The Shareholder Forum


The Bear Stearns Companies, Inc.

Forum Home Page


Bear Stearns Forum Home Page

Program Reference


Financial Times, May 28, 2008 article


FT Home


US investment banks split over Fed loan facility

By Ben White and Francesco Guerrera in New York

Published: May 28 2008 03:00 | Last updated: May 28 2008 03:00


A rift is developing among large US investment banks over whether continued access to a special Federal Reserve borrowing facility is worth the expected trade-off in further regulation by the central bank.

Investment banks such as Goldman Sachs that have been less affected by the credit crisis are said to be leaning against accepting any significant new limits by the Fed, while those that have been somewhat more affected, such as Lehman Brothers, are seen as more eager to maintain access to the Fed facility even if it means new limits on risk-taking.

"You have people like Goldman on the one end and people like Lehman on the other," said a senior executive at one of the banks involved.

"Then you have people like Morgan Stanley in the middle saying everyone should just wait and see what the Fed comes up with" in terms of new regulation.

None of the banks would comment officially, given the sensitivities and differences of opinion on what should be done.

The issue is about to hit a critical stage because the Fed has said it will curtail the ability of investment banks to borrow from the primary dealer credit facility, which is similar to the so-called discount window available to commercial banks, in midSeptember.

Executives at the investment banks believe that date will be pushed back because of continued turmoil in the credit markets but acknowledge that the facility will not be open indefinitely without new regulation.

Resolution of the matter will have an enormous impact on the business model of the investment banks in the future and their competitive position relative to big commercial banks such as JPMorgan Chase and Citigroup.

The Fed initiative, spurred by the collapse of Bear Stearns, allows investment banks to pledge investment-grade securities, including mortgage-backed securities, in return for low interest cash loans. The rationale for the facility was to ensure that none of the other banks would suffer the same kind of evaporation of short-term liquidity that sank Bear Stearns.

At the time it was announced, Dick Fuld, Lehman Brothers chief executive, said the facility took the issue of a liquidity crisis "off the table".

Such direct borrowing from the Fed has typically been reserved for commercial banks. The trade-off has been that those banks must operate with stricter risk controls.

The big commercial banks have told regulators that the investment firms should be subject to the same tight requirements on debt and leverage and that no compromise should be allowed.

They argue that if the Fed is to act as the lender of last resort to brokerage firms, they should be on the same regulatory playing field. "There is no way that you can have [Fed borrowing] for investment banks and not demand they comply with the same leverage requirements as we do," a senior executive at a commercial bank said.

Investment banks, for their part, have to tread a fine line between securing access to emergency funding and boosting earnings through high-risk, highreward activities such as lending to hedge funds.

One executive at an investment bank said the solution could be to ask investment banks to bring their leverage down somewhat, but not to the levels seen at commercial banks.

"The fundamental difference is that they play with depositors' money, while our clients are professional investors," he said.


Copyright The Financial Times Limited 2008





This Forum program is open, free of charge, to all shareholders of The Bear Stearns Companies, Inc. ("BSC") and to any fiduciaries or professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives, addressing issues described in the Forum Summary.

As stated in the posted Conditions of Participation, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

Inquiries and requests to be included in the Forum's distribution list may be addressed to

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.