Banks Ready with “Bag of Tricks” for Financial “Reform”

 

26 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

As consistent readers of this site are well aware, we are not huge fans of the so-called “reform” of the US finance sector

authored by President Obama, and barely squeaking through the Senate, which has pretty much lost whatever prestige it may have once had.

 

26 August 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

As consistent readers of this site are well aware, we are not huge fans of the so-called “reform” of the US finance sector

authored by President Obama, and barely squeaking through the Senate, which has pretty much lost whatever prestige it may have once had.

We’ve detailed what we saw as unclear and problematic in what the legislation actually does contain,

and were shocked by its avoidance of the two major issues that ANY “reform” should have confronted:

 the whole issue of “too big to fail” [ TBTF ] banks AND its wimpy stance on the STILL unexploded “weapons of mass financial destruction,”

the DERIVATIVES that have already caused so much, and will wreak even more, horrific damage in the future.

We characterized it as a jobs bill for lobbyists even before it passed,

and then, once we got a glimpse of its more than 2000 pages,

noted how many of those lobbyists are ex-regulators,

hired explicitly for their already existing “working relations” with their ex-colleagues in the regulatory agencies,

who have been given immense power as a result of this so-called “reform.”

So to us it’s hardly surprising to see how the banks themselves have been preparing for months, if not years,

to deal post-legislation with whatever they couldn’t kill pre-legislation.

And, as usual, they seem to be way ahead of the politicians – certainly not states –men or –women – in Washington.

Indeed, before the ink was dry on this massive tome of mandated regulations and studies that nevertheless evades most of the key issues,

after spending many millions of dollars to lobby against it, bankers are now turning to Plan B:

adapting to the rules and turning them to their advantage – a practice at which we’ve seen how well they excel.

Faced with new limits on fees associated with debit cards, for instance,

Bank of America, Wells Fargo and others are imposing fees on checking accounts.

Compelled to SUPPOSEDLY trade derivatives in the daylight of closely regulated clearinghouses,

rather than in murky over-the-counter markets that we feel, frankly,

given the gigantic loopholes in this “legislation”,

are going to continue, if not necessarily on the same scale as before,

titans like J.P. Morgan Investment Bank and Goldman Sachs are building up their derivatives brokerage operations.

Their goal is to make up any lost profits — and perhaps make even more money than before —

by becoming matchmakers in the vast market for these instruments,

which were without question the principal cause of the financial crisis.

And you think we’re being too cynical 😉 ???

Even when it comes to what is perhaps the biggest new rule —

barring banks from making bets with their own money —

banks have found what they think is a solution:

allowing some traders to continue making those wagers,

as long as they also work with clients.

Banking chiefs concede they intend to pass many of the costs associated with the bill to their customers.

Well, at least they’re honest about that.

“If you’re a restaurant and you can’t charge for the soda, you’re going to charge more for the burger,”

said Jamie Dimon, the chairman and chief executive of JPMorgan Chase,

after his bank reported a $4.8 billion profit for the second quarter.

“Over time, it will all be repriced into the business.”

Indeed, Jamie, that it will.

Short term, the changes imposed by this legislation and other recent reforms

could cut profits for the banking industry by as much as 11 percent, analysts estimate.

Have you noticed, by the way, how in so-called business journalism, there are always “analysts,”

just as when it comes to macro- issues, there are always “some economists” ???

These little media tricks all make it sounds so, oh, I don’t know, respectable –

when, as Black September 2008 and its ensuing revelations like Repo 105 made clear, it’s anything BUT.

Long term, Wall Street will be able to plug at least part of that hole by doing what it does best:

inventing products that take advantage of the new regulations.

At Morgan Stanley, the board has already had extensive meetings on strategies re how to adapt.

Citigroup has already shed risky investment units forbidden by the bill,

freeing up cash it can quickly deploy into new areas.

At J.P. Morgan, 90 project teams are meeting daily to review the rules and retool businesses accordingly.

“We’ve been gearing up for this like a merger,”

Mr. Dimon said in a recent interview.

He said new restrictions on credit and debit card fees, as well as derivatives,

could cost his bank at least several hundred million dollars annually

but added the bank would find new sources of revenue to plug that gap.

No doubt.

There are signs that is already happening across the industry.

Free checking, a banking mainstay of the last decade,

could soon go the way of free toasters for new account holders.

Banks are already moving to make up the revenue they will lose

on lower overdraft and debit card transaction charges by raising fees on other services.

Banks like Wells Fargo, Regions Financial of Alabama and Fifth Third of Ohio, for instance, 

charge new customers a monthly maintenance fee of $2 to $15 a month — as much as $180 a year —

on the most basic accounts.

