So is it just standard issue Wall Street arrogance or does JPMorgan Chase (JPM) know something?
The bank, which has emerged from the financial crisis as one of the strongest big banks in the United States, is pressing ahead with discussions to buy a big Brazilian hedge fund and private equity group. JPMorgan Chase is in talks with Gavea Investimentos, which manages about $5.3 billion in assets.
Yet the U.S. Congress is pressing ahead with a financial reform bill that includes the Volker Rule, which in its strictest form would ban banks from trading on their own account and limit their ability to invest in or sponsor hedge funds and private equity vehicles.
JPMorgan Chase already controls Highbridge Capital Management, a $21 billion hedge fund, and private equity group One Equity Partners.
Does JPMorgan Chase just have a lot of faith that the banking industry’s army of lobbyists will once again prevail and remove anything truly dangerous to the status quo from the bill now in front of a joint House-Senate committee working to reconcile separate bills from the two houses?
Or does JPMorgan know that the fix is already in and no matter what our elected representatives vote to do, when the rules are finally written by the folks who theoretically regulate the financial sector, the result will be change that banks can believe in.
I’d pick the latter. The financial industry knows they get two shots at this. The first in the halls of Congress is likely to result in something with a few teeth—enough so that Representatives and Senators can tell voters in November that they fought for them against big, bad Wall Street. (Not so many, of course, that members of Congress will jeopardize their ability to fund their campaigns with Wall Street money or get employment in the financial industry once their term in office is over.) The second, out of public view, will take place in the halls and offices of the regulatory bodies that actually write the rules that implement the often vague laws that Congress writes. JPMorgan Chase and other big banks are betting that when the rules are finally written, they will permit the activities that banks deem crucial.
On the track record the big banks are almost certainly right. If that’s true, and you’re cynical enough, that means there are some bargains out there among bank stocks that have been sold off because investors think that financial regulation might have some real teeth.
Let me start this column by explaining why financial regulation with teeth is unlikely. And then end by naming three U.S. bank stocks to put on your watch list for purchase during the summer doldrums to come. (To keep track of my watch list, called cleverly enough Jim’s Watch List go to https://jubakpicks.com/watch-list/ )
The so-called Volcker Rule, first proposed by former Treasury Secretary and current Obama economic advisor Paul Volker back in January is a great example of why the damage to financial industry profits is likely to be less than many investors now fear.
The original proposal would restrict proprietary trading by banks for their own accounts unrelated to customers’ needs. It would bar them from sponsoring hedge funds and private equity funds. The stakes would seem to be huge. More than a quarter of all private equity investments between 1983 and 2009 involved bank-affiliated private equity groups, a recent study from Harvard Business School and global business school INSEAD found.
Banking lobbyists are fighting hard for a carve out. Big banks such as State Street (STT), Goldman Sachs (GS), Morgan Stanley (MS), and, yes, JPMorgan Chase want the rule changed to allow de minimus investments by banks in private equity deals.
No big deal right? Allowing minimal investments by banks wouldn’t add significant risk to the financial system and it would allow banks to invest in deal alongside clients. And that would convince bank customers that such deals were safe since the bank had its own money at risk. The interests of customers and banks would be aligned, the banks argue.
It’s hard to imagine that even the banks buy that argument. If the investment is truly minimal, so minimal that it wouldn’t increase a bank’s risk, then how could it possibly convince the participants in a deal that the bank had significant skin in the game?
But every exemption a banking lobbyist can get into the bill in Stage One, the legislative process, the more room for maneuver banking lobbyists will have in Stage Two, the regulatory process.
Just to take this example, if legislators follow their usual practice, they’d leave it up to the regulators who write the rules to define de minimus. The definitions of de minimus in a legal context include “inconsequential, insignificant, meager, moderate, modest, negligible, of minor importance, of no account, paltry, petty, obscure, scanty, slight, trifling, trivial, and unworthy of serious consideration,” according to “Burton’s Legal Thesaurus.
Lots of room for interpretation there. Exactly how would you set a limit for bank investments in private equity deals given that guidance? Should the investment be “modest” or “negligible,” “moderate” or “trifling”? And what exactly, in dollars, is a “modest” or “trifling” investment for a Goldman Sachs or a JPMorgan Chase?
The influence of lobbyists on Senators and Representatives gets all the attention—of the relatively meager amount of attention that we pay to how the legislative sausage is stuffed, anyway. And lobbyists at this level are immensely influential, both in dollar terms and in terms of personal connections.
