With all the deal brokering the Fed is managing right now, they seem more like a real estate agent than a quasi-government entity. The Fed is supposed to help manage the economy, but they keep applying band-aids to the problem. Encouraging one troubled financial institution to sell to another troubled financial institution is not a long-term solution.

The Fed was asleep at the wheel by letting these institutions get this deep into trouble in the first place. Everything was great as long as the real estate market kept moving higher. But the real estate market couldn’t keep moving higher at the pace it was going in 2005.

With the unwinding of the mortgage mess, all things financial have been affected. Banks are going under, brokerages are filing for bankruptcy or being sold, and insurance companies are being forced to restructure. The financial landscape as we know it has changed forever.

We know the background and the outcomes, but I still go back to the true source of the problem. The Gramm-Leach-Bliley Act is at the root of all of this in my opinion. The GLBA was passed in 1999 and it repealed the Glass-Steagall Act. The result allowed commercial banks, investment banks and insurance companies to operate under one roof. As I wrote in my article on July 28:

Tearing down the walls between these entities allowed banks and brokerage houses to operate in the same markets. Commercial bankers could now be licensed to give investment advice. Brokerage firms were now allowed to make mortgage loans. Never mind that neither had experience in these areas.

So now the government is brokering deals between JPMorgan Chase (JPM) and Bear Stearns, Bank Of America (BAC) and Merrill Lynch (MER) , and they tried to get Barclays (BARC) to buy Lehman Brothers(LEH), but that failed to work out. You can bet they are in the talks with AIG, trying to find a partner for them. Since when is it the job of the federal government to serve as a matchmaker? Isn’t the federal government supposed to prevent monopolies, not create them?

Regardless of how many deals the Feds put together, it isn’t going to fix the problem. The can serve as the minister and read the matrimony vows to as many financial companies as they want, but they are not solving the problem. They are providing temporary solutions to prevent a liquidity crisis.

If the Fed wants to solve the problem for the long term, they need to work on a repeal of the Gramm-Leach-Bliley Act. The lending institutions, depository institutions, insurance institutions and investment institutions need to be separated again. If our financial system is so frail, that a collapse of a brokerage house would cause an all out panic and potential collapse of the entire system, there is a problem. The power is too concentrated if this is the case.

My advice to the Fed is to stop applying band-aids and start working on a true solution to the problem. They can start by giving up the role of matchmaker.

Rick

Source: The Way The Fed Is Using Them, Your Best Investment Might Be Band-Aids