What Obama's Proposal Could Mean for Private Equity
Earlier today, President Obama outlined some proposals designed to limit risk-taking on Wall Street. For our purposes, here is the operative section: "We should no longer allow banks to stray too far from their central mission of serving their customers. In recent years, too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward. And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks. Our government provides deposit insurance and other safeguards and guarantees to firms that operate things. We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression. But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage. When banks benefit from the safety net that taxpayers provide, which includes lower cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit. And that is especially true when this kind of trading often puts banks in direct conflict with their customers' interests." It's good political populism, and may even make for good policy (so argues Felix). The fact that Obama made the statement in the midst of Goldman's earnings call is just theatrical one-upsmanship. What it means for private equity, however, is extremely unclear.
