WASHINGTON — Though Federal Reserve Board Chairman Ben Bernanke signaled this month that he would likely extend investment banks' access to the discount window beyond September, the firms themselves do not seem so interested now.
The primary dealer credit facility established in March to lend to investment banks after the Bear Stearns Cos. rescue has gone unused for the past three weeks.
Several observers said the firms are increasingly wary of using the window, because of escalated rhetoric in Washington about toughening oversight as a result of the access.
"They're cognizant of the fact that this facility, if it lasts or becomes heavily utilized, is going to lead to greater regulation, and they don't really want that," said former Fed Vice Chairman Alan Blinder, now a professor at Princeton University. "They perceive that there's going to be a price to be paid."
But observers said the turnabout likely is too late to stop tougher regulation.
"If the investment bankers are not reading the handwriting on the wall, they need glasses," said L. Richard Fischer, a partner at Morrison & Foerster LLP and a former Fed official. "There are a lot of very influential members of Congress and others who are deeply affected by what's happened over the past year … and the question is how much of that are they going to remember in 2009 or 2010? My gut says they'll remember enough that there will be some reforms."
By the end of their first week at the discount window, investment banks had taken on $28.8 billion of loans, much of which likely was related to the Bear rescue. The borrowing grew to $37.023 billion a week later but then began a steady decline. It inched up again to $8.52 billion on June 11 but dropped to $1.69 billion by June 26.
Investment bank lending first flatlined July 2. Just five days later the Fed and the Securities and Exchange Commission put out a plan to share supervisory information about the firms — an indication of just how much life could change for them.
"It showed the regulators are clearly moving the process along as far as they can without official legislative authority," said Adam Schneider, a principal at Deloitte Consulting LLP.
On July 8, Mr. Bernanke said the lending facility for investment banks might be extended into next year, but he made it clear there would be consequences, including a receivership process.
Prof. Blinder said, "It was very clear when Chairman Bernanke said the Fed is not about to close this facility … that the broker-dealers are in much the same position that almost all the banks were in for years."
So far borrowing levels have stayed at zero, but other factors are also at work. Mr. Bernanke said July 8 that funding markets have "improved somewhat" since March, so investment banks likely can find cash from sources other than the Fed.
Moreover, the investment banks have tried to slim their balance sheets to get better control of their business. Lehman Brothers' assets declined 7.5% between Nov. 30 and May 31, to $639.4 billion, while Goldman Sachs Group Inc.'s fell 2.8%, to $1.08 trillion.
Still, stricter oversight of the investment banks is seen as inevitable in the current climate. That is unlikely to be welcome news at the firms, especially if the Fed gains control over them and requires them to exit business lines it deems too risky.
"If I am an investment bank, I want the broadest possible authority to engage in investments," Mr. Fischer said. "If I see something that's wholly unrelated to financial services in the broadest definition of that term, and I think it's worth the risk — gold one day, oil the next day, taking over a company and ripping it apart and selling it for pieces — there are lots of different things I can do. If I have regulatory oversight, and part of that is a restriction on the activities in which I can engage, that changes my world."
One possible fear for the investment banks is tougher capital restrictions. Last week James Dimon, the chairman and chief executive of JPMorgan Chase & Co., challenged the veracity of investment banks' capital ratios, which appeared to be higher than those for some of the largest commercial banking companies. But the Fed, which oversees capital ratios for financial holding companies such as JPMorgan Chase, uses different standards than the SEC, which oversees the ratios for investment banks. If the Fed were given more oversight of investment banks, such distinctions likely would go away.
The best way for investment banks to avoid more oversight, Mr. Fischer said, would be to prove their self-sufficiency by avoiding the discount window in hopes that whatever rules come out would be less restrictive. But most observers say the discount window should remain available to investment banks. "Large investment banks differ from the large, internationally active commercial banks pretty much in name only," said Duncan Hennes, a former executive at Bankers Trust Co. and now a senior adviser at Promontory Financial Group LLC.
Lou Crandall, the chief economist at Wrightson ICAP LLC, agreed that the access should be extended and said lower borrowing would help boost confidence.
"It's more successful if it's not used," he said. "The traditional notion of a lender of last resort is that it gives the system confidence that it won't face a liquidity run. That was the reason it was the investment banks and not the commercial banks that suffered a run in March."
