Five years ago, on September 21, 2008, the Federal Reserve Board of governors approved a document that was then signed by the Deputy Secretary of the Board that changed the legal status of Goldman Sachs and Morgan Stanley from investment firms into bank holding companies. Why? Because that made it easier to bail them out. Banks can access the Fed’s so-called “discount window.” That’s essentially a free- or low-interest credit card with no credit limit. (We should all have one; for example, Sen. Elizabeth Warren (D-Mass) introduced legislation giving college students access to the discount window.)
When they were investment firms, Goldman Sachs and Morgan Stanley could own anything they chose — buildings, power plants, aluminum cans, a casino or two — and they actually own all of that … stuff.
But bank holding companies cannot legally own stuff. That’s due to the cornerstone principle of American banking: Banking and commerce shall not mix.
There are a blizzard of reasons for this, but here’s one way to think about it: Banks shouldn’t own grocery stores. If a bank could own the grocery store, it might make a loan to a grocer with the store as collateral, hope the grocer cannot repay, then seize and operate the grocery store. Then the banker would repeat this, until it owned all the grocery stores in the nation. Then it would raise all the prices, because consumers wouldn’t have a choice. But if the bank is forbidden from owning a grocery store, then the only aspiration the banker would have for the grocer is for the grocer’s success and ability to repay the loan.
The Fed of 2008 gave Goldman Sachs and Morgan Stanley five years to sell their “stuff.” That means now.
Since they took the trouble to buy all those things — buildings, power plants, tin cans, a casino or two — one figures that Goldman Sachs and Morgan Stanley probably would rather not sell them. This may be one of the subjects of conversation when envoys of Goldman Sachs meet with officials of the Fed, as they have 72 times.
Public Citizen believes that the Fed should make Goldman Sachs and Morgan Stanley sell their stuff. Now. (Actually, four years and 10 months ago would have been better.) We also think that any discussion about this should take place in a public meeting where the six Fed governors say what they’re thinking. We also think the Fed should ask the public what we think. They do this with other decisions, such as rules on how to implement the Dodd-Frank Wall Street Reform Act. They should not hide behind technicalities of administrative law on such a momentous decision.
But none of these things are happening. We see no evidence that the Fed is making Goldman Sachs and Morgan Stanley sell their stuff. The Fed’s website doesn’t even list this issue. The Fed classifies types of regulations using letters of the alphabet, and bank holding company status comes under the letter “Y.” There’s nothing under “Reg Y” concerning this issue.
We ask the Fed governors to serve America by enforcing a foundational principle of American finance.
Bartlett Naylor is the financial policy reform advocate for Public Citizen’s Congress Watch division. Follow him on Twitter at @BartNaylor.