Often accused of dodging the issue, US president Barack Obama has tackled the US investment banks head-on. His call for a breakup of the banks, separating advisory business from investment, sent shivers through Wall Street.
Obama was flanked by former central bank chief Paul Volcker, the brain behind the latest plans. The “Volcker Rule” limits the size and scope of financial institutions and stops them from engaging in commercial activities. That includes running property funds.
Of course, words now need to be followed by action. Obama will face strong resistance to his reforms. But if he succeeds, they could have large ramifications for the likes of Goldman Sachs, Morgan Stanley and Deutsche Bank. They would then have to give up their property funds. That would be a good thing.
The potential conflicts of interest surrounding banks’ investments has always been obvious but was never addressed. Investors and agents were fuming when, in 2006, Goldman Sachs turned from an advisor to department store chain Karstadt into an investor in it. The US bank was hired to advise on the sale of a large property portfolio but then cancelled the sale and stepped in with its Whitehall fund as investor, financed by Goldman Sachs, the bank. Did Karstadt get the best possible price? We’ll never know. Ultimately, there was nothing anybody could or would do about it.
Investors did not seem to mind such potential conflicts of interests as they kept pouring in billions of dollars into the fund series run by Morgan Stanley and Goldman Sachs. Both banks would not have been able to raise and invest so much had they not been actively backed by the parent companies, which also provided funding a lot of the time. The banks’ activities have helped to distort the market and drive it to its zenith in 2007.
Big is no longer beautiful. And the too-big-to-fail argument no longer holds true. Smaller property funds, distanced from the large US investment banks, will be healthier for the market. Let’s hope that Obama’s words are followed by action.
