Yesterday I observed after the last big Wall Street investment banking firms became Fed-supervised banks:
These firms apparently did not have a governance model suited to investing in an increasingly complex world. The regulators (SEC) couldn’t be expected to fill the gap. I have already discussed where this is headed: nimble, highly incentivized partnerships such as hedge funds, private equity, venture capital.
I linked my post from the previous week noting:
[I]t’s the hedge funds that avoided the big risks because they were the best governed. And now it’s the similarly governed private equity firms that are waiting in the wings to pick up the wreckage. And so the financial industry will return, in a way, to its partnership roots.
And now from today’s news:
The Federal Reserve, unleashing its latest attempt to inject more cash into the nation's ailing banks, loosened longstanding rules that had limited the ability of buyout firms and private investors to take big stakes in banks. * * *
Monday's move should encourage private-equity firms, government investment funds and others to buy stakes in banks, transferring capital from those that have it to those that need it. Previously, if the Fed determined that a private-equity firm had a controlling stake in a bank, it could classify the investor as a "bank holding company," directly supervise the parent firm and impose restrictions on outside investments. The rules were designed to prevent investors from abusing their bank stakes to benefit their nonfinancial investments.
The Fed showed flexibility in three main areas: allowing certain investors to hold board seats, communicate with bank management and own larger amounts of stock.
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