Senators Sherrod Brown (D-OH) and David (R-LA) have presented a bill that is going to keep Wall Street bankers up at night — the “Terminating Bailouts for Taxpayer Fairness” Act.
The acronym for that is TBTF — see what they did there?
The two Senators have been working together to figure out how to end Too Big To Fail for weeks now. Last month, they both presented on this topic on the Senate floor, and announced that they were working on legislation inspired by former FDIC Chairwoman Sheila Bear.
Now it’s here.
So what’s in it? To put it simply, loads of capital requirements. meaning that banks will have to hold more high-quality capital the bigger they get. The bill points out that “U.S. banks’ assets have grown from 20 per cent of GDP to 100 per cent of GDP, while their capital ratios declined from about 25 per cent to around 5 per cent of total assets.”
That means raising cash by any means necessary — selling off assets, cutting staff (and Wall Street has seen a lot of that), etc.
Here’s the break down of how much money everyone will need to raise and how:
- Community, regional and mid-sized will have to keep $1 in equity for every $8-$10 in assets.
- Wall Street’s megabanks will have to keep $1 for every $15 in assets.
- This cash has to be real shareholder equity too — no “goodwill” or anything intangible like that.
- And these ratios will be based on a bank’s total assets — none of this “risk weighted” calculation stuff that, the bill writes, has let big banks shrink assets on their balance sheets 46%-48%. Brown and Vitter want this to replace Basel 3 capital requirements, and they want it to be simple.
- Subsidiaries and affiliates of banks will have to be separately capitalised.
- And no special Fed treatment (read: subsidy) for non-depository banks: “The Federal Reserve and other banking regulators will be prohibited from allowing non-depositories access to Federal Reserve discount window lending, deposit insurance, and other federal support programs. This will help reduce market expectations of financial assistance for megabanks.”
This couldn’t have come at a worse time for Wall Street. Banks are having a hard enough time coming up with cash. First quarter earnings season was pretty dismal as businesses that were once money makers went dry and legal fees continued to pile up.
In a nutshell, The TBTF bill will make it harder for banks to reach international capital requirements, fight off lawsuits, maintain their staff compensation, pay out shareholder dividends and more.
As you can imagine, the Wall Street lobby machine is already jumping on this. Here’s a statement from Hamilton Place Strategies’ Tony Fratto. He’s a former Treasury and White House official.
“This is a bank break up proposal and tying together the loose fringes of the parties doesn’t make it ‘bipartisan’. It’s actually a bill neither party supports. We’ve come a long way since 2008. Whether because of regulation or market discipline, banks are better capitalised, more liquid, and much safer today. And that’s good because our economy needs banks to perform today. Mandating new and punitive capital charges, and walking away from international agreements — all in the midst of the most extensive financial regulatory overhaul in history — is misguided. There may in the future be serious efforts to review Dodd-Frank reforms, but this isn’t one.”
Perhaps that’s true, but there’s another view to take here, and Wall Street analysts have been talking about it for some time now. The view is that Vitter and Brown are speeding up a process that the market has been undertaking anyway.
Last summer, when former Citi CEO Sandy Weill shocked the Street by saying that he regretted his push to end Glass-Steagall, everyone was talking about this topic.
That’s when bank analyst Meredith Whitney said that banks were already “overcapitalized and sluggish,” and that the supermarket banking model Weill championed was destroying pricing in products like credit cards and home equity loans by emphasising securitization and capital markets.
The latter are the businesses that Brown and Vitter are worried about, and on Wall Street (for the most part) those are the businesses that are suffering — think: sales and trading.
The unsexy businesses like credit cards and wealth management, on the other hand, have been carrying the Street.
“You can make great money in a utility type of business by borrowing cheaply and lending sensibly but that’s not what’s being done. The basic bank model has, is, and will be attractive. It’s just you’re combining everything and undercutting pricing in one place and trying to make up for it, effectively having loss leading businesses… it’s not a business that works…You’re either making money or you’re not. If you’re not making money get out of the business.”
If this bill passes, some people may very well take that advice.