June 14, 2011
Isn’t it funny how the subprime real estate crisis became The Great Bank Robbery? That almost nothing -- except maybe sexting teenagers – can clobber a reputation faster than defending the Wall Street? Jamie Dimon recently dared to do so, and received a thorough drubbing for his trouble. He’s not alone. Rochdale Securities’ Richard Bove, a well-known analyst who has followed bank stocks for decades, wrote a piece suggesting that Goldman Sachs may not have wronged clients. He was blasted on TV by commentators who hinted darkly that the investment bank “got to Bove,” even though Bove is advising clients to sell Goldman’s stock.
At a banking conference last week in Atlanta, Dimon dared to suggest that the Obama administration’s continued clampdown on Wall Street might – just might – be harming our recovery. Specifically, he asked Federal Reserve Chairman Ben Bernanke whether the new regulations on banks could be “holding us back.” Talking heads popped up like Whack-a-Moles denouncing the JP Morgan head; former Labor Secretary Robert Reich said Dimon’s remarks showed that “he still didn’t get it.”
According to Bove, our regulators still don’t get it. He has written repeatedly that Sheila Bair, Chairman of the FDIC, who famously claimed that “…a higher regulatory capital requirement for banks won’t hold back lending…,” Bernanke et al have made a hash of financial oversight. He chides regulators for having loosened restrictions on the banks even as a giant liquidity bubble emerged, feeding the subprime frenzy, and tightening up on the banks now that the economy needs sustenance. He writes, “There is now $1.5 trillion dollars (sic) sitting in the Fed earning virtually nothing while unemployment rises and the economy falters. It is simply incomprehensible that this nation can be so poorly served by those people who should be expected to know what they are doing.”
Bove cites a recent speech by Fed Governor Daniel Tarullo given at the Peterson Institute. Tarullo suggests that “systemically important” financial institutions should raise their capital ratios by 20% to 100% above current levels. Bove points out that the proposal, which he dubs absurd, would “effectively take U.S. banks out of the financial system for an extended period. It would have a similar impact on the economy as the Fed’s two reserve ratio increases in 1937 which plunged the United States back into depression.”
Bernanke has doubtless considered Dimon’s question, and the Depression-era precedent mentioned by Bove. As the economy has stalled – again – and the Obama economic team seems to have run out of fixes, the Fed Chair must be questioning the impact of heightened regulation – not just on the banks but on businesses overall. With consumers still trying to pay off excess debt, the government over-borrowed and with corporations holding the nation’s only healthy balance sheets, encouraging business investment and spending is the only game in town.
The public hates banks, and with good reason. They have been told that careless and greedy bankers caused the financial collapse, throwing millions out of work. There is some truth in that narrative, but it is not the whole truth. Gone from that streamlined history is the supporting role played by Barney Frank (co-author of the Dodd-Frank financial punishment bill) and others in Congress who pushed to weaken mortgage loan standards in the mistaken belief that everyone should own a home whether they can afford to or not. Then there are the millions of Americans who bought houses they could not afford in the mistaken belief that real estate prices would only rise, never fall. Add to this toxic mix the ratings agencies that got the credit worthiness of newfangled securities so terribly wrong and the investors who bought those faulty securities because they did not do their homework.
Also lost in translation is the reality that Americans overall took on too much debt in a decade-long spending spree that was facilitated by an accommodating Fed and a horrific trade imbalance with China. In response to Dimon, Bernanke said he did not accept the premise of Dimon's question. "Many people try to say that the single cause of the crisis was 'X,'" Bernanke said. "There was no single cause of the crisis." Amen to that.
Here’s the problem: because the public blames our current woes on the financial sector, a Congress all too eager to disown its own responsibility for the downturn is pressing for overly restrictive banking regulation – regulation that will likely play no role in preventing another recession. Here’s the other problem: at the peak, banks and related companies produced nearly 42% of overall U.S. corporate profits. (In retrospect, we should have known something was terribly wrong.) Though that share has now fallen to merely 29%, it is still a sizeable chunk of our nation’s earnings.
Enacting regulations that by definition will crimp income – like the forced divestiture of proprietary trading desks and reduced swipe fees – will also reduce the country’s bounce-back. Numerically, that is simply a given. Add to that the reality that lending and credit are the spokes on which any economy turns, and Mr. Dimon’s question begins to resonate.
Investors get it. Financial stocks have lagged, with the representative Dow Jones Financial Sector ETF down 12% from its peak on February 18, compared to a 5% dip in the S&P 500. A recent piece in Business Week entitled “The Incredible Shrinking Financial Sector” quoted a Price-waterhouseCoopers advisor saying “You don’t have to be a scientist to figure out that tighter regulation and more onerous capital rules without economic growth will shrink the industry.” Analysts at Sandler O’Neil recently reduced earnings estimates for Bank of America, Citigroup, JPMorgan Chase and Morgan Stanley, mainly due to lower trading revenues.
With the Obama administration in full campaign mode, it is unlikely to wind down its popular anti-bank rhetoric. On the other hand, the New York Times described in a recent front-page piece the president’s efforts to reconnect with big donors on Wall Street. We can only hope that what economic urgency has failed to produce in the way of a reasoned approach to bank regulation, campaign fund-raising may yet achieve. What a truly terrible reality.