WASHINGTON — GMAC Financial Services' application to become a bank holding company could reignite the debate over the mixing of banking and commerce.
This time it would have new wrinkles — automakers are involved instead of Wal-Mart Stores Inc. and the venue would be the Federal Reserve Board as opposed to the Federal Deposit Insurance Corp. But observers are watching GMAC's application with history in mind.
"If the Fed approves that, they've just approved a Wal-Mart," said Lawrence White, a professor at New York University's Stern School of Business. "I thought that violated the whole basic structure of what the Fed and what the Congress was trying to do, which was preventing manufacturing firms from directly owning a bank."
Mark Flannery, a professor of finance at the University of Florida, agreed that GMAC's application is likely to rekindle old passions.
"One of the things that inevitably comes up with a bank holding company application is how close the company's actions can come to commerce," he said. "I suspect that one of the things the Fed will be doing when they accept applications is saying, 'You're going to have to get rid of certain subsidiaries and get rid of certain activities you've done.' "
The financial crisis has largely sidelined what was once one of the industry's biggest questions — exactly where the line between banking and other business should be drawn. The debate was mostly fueled by bids from Wal-Mart in 2005 and Home Depot Inc. in 2006 to purchase industrial loan companies.
GMAC sees itself on the banking end of the spectrum. It makes loans, already has an ILC, and maintains a mortgage business.
Others argue that, in the aftermath of the Gramm-Leach-Bliley Act of 1999, divisions of banking and commerce are only theoretical, and that GMAC's application should be approved.
"If we allowed more nonfinancial companies to acquire controlling positions in banks, that would be good," said Peter Wallison, a fellow at the American Enterprise Institute and general counsel of the Treasury Department during the Reagan administration. "It would reform the banking industry. … I think that restriction has made the banking system much less competitive."
GMAC is one of several companies that have turned to the Fed with an application to become a bank holding company. Weeks after Lehman Brothers failed in September, Goldman Sachs and Morgan Stanley won speedy approval of their applications to become banks. Last week, American Express Co. and its travel arm were also approved for conversions. Protective Life Corp. applied this week to become a bank holding company while four other insurance companies applied last Friday to become thrift holding companies by purchasing thrifts.
The clear goal for these firms is to get funding from the Treasury's Troubled Asset Relief Program. A GMAC spokeswoman said her company filed an application to receive Tarp funds on Nov. 14, which was the deadline to apply.
But Prof. Flannery said that even though GMAC engages in financial activities, it is fundamentally different from its predecessors that sought to change their charters.
"There's an important difference that GMAC is owned by an industrial company … who has a vested interest in financing decisions," he said. "One has trouble thinking GMAC won't be operated for the benefit of General Motors."
General Motors Corp., which owns 49% of GMAC, is exploring a merger with Chrysler and, like other Detroit automakers, has spent recent days on Capitol Hill lobbying for a government bailout. Cerberus Capital Management LP is the majority owner of GMAC, with a 51% stake.
Before the financial crisis took hold, the Fed fought efforts for commercial firms to purchase ILCs. Some observers find it ironic that it is the central bank that must now judge how this policy will move forward.
"This strikes me as very odd that … we said we didn't want these institutions competing with the banking sector," said Joseph Mason, a professor at Louisiana State University. "Now we're pulling them in."
But the Treasury is actively pushing more nonbanks to fall under the Fed's oversight. Secretary Henry Paulson called Thursday for the creation of a charter for systemically important institutions. "We need a mechanism, essentially an amendment of the federal bankruptcy system, for the orderly wind-down of such institutions," Mr. Paulson said during a speech in California. "Also, to ensure the market stability regulator can fulfill its role, large, systemically important institutions, including hedge funds, should be required to have a charter that would permit some type of oversight. Similarly, any financial product whose market size presents a systemic issue should be subject to regulatory oversight."
Mr. Paulson has previously recommended that the Fed serve as the systemic risk regulator. Congress is set to take up the issue of regulatory restructuring next year.
In the meantime, the Fed's next step with regard to GMAC is unclear and a representative of the central bank did not comment on the company's announcement. Approving GMAC's application could spur other automakers, several of which own ILCs, to apply for bank holding company status.
Community bank representatives, who successfully fought off Wal-Mart's application, said policymakers should take a careful look at GMAC's plan.
"It's still a very important debate and I think these developments should revive it," said Karen Thomas, executive vice president for government relations at the Independent Community Bankers of America. "This has presented the newest avenue for mixing banking and commerce."
Some observers are calling on the Fed to take a timeout on the conversions.
"Actions this year are creating moral hazard to an unprecedented degree," William Poole, the former president of the Federal Reserve Bank of St. Louis, said in a speech Wednesday. "The Federal Reserve and federal government need to move quickly to limit which firms have access to government resources. The Federal Reserve should put a moratorium on all conversions of corporate charters to commercial bank charters."
Prof. Mason agreed that taking time — as little as 90 days — to work through the policy implications of GMAC's application could be helpful. "A moratorium would make sense in this environment," he said. "This is very different from, say, allocating Tarp cash to banks. You have call reports, Camel ratings, and intelligence on the ground and ready to go for them. With respect to a finance company, you're building from the ground up, and if we've learned anything from this episode, it's that you can't trust information reported" in financial filings.
But Mr. Wallison said a moratorium during such a dramatic market decline is unrealistic.
"I worry about moral hazard when we have a normal economy," he said. "But when you're looking into the abyss, as I think in many ways this economy is, I think" that approving GMAC's application is "an appropriate step."