The U.S. Chamber of Commerce, to take just one example, spent $148 million on lobbying Congress in 2009 and the first quarter of 2010, according to the Center for Public Integrity. It’s hard to get a precise estimate of how much is spent on lobbying on a specific issue, but the Center calculates that the top 10 lobbying companies in Washington collected $30 million in fees for lobbying on financial reform and other related issues. (The center’s estimate is based on a study of lobbying companies’ financial disclosure forms that contained key words or bill numbers related to financial reform legislation.)
The volume of personal connections between lobbyists and Congress is perhaps even more overwhelming. According to research by Public Citizen and the Center for Responsive Politics 56 financial industry lobbyists once worked on the personal staff of the 43 Senators and Representatives sitting on the financial reform conference committee. A total of 1,447 lobbyists for the financial industry once worked for the federal government and 73 are former members of Congress.
But lobbying Congress is only part of the game. Congress writes the laws but it leaves it up to the regulators to write the rules. In a mid-June review of the text of the financial reform legislation, the Chamber of Commerce counted 399 rulemakings and 47 studies required by lawmakers.
Each one of these, like the proposed de minimus carve out of the Volcker rule, would be settled by regulators operating by and large out of the public eye and with minimal public input. But the lobbyists for the financial industry who once worked at the Federal Reserve, or the Treasury, or the Securities & Exchange Commission, or the Commodities Futures Trading Commission, or the Federal Deposit Insurance Corp. know how to put in a word with those writing the rules. Need help understanding a complex issue? A regulator has got the name of a former colleague now working as a lobbyist in an e-mail address book. Want to share an industry point of view with a rule maker? Odds are a lobbyist knows who to call to get a few minutes of face time.
The regulatory battles range from issues like the precise way to calculate de minimus to membership on the list of banks that need extra regulation because they represent a systemic risk to the financial system. (Define that one. Go ahead. I dare you. Best of luck to the Federal Reserve.)
No wonder that one of the most contentious battles has been over amendments offered by Senator Jeff Merkley (Dem-Ore.) and Senator Carl Levin (Dem.-Mich.) to restrict the discretion that regulators would have in implementing the Volcker rule.
Estimates of the cost of the financial reform legislation are designed to terrify legislators and voters. We’re in danger of destroying one of the few globally competitive U.S. industries, the anguished cry goes. (Of course, that globally competitive industry played a key role in creating a financial crisis that took the world close to another Great Depression, but never mind.) Some banking industry analysts have estimated that financial reform as now written could reduce profits at big banks by 12% to 35%. Earnings at Goldman Sachs would fall 23%, at Morgan Stanley 20%, at JPMorgan Chase 18%, and at Bank of America (BAC) 16%, according to a June 16 investment report from Citigroup.
Sorry but I think those estimates completely over-estimate the power of words in a Congressional bill to produce actual change on corporate bottom lines. (And, of course, it is to Wall Street’s political benefit to moan that it has been mortally wounded when it’s barely been scratched.) The words will have been lobbied over until they offer the most room for discretion possible to the actual rule makers who will then be lobbied some more, out of public sight, to bend the rules in industry’s favor as far as possible without actually breaking with the original Congressional intent. Whenever it happens to be clear.
The current legislation gives rule-makers up to 18 months to finish their work. But remember that rules in Washington are seldom completed on time. Count on 2012 to be well advanced before the bulk of rules actually hit the industry.
By then, the banks that I’m adding to Jim’s Watch List today, Goldman Sachs and Morgan Stanley—and JPMorgan Chase, which I added to the Watch List on June 8—will have massaged the rules so that they can certainly live with them without major changes to their business models. And maybe their lobbyists will have even found a way to turn some of those rules into weapons to use against competitors.
It wouldn’t be the first time that reform worked out that way.
Full disclosure: I don’t own shares in any company mentioned in this post.
GlassWizard,
Thanks, that was a great article. In way it makes me feel better, as I have aged I have realized that I don’t “know” as much as I did when I was younger. 🙂
There is a remark in this article that is just patently unbelievable and I feel duty bound to bring attention to it: the remark that Jubak’s Watch List is “cleverly named”, is blatantly untrue!
cjxland,
I’m not so sure we deserve them. Maybe the man behind the curtain has a good deal to do with who we get to pick from and it doesn’t matter which one we pick!
Or maybe we’re just not that bright.
http://opinionator.blogs.nytimes.com/2010/06/20/the-anosognosics-dilemma-1/
P.S. the 1 million legal immigrates are per year. Most of the retires numbers I see are total people, which have Mexico are the main country they go to (tracked by where their Social Security goes), and even there the total is less then 700,000.
You can guarantee that the game is rigged. Take Goldman Sachs. Before the financial crisis is not a bank. Once the government starts bailing out “banks”, it becomes one (Not the only one out there to play that trick). If anything actually affected Goldman Sachs’ bottom line, then would just become a non-bank again, and wait for the next time for the government to allow them to become a bank again and pay them a bailout.
