This is the best they could come up with? In the wake of Lehman Brothers' (NYSE: LEH ) failure this weekend, 10 major banks, including the remaining investment banks (Goldman Sachs (NYSE: GS ) , Morgan Stanley (NYSE: MS ) , and Merrill Lynch (NYSE: MER ) ), are creating a $70 billion fund that any one of the participants can borrow from in a crunch.
A purely symbolic gesture?
This industry initiative complements the Federal Reserve's decision to expand its funding facilities (the Fed has broadened the types of collateral it will accept to include equities!). However, it looks to me like a hastily crafted, symbolic action as a show of bankers' will to restore order to the industry.
First, despite what Nouriel Roubini thinks, I don't think that Goldman and Morgan Stanley will suffer the same loss of confidence that toppled Bear and Lehman and pushed Merrill into the arms of Bank of America (NYSE: BAC ) . Another crisis of confidence that prevents a broker-dealer from obtaining short-term funding looks unlikely now that only the best-run organizations are left standing. Still, we could certainly witness more consolidation, which brings me to an even stronger counterargument.
Are commercial banks really on the side of investment banks?
Do JPMorgan Chase (NYSE: JPM ) or Citigroup (NYSE: C ) -- which have a deposit base that provides stable funding for their other activities -- have a strong interest in supporting their pure investment bank competitors? The question seems even more pertinent for foreign universal banks such as Barclays or Credit Suisse. After all, Goldman and Morgan Stanley are attractive prey for European banks that have been trying to break into the big time in the U.S. securities industry for years.
Perhaps the fund was an effort to pacify Treasury Secretary Paulson, who is anxious to see the industry band together to solve its own problems. Do you remember the $75 billion "Super-SIV" that JPMorgan, Bank of America, and Citigroup spearheaded back in the early days of the credit crisis? Paulson was a strong proponent of the project, which was meant to provide liquidity for SIVs (structured investment vehicles). That's what this new $70 billion fund reminds me of.
What happened to the Super SIV? Citigroup decided to focus on fixing its own house, by bringing $50 billion of SIV assets onto its balance sheet, so the Super-SIV never got off the ground. When the case for collective action isn't overwhelmingly compelling, firms will generally act independently in their own self-interest.
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