Financial companies are applying for bank holding company status to diversify and improve their access to cash.

Barbizon modeling agency made a name for itself in the 1980s with the catchy slogan, "Train to be a model...or just look like one!" The federal government has inadvertently taken a page from the Barbizon book in its efforts to jumpstart the banking industry. Barbizon promised beauty, but the feds are promising something even more compelling: cash.

Everyone's doing it

Goldman Sachs, Morgan Stanley, American Express, CIT Group, GMAC, and Hartford Insurance have all made the move to become bank holding companies, known as BHCs by financial insiders. Stand-up comics may soon be claiming that a donut shop in Pacoima, a bowling alley in Boca Raton, and four hot dog cart operators in New York may soon be following suit.

Bank holding company status allows you to act like a bank, even if you're not really one. In different times, that wouldn't be very appealing. But right now, the credit markets are locked up like a jammed bowling alley ball return. Goldman Sachs and friends don't have the same access to borrowed cash that they used to have; now they want to raise money by taking deposits instead.

Depositors provide a cheap source of cash. As if that weren't incentive enough, banks also get special favors right now, as the government desperately tries to coerce them into lending money again. Unfortunately, funding from the TARP, and liquidity protection from the TLGP, haven't produced results just yet. It's possible that bankers are holding out for season tickets to Laker games, or backstage passes for a Miley Cyrus concert.

Added flexibility comes with increased scrutiny

In reality, the hot dog cart operators in New York aren't candidates for BHC status. BHCs are allowed to offer non-traditional banking services-namely, services other than taking deposits and making loans. But those non-traditional services generally fall within the realm of personal finance. Examples include selling mutual funds and underwriting insurance policies. The Federal Reserve Board is tasked with regulating BHCs to ensure that those non-banking activities don't conflict with the core banking services. Perhaps the hot dog guys could argue that buying a cheap meal is as fiscally responsible as balancing a checkbook, but it's a stretch.

In the old days, many banks chose not to use a BHC structure because of the added regulatory burden. The oversight of the Federal Reserve Board is in addition to the layer of regulation that's applied to traditional banks. Federal savings banks are regulated by the Office of Thrift Supervision (OTS), state banks are overseen by a state agency and the FDIC, and national banks are supervised by the Office of the Comptroller of the Currency (OCC).

The complexity of the BHC and bank regulation system no longer seems to be much of a deterrent, however. Maybe Barbizon could reinvent itself as a bank consulting firm. After all, you can always bank on women wanting to be beautiful.

Published on December 17, 2008