Banks Too Big To Succeed?
In the name of Safety, Congress writes financial regulations that throttle the financial industry, slow the economy, and invite mischief of chilling proportions.
Congress has slammed another 2,000 page behemoth through the system. Much like other recent legislation, perhaps the goal is to pass something now and change it later.
TOOTHLESS BUT DANGEROUS
The financial community generally breathed a sigh of relief, calling the bill “toothless.”
Indeed, much of this new regulatory heap seems to specify over and over that new regulations should be written. New layers of bureaucrats are assigned the task to make it all better. Initial reviews suggest that the actual regs are largely nonexistent.
Short term, banks may have dodged a bullet. Going into campaign season, however, we can assume that politicians will say bold and silly things, trying to get re-elected.
September and October may be months when we see incisors installed in this gummy production.
There are several different ways to measure the size of a bank. By any measure that I can discover, only two U.S. banks rank among the top ten largest banks in the world. JP Morgan usually comes in around number 8 or 9. Banc of America is generally number 10 or 11.
The world’s largest banks are easily 50% larger than either of those.
Consider that the big players come from France, Scotland, UK, Germany, Switzerland, and Japan, with at least four Chinese banks coming on strong.
China is aggressively making deals all over the world.
Europe may have to. European companies could easily find safety from government austerity programs by selling themselves to foreign competitors. China would be a buyer.
U.S. companies may well consider purchasing their European counterparts, especially considering the $1.8 trillion of cash American corporations have already accumulated.
Now, here’s my question: Who’s going to get that merger business, if Congress wants U.S. banks to be smaller, less competitive, and less profitable?
It seems, once again, Congress would legislate U.S. business away from our country.
FINANCIAL MARKET MAKERS ARE QUICK
When the U.S. government stepped in to bail out U.S. banks, we didn’t see bankruptcy courts. We didn’t see conventional liquidations.
We saw our government literally pick the winners and losers, backed by taxpayer money.
Not only has that not changed under this proposed legislation, it will be expanded. It may well affect the entire U.S. economy. Here’s how:
When the government stepped in with TARP and slapped restrictions on how much money people could make in the financial industry, Goldman Sachs made it clear that hot deal makers at GS would continue to earn huge incomes.
What is basically required for tens of millions, or even hundreds of millions of dollars to move from one firm to another is for a key player to walk across the street and say, “I’m in.”
That happened repeatedly for Goldman Sachs, and record earnings followed.
These new financial regulations may invite the most influential players in the industry to move, not across the street, but across the ocean.
At issue will be the ability and willingness to do large deals, to do them quickly and effectively, and to do them profitably.
THE SAFETY BLUFF
Claims that banks can get too big are just a diversion, I suspect. It’s just politicians taking public focus off their own dismal performance.
Congress unhooked important regulations over the years, saying, for example, that the decades old separation of banks from speculation was just unnecessary. From Michael Milken to Bernie Madoff, we know this is a world ripe for plunder. And enforcement agencies are often too weak to be effective.
Having erased that firewall between banks and trading, our representatives are finally looking to restore some security, with regulation of derivatives and proprietary trading. OK. We’ll be listening to knowledgeable industry people to see if they got that one right.
Similarly, Congress began passing “affordable housing” laws back in the 1970s, forcing banks to lower their credit requirements for home mortgages. As it became clear that our government favored shoddy financials, a lot of people made a lot of money by pushing bad paper.
The politicians that pointed our economy toward a cliff, and then started it rolling, are shocked that the economy did, indeed, go off the cliff. The same politicians are still in power. They have admitted nothing, and they continue pushing the economic equivalent of denying gravity. I don’t see improvement here.
I have discovered nothing about Fannie Mae or Freddie Mac in the new regs.
I can see that Congress continues grasping for more money. Winners must pay for losers. Losers may not lose at all.
HOW TO BEAT YOUR COMPETITION
And, yet, I can see several references to seizing financial institutions and breaking them up. So far, the primary requirements: a company must have something to do with money, and a government regulator must determine that the company shouldn’t exist anymore. Wow.
This potentially open-ended power grab has alarming implications.
First, how is that even legal?
Second, will banks pay politicians to avoid being classified as dangerous to society?
Third, to remain acceptable to politicians in power, what size loans will banks have to issue to each of a politician’s friends?
Oh, wait. Wasn’t that what fifth amendment protection was for? Due process, and all that? Unless “process” is reduced to one or two guys deciding it’s time to seize one of the biggest banks in the country; I think the shareholders might be entitled to a conversation or something.
I suppose we’ll hear more.
Financial stocks may rise after weeks of punishment. Lending will not increase.
Banks will be required to add even more to the astronomical piles of cash already set aside. Corporations can see that. Companies will continue to hoard their own money.
There is no green light for investment.
Congress’ insidious reach into every industry in America makes financial institutions newly vulnerable.
As a direct consequence, U.S. companies may realize that their political affiliations could potentially become more important than their banking relations.
Job creation waits while Washington redistributes American wealth.