I see absolutely nothing in this bill that really attacks the two problems of too big to fail, and taking on too much risk counting on the tax payers to bail them out. Not to mention of course as Jim says, it is the vague bill that actually sets the rules. And of course we all know just because there is a rule doesn’t mean it will be enforced, or even if they will fund having enough people checking if banks are complying. Banks will use this as an excuse to charge more though.
Seaturtlelady,
I looked and I couldn’t find any real data on the people leaving the US. From what I could see though at least for retiring, it is a drop in the bucket in comparison to the people coming into the US (even if you only count the 1 million or so legal immigrates).
Cramer’s article struck me as a rehash of Peggy Noonan’s column in last saturday’s WSJ, but without giving credit. Gee, Cramer passing off someone else’s work as his own. Shocking.
Kelvinator-
And plus, btw: great post in repsonse to some of the other folks, on the subject of Cramer and just whom is to blame for all this. Very well said.
Kelvinator-
Have not seen that, but I guess I better! Thx for the tip. Maybe I’ll find something in there to get a laugh at, too.
[Actually, I was just working on my “cynical” there…]
It is not like Democrats are good and Republicans are bad. Any economics book worth its salt will tell you that deregulation and pro-rich tax cuts started during the reign of Carter, not exactly Reagan. The Democratic presidents/congresses ever since only endorsed the conservative ideas formulated by the Republican establishment. Obama is a continuation of this trend.
Cramer is right in that Obama is like Carter. He happens to be a president in an era where lying to the masses is almost impossible. You can become a president by promising pro-Main Street reforms but not get re-elected after doing all the things that contradict your promises.
I don’t understand why Cramer is unhappy about Obama. He and the Congress just agreed on a Financial Reform that nowhere near will be enough to protect us from another crisis down the line. Today, with the ECRI leading index clearly showing a slowdown in the economy, the market (actually the Financial sector) is rejoicing with the news of a toothless Financial Reform.
It’s a sad day for the people of America…
cjxland – got a laugh out of your last line – “now can we make a buck off this mess?” I don’t know if you ever saw the movie, “Memento”, (I just did last night). Per the movie, that would be the one thing that the American investor would have tattooed on his or her wrist to guide them when they wake up disturbed and disoriented, short term memory gone in a strange motel room (and strange world)…
I’m curious if there is a website that compiles data on the number of U.S. citizens moving out of the country??
xy & rosemanjhk – I also agree with Cramer that Obama has been a huge disappointment in stepping beyond being a politician, leveling with the American people, and being a strong leader. But the problem with a powerful leader in this environment is that once he or she gives up trying to be all things to all people and he’s certain not to lead in the direction that everyone is going to like. I doubt that the strong leader I would like Obama to be would be the same one Cramer wants, or possibly the one either of you would want. Cramer is perpetually ranting about how anti-business this admin is – the same multi-decade right wing business-is-god pap that has helped crash the financial system and now is trashing the global environment. Any US leader these days is dealing with the culmination of decades of unbelievably large systemic problems of debt, corruption, laisez faire business in which GAAP and mark to market accounting is thought to be anti-business (!!!), and over leveraging at every level of society. Denial and delusion are gradually giving way to depression on a grand scale as gravity and reality returns to the world of commerce. I wouldn’t blame all that on Obama any more than I would believe, like Cramer apparently does, that a return to a little more pro-business, pro-growth cheerleading will fix things just fine. These are very tough problems that require getting very real and trying to bring people together, right? Or pushing hard on people who won’t move. Not easy in the best of times. I listened to This American Life’s podcast on how Barbados dealt with its major financial crisis in the early ’90’s compared to how Jamaica dealt with theirs a couple of decades ago – both had to borrow money from the IMF, but Barbados banded together socially – business and union leaders joined at the hip to confront the IMF and agreed to across the board pay cuts but protected education and health benefits for the poor. Barbados paid back its IMF debt in 5 years and now has 2x the median income as Jamaica and much better lifestyle, while Jamaica is a rich/poor jungle. This country will eventually be partly ruled by rude Rasta boys like Jamaica and Mexico if there is no leadership that can talk about what’s really going on and ultimately balance representing the poor as well as the rich, (who can retire from disasters like Wall Street or move away from disasters like the Gulf – for now).
I think what worries everyone is that there’s really no one, including Obama, who is articulating a vision that really tells it like it is, talks about the hard choices and seems to see a path through…
Looks like the same old Cramer to me- still pandering to the lowest sentiments of his constituency, shooting for that least common denominator.
