Current Weather
The Spy FM

New Republic: Your Taxes At Work, Wall Street Style

Filed by KOSU News in Business.
June 1, 2012

Noam Scheiber is a senior editor at The New Republic, where he writes about politics and Obama administration economic policy.

When we last left Morgan Stanley, the company was taking all manner of abuse for botching the biggest IPO of the millennium. Alas, that turns out to be the least of its problems. Far more pressing is the fact that Moody’s may be on the verge of massively downgrading Morgan Stanley’s bond rating, which could cost the company billions of dollars (perhaps tens of billions) in collateral and increased borrowing costs.

Then yesterday’s Financial Times brought even worse news. To help save some cash in the event of a downgrade, Morgan Stanley was hoping to park a big portion of its $52 trillion derivatives portfolio inside its bank subsidiary — the portion of the company that functions as an old-fashioned loan-maker, not a hedge fund or investment bank. The reason for doing this is that it would lower borrowing costs that would otherwise shoot up when its credit rating dropped. Why? Because being a bank means you have lots of customer deposits, most of them insured by the federal government, and that you have access to really cheap loans from the Federal Reserve. If, say, you suddenly took a multi-billion-dollar bath on your derivatives bets, Uncle Sam would be there to absorb the losses, or at least help you manage them, and the bondholders who’d loaned you money wouldn’t feel the pinch. And, of course, the bondholders know that in advance, which is why they’re likely to loan you money at reasonable rates in the first place. Hence the low borrowing costs.

Sounds like an ingenious plan — just have the taxpayers subsidize the riskiest part of your operation! And, indeed, it is. As the FT notes, most of Morgan’s Stanley’s American competitors, chief among them Goldman Sachs, already house something like 90 percent of their derivative book in their bank subsidiaries (versus a mere 3 percent for Morgan Stanley today).

Unfortunately, the folks at Morgan Stanley just can’t catch a break. Just as they were about to follow suit and mosey on over to the federal trough, the feds (well, presumably the FDIC, whose insurance fund would be on the hook for those losses) decided that having taxpayers stand between bondholders and trillions of dollars in derivatives bets might not be the greatest idea in the world. According to the FT:

[R]egulators have not yet ruled on the request. Under a lengthier process introduced by the Dodd-Frank financial reforms, the Fed is required to formally consult on such moves with the Federal Deposit Insurance Corp, complicating the issue.

The Fed, which oversees Morgan Stanley as a financial group and looks to safeguard the stability of the broader financial system, has a different mandate from the FDIC, whose concern is safeguarding bank deposits.

Man — what’s a giant Wall Street firm have to do to catch a break these days!

In all seriousness, I’ve been pretty hard on Dodd-Frank these past two years ago. But if all it does is stop these kinds of shenanigans, then there’s clearly something to be said for it. If, on the other hand, the Fed gets its way on this — the Fed being famous for trying to shield bondholders from losses — then it will have proven itself to be a truly worthless piece of legislation. I’m not holding my breath. [Copyright 2012 The New Republic]

Leave a Reply

9PM to 5AM The Spy

The Spy

An eclectic mix of the Spy's library of more than 10,000 songs curated by Ferris O'Brien.

Listen Live Now!

5AM to 9AM Morning Edition

Morning Edition

For more than two decades, NPR's Morning Edition has prepared listeners for the day ahead with two hours of up-to-the-minute news, background analysis, commentary, and coverage of arts and sports.

View the program guide!

9AM to 10AM The Takeaway

The Takeaway

A fresh alternative in morning news, "The Takeaway" provides a breadth and depth of world, national and regional news coverage that is unprecedented in public media.

View the program guide!

Upcoming Events in your area (Submit your event today!)

Streaming audio and podcasts

Stream KOSU on your smartphone

Phone Streaming

SmartPhone listening options on this page are intended for many iPhones, Blackberries, etc. with low-cost software applications available to listen to our full-time web streams, both News on KOSU-1 and Classical on KOSU-2.

Learn more about our complete range of streaming services

We're perfecting the patient experience - Stillwater Medical Center