Magazine article American Banker

As Applicants Line Up, Is Fed near Its Limit?

Magazine article American Banker

As Applicants Line Up, Is Fed near Its Limit?

Article excerpt

Byline: Steven Sloan

WASHINGTON -AS THE FEDERAL RESERVE BOARD WEIGHS WHETHER GMAC FINANCIAL SERVICES MAY BECOME A BANK HOLDING COMPANY, OBSERVERS ARE ASKING IF THE CENTRAL BANK IS OVEREXTENDING ITSELF.

The Fed has already agreed to assume oversight of Goldman Sachs and Morgan Stanley, guarantee $29 billion of Bear Stearns assets, lend to American International Group, backstop the money market mutual fund industry, and buy unlimited amounts of commercial paper.

Several observers questioned the wisdom - and the Fed's capacity - if it also starts overseeing automakers, and wondered about the precedents of such an arrangement.

"There's no question they will be stretched," said Robert Clarke, a former comptroller of the currency and a senior partner at Bracewell & Giuliani LLP. "The financial regulators are going to be challenged in this period of time like they've never been before."

Observers also raised concerns about other troubled companies that fall outside the traditional sphere of financial services that could soon be knocking at the Fed's door soon.

Marc Franson, a partner at Chapman and Cutler LLP, said thereis a growing sense that the Fedis overreaching.

"They only have a limited degree of resources, and as they take on additional work, that's going to tax those existing resources," he said. "Where's this going to go? Every commercial company with an industrial bank may be seeking the same thing as GM."

"The list is a large one, including GE, Pitney Bowes, Target," Mr. Franson continued. "If they wanted to, there's a potential stampede to become bank holding companies."

It is unclear how the Fed will rule on a GMAC application. General Motors Corp., which owns 49% of GMAC, is exploring a merger with Chrysler and has sought government assistance to help finalize a deal. As part of such a deal, GMAC would convert to a bank holding company.

The Fed, whose policymaking committee met Tuesday and Wednesday, has not approved a bank holding company application from GMAC. A spokeswoman for the finance arm of GM would only say "we continue to explore a number of possibilities."

"There's been a lot of activity in the world around us," she said. "This is an environment where no two days are alike."

Under Fed rules, any firm that owns more than 24.9% of a bank must register as a bank holding company and submit to supervision from the central bank. The rules were recently revised to let investors hold as much as a third of a bank's stock, though voting shares are capped at 15%.

If GMAC ultimately wins approval to become a bank holding company, GM would have to reduce its stake in the company. But, in exchange, the finance arm would get access to the Fed's discount window and could benefit from the perception of stronger oversight from the central bank. …

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