Chillin' out till it needs to be funded
That’s a big weekend for the economy as a whole as one tries to recover nuggets like ” Mr Paul Volcker by his own admission has said he doesn’t understand Capital Markets. He has proven that to me.” Of course, Martin Luther King would agree ( about the long weekend, maybe not the long winded regulation and commentary.) To defend a regulation which adds probably 20 toll gates to every financial trade, is going to be costly as it has proved to Paul Volcker and other proponents of the Dodd Frank Act.
The entire industry has never denied support to the Dodd Frank Act tomes, and they are equally unified in now trying to tell Volcker to “Frankly, my dear, you could tone it down” or maybe “Paul Dear, why don’t you!”
The banks have lost at least the next two decades
We will therefore bring the ramifications of having a crippling effect on the economic growth engine into focus , like it was that A clear sunny day picture in your cross hairs ( in that eye test machine). Consultancies have tried making money off such studies, people like me have sought employment in banks with the same argument and others have used the bull pulpit to exhort the banks on the same, telling them its their own fault from you know where by you know who!
Return on Equity at banks is likely to remain in the low single digits and even if I were to forget the rest of the banana peel., assuming JP Morgan is at the top of the pole at its 9% RoE the others are unlikely to make it past 6% and Goldman Sachs may redesign itself back but it won’t be full time banking pole unless it plans to buy Bank of America or Wells Fargo for without that extensive network of retail branches that are proving lower in profitability everyday except for the winner, there is no question of making it to the #1 seeding.
( A note of eligibility for the JP Morgan that has made the top of the pole here: The bank having beaten the regulators at the CAR game, frankly, and having maintained the dignity of banking without European fraud and without yet becoming any saintly than pushed on to the wall by the law, and neglecting little skirmishes like their credit collateral team which is probably responsible for three systemic crises bankruptcies by demand for collateral at AIG, Lehman and MF Global and probably a 100 other corporate bankruptcies in this 3 year marathon they never got talked about and after paying up on a $26 bln foreclosure settlement to boot)
And thus, firstly the banks are a couple of decades behind in profits and thus dividends and , probably Capital gains their investors need to process because of the same..( no way!, they will be the hottest equities this year, everyone having gone thru the spat together in public)
Before I sign off this first piece of the marathon I have almost missed, I must remind myself of the other arcane features of the Volcker rule yet not incorporated into the Act for the following:
a. US banks are herewith banned/restricted from trading Foreign sovereign bonds ( one limiting factor could have been rating but I doubt if Volcker can bring himself and the Congress to admit to needing ratings now) What global policymakers know from that is that the next Italy and Greece investors cannot be allowed to come from Wells Fargo, Regions Financial and others on the KBW but most importantly none of global banks incorporated and headquartered in the US like JP Morgan, Citibank and Bank of America
b. A corollary to that not noted in the short summaries from press releases, Banks are dying to get out of US jurisdiction through legal entities and others as that may allow them to not count themselves under the thumb of the Dodd Frank Act, forcing regulators to come back to a London London variety entertainment circus where each deposit and trade will be counted for US impact, all of them never discussed because this is still incredibly undoable for anyone, let alone the banks wanting to do that or the Fed/Treasury supporting Volcker and the Dodd Frank Act
c. Japan already thinks the rule means US banks would not want to be in Tokyo or similarily Lat Am and transacting in JGBs would be nearly a pipe dream for banks rushing to Japanes e government auctions
d. Any Repo transaction where new auction participation is financed by extinguishing / buying back old obligations from banks would become a proprietary trade and is seemingly defended as such by Paul Volcker trying to remover layers of collateral and wholesale funding from the next generation of inter bank markets, which a t this point, I must leave to argument because I think the argument has to be explored. That is near about the place banks did go wrong in landing themselves with a RBS and DB run exclusively by inter bank repo ‘cash’ and so called ‘wholesale funding’