PAGING SENATOR GLASS AND REPRESENTATIVE STEAGALL

12/5/08

We learned in this morning’s Wall Street Journal (page C2, 12/5/08) that Citibank is putting the pressure on General Growth as that mall developer is seeking an extension on a $900mm secured loan for which Citi is a lead bank. It seems Citi is demanding concessions on a second, unsecured, $2.6 billion unsecured loan on which Citi is also a lead, but the details are unimportant for sake of this discussion.

We learned in the same article that Citi disclosed yesterday that it has bought 14.2 million General Growth common shares, or 5.3% of the company, in a separate transaction. Hmm…

I know that the purchase of shares is indirect, part of a swap arrangement with Pershing Square Capital Management, a hedge fund with which Citi has a lending arrangement. And I also know that Citi’s General Growth common purchase, with a total value of just over $20mm, is paltry compared to the size of its loans to general growth. That having been said, isn’t this type of arrangement what the Glass-Steagall Law, repealed in 1999, was designed to thwart, i.e., a commercial bank using its government insured deposits to protect the equity investments of its investment banking affiliate, or perhaps the equity investments of an important client? While Citi may not be doing that, the appearance here certainly has an odor rather than an aroma.

As an almost reflexive deregulator, I am not calling for the reinstatement of Glass-Steagall. Even if I were in favor of such a move, it is probably impossible at this point and, indeed, a large portion of the government’s bailout efforts of the financial industry involves having investment banks either merge with or come to look more and more like commercial banks, further blurring the distinction between the two. But, given the irresponsible behavior of some the behemoths that the repeal of Glass-Steagall made possible, maybe the new Administration and Congress might want to take a long look at Glass-Steagall and what it has wrought.