Pulling the plug on big banks could force them to exit alternative investments
At issue are investments in private equity and venture capital-backed start ups, often considered the most risky of alternative investments. Critics say big banks should not invest their own capital in these often illiquid gambles.
Pulling the plug on the banks, however, could force them to exit such alternative investments “at fire-sale prices,” according to the report. It could also lead to pulling the plug on the investments could hamper venture funded start-ups, which is what House Democrat Gary Peters of Michigan cited as his concern. Along with fellow Democrats John Carney Jr. of Delaware and Dennis Heck of Washington, Peters wrote in a letter last week to Fed general counsel Scott Alvarez that is rooted in concerns Peters said came from startups and other firms in Michigan.
Industry executives are said to have met privately with Fed officials, reporting that they appear receptive to concerns about the rule’s impending 2015 implementation date and the sale of investments in such funds. Private equity and venture capital investment exposure is known to have long cycles until the investment becomes mature.
Goldman, JPMorgan, Morgan Stanley to be most affected
The banks most affected would be goliath players Goldman Sachs Group Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM) and Morgan Stanley (NYSE:MS) who have significant investments in such funds. To a lessor degree it would impact smaller regional banks, according to the report. It is unknown the extent to which smaller regional banks invest bank funds into private equity and venture capital start-ups, but the number is thought to be low. Smaller banks were exempted to a certain degree, allowed to hold a niche class of debt instruments that were previously banned, which was the focus of their interest.
“We think it is important for the Federal Reserve to address this issue promptly so that banking entities can plan how to handle their fund investments,” Peters was quoted as saying.
The investments were established before Dodd-Frank became law. The Volcker rule provision of that law prohibited banks with a government risk guarantee from making highly speculative bets with bank capital.
Big banks rolling back proprietary investment arms
Big banks are already rolling back their proprietary investment arms. On Monday, for instance, JPMorgan announced a deal to shed nearly half its exposure in the portfolio of its buyout arm, One Equity Partners, a more that didn’t come as a surprise, the report noted.
Big Banks critics claim the Fed has limited authority to grant relief from Dodd-Frank’s rules. “This is supposed to be a regulatory option in special circumstances,” Marcus Stanley, policy director for Americans for Financial Reform, a group that advocates tougher financial regulation, was quoted as saying. “It’s not supposed to be an automatic permission for every bank to get a 12-year period after passage of Dodd-Frank to divest from venture funds.”