Tribune Deal Reminds Us of Banks' Power

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) is the second-largest stakeholder in The Tribune Company ( TRBAA).

This isn't news in the technical sense. JPMorgan owned a 9% stake in The Tribune Company when it emerged from bankruptcy protection on Dec. 31. 2012, and some news reports even bothered to make mention of this fact at the time.

Still, chances are that if you told a regular follower of business news that JPMorgan is the second-largest owner of Tribune Co., you'd be met with surprise. Following Monday's announcement that the Tribune will pay $2.7 billion to buy 19 television stations, making it the nation's largest owner of commercial television stations, JPMorgan's stake becomes more significant. Oh, and of course JPMorgan is the main lender on the deal.

While this is nice for JPMorgan, it makes us wonder about those supposed laws separating banking and commerce.

The bank holding company act in 1956, which was strengthened in 1970 said commercial companies can't own banks, explains Mehrsa Baradaran, University of Georgia law school professor who has written about the separation of banking and commerce.

This law stymied efforts by Wal-Mart ( WMT) to get a banking charter in 2005, Baradaran says.

Nonetheless, an exception was created in Utah 1987 allowing the creation of "industrial loan companies" (ILCs). This exception has allowed companies including American Express ( AXP), Target ( TGT), Volkswagen and General Electric ( GS), Goldman Sachs ( GS)and Morgan Stanley ( MS) to obtain banking charters.

"First it was grandfathered in and then it became a loophole," Baradaran says. However, Wal-Mart's application in 2005 was met with fierce lobbying from the banking industry, causing the FDIC to create a moratorium on ILCs.

The 2010 Dodd-Frank law reinstated that moratorium and, according to Baradaran "it now looks like no one will be able to get an ILC."

On the other hand, rules such as the 1933 Glass Steagall Act regulate what kind of businesses banks can own.

"This is very murky. It's very controversial, and it's constantly in flux," Baradaran says.

In 1933 it was very clear cut. Banks couldn't underwrite securities, engage in proprietary trading or sell insurance. Those laws were contested in the 1980s and were essentially thrown out with the 1999 Gramm Leach Bliley Act.

The Volcker Rule, part of Dodd-Frank, aims to reinstate some of the Glass Steagall prohibition, but it has yet to be enacted and remains subject to intense lobbying. Other efforts to limit the power of banks, such as legislation sponsored by Sens. Sherrod Brown (D-Ohiol) and David Vitter (R-La.), look like a long shot.

Meanwhile, banks continue to hold large ownership stakes in several important industries. Goldman Sachs, Morgan Stanley and JPMorgan Chase, for example, retain extensive commodities business interests, which "threaten to undermine the fundamental policy objectives that underlie the principle of separating banking from commerce," according to a 2012 paper entitled "The Merchants of Wall Street: Banking, Commerce, and Commodities," by University of North Carolina law school professor Saule Omarova. The paper argues such laws are essential to "ensuring the safety and soundness of the U.S. banking system, maintaining a fair and efficient flow of credit in the economy, protecting market integrity, and preventing excessive concentration of economic power."

Still, before we get too freaked out about banks' wide-ranging ownership interests, we should note that it is natural for banks to acquire all sorts of property in exactly the way JPMorgan ended up owning 9% of Tribune Co. Banks are creditors, after all, and creditors often end up owning assets when the owners can't pay their debts.

On the other hand, it isn't very clear when banks should be required to sell these assets, whether regulators are paying attention to this issue, or, assuming they are, whether they have enough power for it to make a difference.

A Tribune spokesman referred questions to JPMorgan Chase, where a spokeswoman did not respond to a call or an e-mail message. A Federal Reserve spokesman declined to comment.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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