It’s about time – The New Glass-Steagall

The first time I heard about the “Glass-Steagle Act” was in year 2002 when an ex-banker told me about it. Well Simon, you were right. You said that the repeal of this one act was the factor that changed the character of the banking industry altogether and the cause of it sliding down a slippery path of compromises. It was a road of no return, well, until now, that is. See article below “New Glass-Steagall Will Shake Private Equity” by Toby Lewis, The Wall Street Journal|Business, 22 Jan 2009.

The Biggest Cause of the Financial Crisis
Interestingly, when the Motley Fool team “set out to determine who deserved the most blame” for the financial mess out of sixteen contenders, their conclusion was the repealers of the Glass-Steagall act. If you are interested to read about the other 15 culprits, the Motley Fools have it for you packed in 125 words. Here’s their explanation on the Glass-Steagall Act:

“The Glass-Steagall Act required the separation of commercial and investment banks. After it was repealed, one-stop-shops such as Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and Bank of America (NYSE: BAC) were allowed to supplement their regular deposit and lending businesses with all the bells and whistles of Wall Street — helping to lead them into too-big-to-fail territory.” (Motley Fools)

The financial crisis has brought to light the wisdom of the Glass-Steagall Act. So it is with a sigh of relief that we see politicians coming round to see the real reason and that one thing that has caused the failure of banks.

Financial News: New Glass-Steagall Will Shake Private Equity
JANUARY 22, 2010, 9:20 A.M. ET

Following President Obama’s shock announcement yesterday of plans to strip banks of their private equity interests, Financial News looks at the U.S. and European banks’ exposure to the asset class.

The White House issued a statement yesterday, in which it said: “No bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund.”

The rule in its present wording could potentially force banks to dispose of both their direct private equity arms and also their substantial fund investments in the asset class.

Should European politicians decide to follow the U.S.’s lead, as some expect, there could be a big impact on the powerful investment houses in the banks based in the region.

Tim Syder, deputy managing partner of U.K. mid-market buyout firm Electra, said a similar move in Europe would have a greater affect at the top end of the private equity market. He said: “There is going to be less private equity competition in the market as capital will be more expensive. Where it is going to have an effect is that banks are not going to be investors in funds. Funds will be harder to raise but I think that would have happened anyway.”

The move is likely to further precipitate a decline in banks’ holdings in private equity, which made up about 50% of the asset class in the 1980s, according to industry insiders. Bank investments in private equity now make up 9% of fund investments, according to data provider Preqin.

Bruce Ettelson, a partner at law firm Kirkland & Ellis, said: “In a world where there is less capital available for private equity and hedge funds, this will take out another source of funding.

“Banks unloading their stakes into the secondary market could cause a decline in prices and have an adverse affect on the very institutions that government is trying to buttress.”

The following data has largely been taken from the banks’ websites, the banks themselves and Preqin, where stated.

In Europe
Credit Suisse (CS) has more than $33 billion of private equity managed assets, which are held in operations such as its fund of funds division and a direct arm, DLJ Merchant Banking.

Lloyds Banking Group (LYG) owns Lloyds Development Capital, which manages GBP2 billion of investments, and Bank of Scotland Integrated Finance, which is running an ongoing sale process handled by UBS (UBS). It has deployed more than GBP10 billion since 2000.

Barclays Private Equity is also considering a spin out. Its latest buyout fund raised EUR2.4 billion.

HSBC Private Equity has a large Asian business, HSBC Private Equity Asia, with $3.5 billion under management and a North American business with more than $1 billion, as well as a U.K. division with undisclosed assets.

BNP Paribas (BNP.FR) is the largest investor in the funds of PAI Partners, France’s largest buyout firm.

In the U.S.

The direct arms of the U.S. banks are large. Goldman Sachs (GS), across its eight private equity units, has $27.2 billion (EUR19.2 billion) of dry powder ready to deploy in private equity deals, the most of any firm globally. U.S. firm Blackstone Group holds the second-highest amount of un-deployed capital with $25.2 billion.

Citigroup (C) owns highly-regarded direct division Metalmark, which has invested $7.6 billion since 1986, and also through alternative asset arm Citi Alternative Investments, which has long been a large player in private equity.

JP Morgan’s (JPM) direct investment arm, One Equity Partners, manages $8 billion of investments and commitments. The bank also has $6.8 billion invested in other private equity funds, according to Preqin.

Bank of America Merrill Lynch’s (BAC) private equity arm BAML Capital Partners has more than $8 billion under management. It has $5.1 billion of fund investments, Preqin said.

Morgan Stanley’s (MS) private equity arm has invested $6 billion since 1985.

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