After Lehman Brothers filed for bankruptcy protection and Bank of America absorbed Merrill Lynch September 15, the knee-jerk reaction has been to call for more government regulation. But, according to CNBC’s Maria Bartiromo, regulation is the problem.
Democratic presidential candidate Sen.
“Part of the issue, with regard to this need for capital is a need for easing of some of the regulatory strangleholds on, on, on the system,” Bartiromo said. “Because – as we’ve spoken about before, there are a number of deep-pocketed, big-money private-equity firms that would like to buy into the financial services system and they are unable to because if you own 25 percent of a bank, own a certain amount of an insurance company – you are regulated like a bank and these firms are not going to do this.”
CNBC’s “Kudlow & Company” host Larry Kudlow agreed with Bartiromo’s point and emphasized that this is a reality that should be considered to deal with the banking crisis.
“That is such a great point, Maria, honestly! And no one has come to grips with the role of these private-equity firms who want to play and have capital and yet no one has come to grips with this,” Kudlow said. “You’re making a great key point.”
An August 3 New York Times editorial explained [2] the rules, although it opposed loosening regulation:
“Under current rules, if an investment firm owns 25 percent or more of a bank, it is considered, properly, a bank holding company, subject to the same federal requirements and responsibilities as a fully regulated bank. If a firm owns between 10 percent and 25 percent of a bank, it is typically barred from controlling the bank’s management. To place a director on a bank’s board, an investor’s ownership stake must be less than 10 percent.”
The Times’ editorial board claimed regulations exist “to prevent conflicts of interest and concentration of economic power.” However, private-equity firms don’t think they’re being given a proper opportunity when both sides would likely benefit.
“This is an issue that a number of private-equity funds are upset about,” Bartiromo added.
She explained private-equity investors are shying away because if they were to be regulated under these rules, it would impact other investments they hold.
“With regard to a bank – if you own 25 percent, and these firms want to own big stakes of financial institutions, but if they take a 25 percent stake, they are regulated like a bank. So, of course they’re not going to do that. They have a lot of different investments. That’s what I’m talking about.”
Bartiromo noted how this issue hasn’t been broadly recognized, but predicted it would be eventually.
“Hank Paulson recognizes that the regulatory environment needs to be changed, but it’s too bureaucratic and these – this issue has not come to the forefront yet, but it’s coming,” Bartiromo said. “Private-equity firms are complaining. They want to be buying in and we are basically sending some of the smartest investors with deep pockets out of our markets.”
Bartiromo’s attitude about regulation is more of the exception than the rule when it comes to the media, often promoting “nanny state” solutions [3]. While many economists tend to disagree on ways to solve the problems with the markets, the one thing they do tend to agree [4] on is that the government should stay out.