Wall Strasse beats Wall Street on Obamas bank bill

Written by Matthew Lynn | Updated: Jan 30 2010, 04:32am hrs
US President Barack Obama has taken a sledgehammer to the model that Wall Street investment banks have created over the last three decades. And yet, as is always the case in business, one man's misfortune is another man's opportunity.

If Europe plays this right, it could establish its banks and financial centers as the industry's leaders. The dominance of Wall Street may be coming to an end.

In effect, "Wall Strasse" can overtake Wall Street: European financial centers can lure refugees from the tightly regulated New York markets, and the big European banks can start offering customers the all-in-one service that their US rivals won't be able to anymore.

The impact of Obama's assault on the investment banks is clear. The US plans to prevent banks from proprietary trading - that is, taking positions in stocks, bonds, currencies or other instruments on their own account. And it intends to stop them from owning hedge and private-equity funds. It remains to be seen whether the legislation can be passed, and whether the banks can find a clever way of sidestepping the rules. But Europe's response should be very simple: The region should do precisely nothing.

Resist the pressure

There will be plenty of pressure to match the US proposals with their own restrictions. George Osborne, the Treasury spokesman for the UK's opposition Conservative Party, has already hinted as much. Regulators in Frankfurt, Paris and Brussels will be told they should copy the new rules.

They should resist

Obama's proposals are senseless. They are driven by populist fury at the greed and irresponsibility of the banking industry rather than a cold-headed analysis of the problems.

Admittedly, that is understandable. The way the banks have gone straight back to paying huge bonuses so soon after many of them collapsed has displayed breathtaking arrogance, and a lack of political savvy for which they will pay a high price. In effect, they may well have blown up their whole industry for the sake of a single year's bonus. Not smart. Yet fury is rarely a good basis for drafting legislation.

There is no reason why banks shouldn't be allowed to own hedge and private-equity funds. There weren't any banks that went bust because those units lost a bundle of money. Sure, some of the funds suffered in the recession of the past year. But there is no evidence they caused the crisis.

Goldman as survivor

Nor is there any reason why the banks shouldn't be allowed to trade on their own account. Again, where is the proof that it was proprietary trading that caused the crash

The bank that is among the most involved in hedge funds, private-equity funds and proprietary trading is also the one that came through the credit crunch in best shape: Goldman Sachs Group Inc. If you look at the facts, you would be forced to conclude that the banks should deepen their involvement in hedge funds, and trade their own books more, not less. So there is no reason for Europe to follow the US lead.

True, there is a problem with banks being "too big to fail." That needs to be fixed. But the important words in that sentence are "big" and "fail." What we need are rules that make sure that badly run banks can collapse without causing systemic damage. And we may well need to break up banks into smaller units. But while they may become smaller, we don't need to micromanage bank businesses.

Bank refuge

Instead, Europe should take advantage of the US bank bill. It can do that in two ways. First, it can provide a refuge for the big US banks concerned about the impact of the new rules. Goldman Sachs moving to London JPMorgan Chase & Co to Frankfurt Why not Companies go through huge transformations all the time to maintain and expand their businesses. Shifting the location of your headquarters across an ocean isn't such a big deal. If that's what you need to do, get on with it. Second, the main European banks, unshackled by these restrictions, can move into the space that their US rivals will be forced to vacate.

Integrated investment banks, including hedge and buyout funds, and trading their own books, weren't created because bankers just wanted to take wild and crazy risks (although a few probably did). It was how they served their customers.

Full service

A company coming to an investment bank didn't just want advice on a merger: It wanted a bank that could arrange the finance as well even if that meant buying a subsidiary for its private-equity fund, or taking some stock onto its own books. They didn't just want a sponsor for an initial public offering: They wanted a bank that could buy the shares as well. Once Obama's bill is pushed through, the US banks won't be allowed to offer the full range of services anymore.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)