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 misplaced whatever prestige it may have once had.

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

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

 the whole issue associated with “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 cause even more, horrific damage in the future.

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

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

noted how many of individuals lobbyists are ex-regulators,

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

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

So to us it’s hardly surprising to see how the banking institutions themselves have been preparing for several weeks, if not years,

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

And, as always, 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 rules and studies that nevertheless evades most of the key issues,

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

adapting to the rules and switching them to their advantage – a practice where we’ve seen how well these people excel.

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

Bank of America, Wells Fargo yet others are imposing fees upon 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 T.P. Morgan Investment Bank as well as Goldman Sachs are building up their types brokerage operations.

Their goal is to make up any lost earnings — and perhaps make even more cash than before —

by becoming matchmakers in the huge market for these instruments,

which had been without question the principal cause of the financial crisis.

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

Even with regards 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 answer:

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.

“In the event that you’re a restaurant and you can’capital t charge for the soda, you’lso are going to charge more for that burger,”

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

after their 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 along with other recent reforms

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

Have a person noticed, by the way, how in so-called business journalism, there are always “experts,”

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 understand, respectable –

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

Long term, Wall Street will be able to plug a minimum of part of that hole by doing what it does greatest:

inventing products that take advantage of the new rules.

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 upward cash it can quickly set up into new areas.

At J.G. Morgan, 90 project teams tend to be meeting daily to review the rules and retool businesses accordingly.

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

Mr. Dimon said in a current interview.

He said new limitations on credit and debit card charges, as well as derivatives,

could cost their bank at least several hundred zillion dollars annually

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

No doubt.

There are signs that’s already happening across the industry.

Free checking, a banking mainstay of the last decade,

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

Banks are already moving to make up the revenue they’ll lose

on lower overdraft as well as 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 upkeep fee of $2 to $15 per month — as much as $180 a year —

on the most basic company 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, oftentimes customers can escape the brand new checking account charges

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

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

Still, with checking account fees spreading, Financial institution of America rolled out a fee-free, bare-bones account on the eve of the United states senate vote.

The catch – or don’t let say catch/es ???

To avoid any charges, customers must

·        forgo using tellers at their local branch,

·        use only Bank of America cash machines, as well as

·        opt to receive only online statements.

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

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

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

but now tacks on a monthly maintenance fee.

JPMorgan Chase is considering hiking annual fees for debit cards

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

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

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

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

Sans doute, as the French would state.

While commercial banks are expected to have 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 question how “fundamental” those changes are going to be.

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

Now, most types will supposedly be traded via clearinghouses,

which will bear the risk, departing banks to simply broker the actual 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 chief branch / or the media has come up with a clear answer to that key issue.

The shift in order 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 actual real risk / benefit ratios were –

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

As a result, banking institutions have already spent tens of millions of bucks to rewire their personal computers so they are more efficient within the leaner times ahead.

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

We do.

NOT.

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

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

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

hence exempting them FROM the clearinghouse nexus –  

these same institutions quietly faster plans to adapt to whatever guidelines would eventually pass.

At T.P. Morgan Investment Bank, more than 100 people, from traders to risk managers as well as computer programmers,

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

Citigroup has taken off several dozen employees upon similar projects, and may form a global clearing services company unit.

Although the derivative guidelines will not go into effect till 2011 –

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

not least by having their insurance supporters “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 along with other potential clients since late ’09.

“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 Very first New York Securities said in the following paragraphs from the New York Times.

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

Just as the derivatives clients are likely to mutate — but hardly vanish —

proprietary trading –

that is, betting on a single deals in which you’re advising clients … conflict of interest, anyone ??? –

is unlikely to disappear anytime soon.

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

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

shifting those traders to desks that work with respect to clients.

But those traders it’s still able to make occasional bets on the market,

even if their primary responsibility is to serve clients.

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

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

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

Whose interests would be the banks going to serve – your own or theirs ???

And if you need a good explicit answer to that,

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

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

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

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com