Even TCF Financial of Minnesota, whose marketing mantra championed “totally free checking,”

started imposing fees this year in anticipation of the new rules.

To be sure, in many cases customers can escape the new checking account charges

by maintaining a minimum balance or by using other banking services,

like direct deposit for paychecks and signing up for a debit card.

Still, with checking account fees spreading, Bank of America rolled out a fee-free, bare-bones account on the eve of the Senate vote.

The catch – or should we say catch/es ???

To avoid any charges, customers must

·        forgo using tellers at their local branch,

·        use only Bank of America cash machines, and

·        opt to receive only online statements.

“You are going to see more of these targeted offers,”

said David Owen, Bank of America’s payment product executive.

Fifth Third, for example, has added extra services to its basic checking account, like fraud alerts and brokerage discounts,

but now tacks on a monthly maintenance fee.

JPMorgan Chase is considering hiking annual fees for debit cards

that offer rewards points, or scaling back how many they dole out.

“The rule of thumb is that it costs a bank between $150 and $350 a year” to maintain a checking account,

said Aaron Fine, a partner at Oliver Wyman, a financial consultancy.

If banks cannot recoup that money, he added, they may feel justified in jettisoning unprofitable customers.

Sans doute, as the French would say.

While commercial banks are expected to feel the effects first,

investment banks are bracing for more fundamental changes

in lucrative businesses like derivatives trading.

And there those pesky derivates are AGAIN –

only we wonder how “fundamental” those changes are going to be.

In the past, banks would sell complex derivative contracts directly to buyers, pocketing hefty fees.

Now, most derivatives will supposedly be traded through clearinghouses,

which will bear the risk, leaving banks to simply broker the transaction.

And that, of course, raises the question of WHY anyone would want to establish a clearinghouse,

since they will be bearing the risks, but not participating in any huge profit-making ???

At least so far, no one from Congress / the executive branch / or the media has come up with a clear answer to that key issue.

The shift to clearinghouses will supposedly turn derivatives trading from a highly profitable niche –

because everything was done in secret, so no one had any idea what the real risk / benefit ratios were –

to a more volume-based business, in which banks will have to compete on customer service and price.

As a result, banks have already spent tens of millions of dollars to rewire their computer systems so they are more efficient in the leaner times ahead.

Don’t you feel bad for the poor banks, having to rewire their computer systems ???

We do.

NOT.

Even as bank lobbyists fought successfully to dilute the most transparent parts of the new derivatives rules –

namely, as we have pointed out, making sure they are limited to “standard” contracts,

when, in reality, almost ALL derivative transactions are “unique”,

hence exempting them FROM the clearinghouse nexus –  

these same institutions quietly accelerated plans to adapt to whatever rules would eventually pass.

At J.P. Morgan Investment Bank, more than 100 people, from traders to risk managers and computer programmers,

have been busy for months retooling the bank’s giant derivatives business.

Citigroup has peeled off several dozen employees on similar projects, and may form a global clearing services business unit.

Although the derivative rules will not go into effect until 2011 –

giving the banks plenty of time to figure out how to get around these new “rules”,

not least by having their lobbyists “consult” with their former colleagues in the regulatory agencies that are supposedly going to “watch over them” –

major banks have been pitching these new clearing services to hedge funds and other potential clients since late 2009.

“If you are in the business of electronic trading, inevitably this is getting brought up in conversation and priced into your clearing deal,”

Donald Motschwiller, managing partner and co-president of First New York Securities said in this article from the New York Times.

Indeed, Don – INEVITABLY it’s going to be “priced into” your deal – what else would you expect ???

Just as the derivatives business is likely to mutate — but hardly disappear —

proprietary trading –

that is, betting on the same deals in which you’re advising clients … conflict of interest, anybody ??? –

is unlikely to disappear anytime soon.

In that case, banks like Citigroup and others – full disclosure: Citibank is my personal bank, and I LOVE their service –

have started to dismantle stand-alone desks that use the bank’s own money to make speculative bets,

shifting those traders to desks that work on behalf of clients.

But those traders will still be able to make occasional bets on the market,

even if their primary responsibility is to serve clients.

Now, correct me if I’m wrong, but in a situation like that –

as we have seen already from Goldman Sachs betting against the very securities it was selling clients –

isn’t there a STRUCTURAL conflict of interest ???

Whose interests are the banks going to serve – yours or theirs ???

And if you need an explicit answer to that,

then allow me to show you documents proving my ownership of the Golden Gate Bridge –

which, since I no longer live in San Francisco, I don’t need anymore,

and will happily sell to you at a price I’m SURE you can afford.

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com