those businesses. In addition, Democratic senators have raised
concern that the operations at some of the largest institutions give
them an unfair trading advantage that isn't fully disclosed.
Tarullo
suggested that an advantage that Morgan Stanley and Goldman Sachs
receive because of a controversial provision in the 1999
Gramm-Leach-Bliley Act could be phased out. The provision permits
Goldman Sachs and Morgan Stanley to continue to own a physical commodity
business if they owned it before September 1997. A move by the Fed to
keep the two big banks out of that business would require that they
divest physical commodity assets.
The status of those two institutions changed in September 2008, when
the Fed, as part of an effort to limit the fallout from the expanding
liquidity crisis, allowed them to register as bank holding companies in
order to take advantage of the low-cost funding available at the Fed's
discount window operations.
"The
Gramm-Leach-Bliley Act in 1999 had an interestingly drawn provision
which prospectively exempted institutions that were currently engaging
in all forms of commodity activities that might at some point in the
future become bank holding companies and thereby has given a
grandfathered right to a couple of firms to engage in far broader range
of commodities-related activities than other bank holding companies,"
Tarullo said. "I do think that is something which is anomalous in a
regulatory system and I think it would be better to phase that out....MORE
