WSJ
  * JANUARY 8, 2009, 5:00 A.M. ET


 OECD: Investment Banking Businesses Should Be Segregated

LONDON (Dow Jones)--Investment banking should be separated from deposit 
taking, either entirely or as part of a clearly segmented holding 
company, the Organization for Economic Cooperation and Development said 
Thursday.

In its twice-yearly publication on trends in financial markets, the OECD 
said as a result of regulatory and governance failures, inherently risky 
investment banking businesses had been able to raise capital too 
cheaply, leading to a build up in debt that contributed to the current 
financial crisis.

"These businesses benefitted from a too low cost of capital and, 
commensurately, they became too large...as a consequence," the OECD 
said. "When embedded inside a financial conglomerate like Citi or a 
European universal bank like UBS, excessively large (investment bank) 
segments put those institutions at risk."

The OECD said in order to prevent a recurrence of this problem, 
investment banking could be treated in the same way as hedge funds.

"(Investment banks) take on a lot of risk and their losses can eat up 
the capital of the group quickly," the OECD said. "(Investment banks) in 
this first approach could sit outside the well regulated fence, along 
with hedge funds and the like, where caveat emptor applies."

That would essentially reintroduce and universalize the Glass-Steagall 
Act, introduced in the U.S. as a 1933 response to the stock market crash 
of 1929 and repealed only in 1999. The act enforced the separation of 
investment banking and deposit-taking functions in separate institutions.

Alternatively, the OECD said an investment banking business could be 
part of a non-operating holding company, with capital rules that are 
tailored to the riskiness of the activities of each unit.

"In the event of a crisis any loss making subsidiary can be dealt with 
by supervisors without endangering the whole conglomerate," the OECD said.

Traditional, stand-alone investment banks have ceased to exist, with 
Goldman Sachs Group Inc. and Morgan Stanley having converted themselves 
into bank-holding companies in order to gain access to U.S. government 
support.

But the OECD is more concerned that investment banking businesses within 
financial conglomerates can endanger the larger entity. Indeed, 
precisely because they are part of greater entities, they can become too 
large and take too many risks.

"UBS for example used its treasury operation to use the bank name to 
borrow cheaply on the capital market and then internally allocated cheap 
funds to high risk investment banking units," the OECD said.

Recent developments appear to run counter to the OECD's recommendations. 
Previously stand-alone investment banks are now part of wider bank 
groups, with Bank of America Corp. having taken over Merrill Lynch & Co. 
Inc. and JP Morgan Chase & Co. having acquired Bear Stearns.