You folks apparently didn’t read so carefully what Jim wrote so carefully up above- you still aren’t getting it: in your infinite wisdom, you are going to keep focusing on the smoke and mirrors, looking where the con men want you to see, and arguing the nonessentials into total oblivion- letting them push yer hot buttons while the crooks of every stripe are picking yer pockets. [Hey- pay no attention to that man behind the screen…]
We deserve the politicans we get, and all the lobbyists, and all the shysters and shills and sharpers, and their good corporate buddies.
Now…can we make a buck off of this mess?
Jim, excellent article — your analyses are always politically unbiased. These types of articles, as well as those in-depth financial analyses of individual companies, are why I (and I’m sure others here) have read your articles/advice seemingly forever.
Both/either party has long ago been bought by those virtuous “big business” types, in this case, banks. We could, I suppose, limit a Representative’s ability to work for the industry they were regulating… oh wait, we do have a 2-year restriction… hmmm, how about a lifetime restriction? Oh no! Not regulation of that marvelous, albeit illusory, “free” market again!
AOD down, really?? How odd.
adamadamek…
This article explains why AOD is going down…
http://seekingalpha.com/article/211226-alpine-s-total-dynamic-dividend-fund-overdosing-on-financial-engineering?source=yahoo
I have to fully agree with Cramer’s article. This reminds me Jimmy Carter and his horrible presidency. There is a big difference in being a community organizer and President. The country needs a leader to get things on the right track…the only question is who that person might be?
@ xy –
That is actually one of the few times Cramer has made sense. The similarities between the Carter admin and the current one can be seen, political leanings aside. intelligent men trying to do the right thing at the wrong time maybe?? Victims of the times and the systems? Who knows, history will be the judge as always…..
Jim,
Cynical? We’d have to run an Optimist Extract IV before we could approach cynical. One thing for sure, shorting GS is a fools bet. Never bet against the vampires.
Did you see this:
http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html
The sky may not be falling, but I have my eye on a titanium umbrella and a bundle of wooden stakes.
This BS makes me so mad. Whatever happened to politicians doing what is good for the COUNTRY?
Excellent Post Jim. Your article highlights many of the problems of undue influence by special interest groups upon the legislative process.
Don’t know what the fix is, but it sure is a big problem. On a side note, I tiptoed back in oil stocks this morning a bought 100 sh. of cvx.
Off topic.
Cramer unleashed.
http://articles.moneycentral.msn.com/Investing/top-stocks/blog.aspx?post=1774118&_blg=2
EdMcGon,
AOD has tanked due to the dividend cut, do you have any thoughts? I am assuming you still think it’s poison.
“New regulations will hurt job creation.”
I will let you guess the political affiliation of the visionary who uttered these words of deep virtue.
Jim-
Superior article, one of your “best evers”!- I believe you’ve hit every nail in this issue- and the broader issue of “reform” legislation- precisely on its head.
Too bad no one is listening. You have my sincere commiseration. What have we become…? [I’m trying to decide if I am “that cynical” … ;]
[Anyone care to wager what occupation Mr. Dodd and Mr. Frank will be moving into, after their careers as pols? (Hint: No, NOT bank president…but that is close)].
It doesn’t matter if this bill is not as horrible as Wall Street says. The economy will not get better with this President, use that word loosely, and Congress constantly attacking Big business as being the cause of all evil. Business people I talk to everyday do not want to hire or invest in capitol because they don’t have any idea what new regulations or taxes will be coming from this administration.
They also feel they supported Obama on health care and he now has turned them into villians once he got the bill passed. Things will not get better in the ecomony because they feel this is a weak but dangerous President.
Get used to weak growth and high unemployment
reading something like Jim’s article just makes me sick to my stomach to think of how “democratic” our governmental system is these days
“Not so many, of course, that members of Congress will jeopardize their ability to fund their campaigns with Wall Street money or get employment in the financial industry once their term in office is over.” —- This is not called bribery.
“According to research by Public Citizen and the Center for Responsive Politics 56 financial industry lobbyists once worked on the personal staff of the 43 Senators and Representatives sitting on the financial reform conference committee. A total of 1,447 lobbyists for the financial industry once worked for the federal government and 73 are former members of Congress.” —– The system works.
“The U.S. Chamber of Commerce, to take just one example, spent $148 million on lobbying Congress in 2009 and the first quarter of 2010, according to the Center for Public Integrity.” —- About same amount that Unions spent in 2008 election.
de minimus……3%
from WAPO:
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/25/AR2010062500675_pf.html
Even as they worked to toughen the Volcker language, lawmakers agreed to an exemption at the behest of Sen. Scott Brown (R-Mass), one of only four Republicans to vote for an earlier version of the financial regulation bill in the Senate last month.
Brown, whose state is a hub of the asset-management industry, wanted the bill to allow banks to invest at least a small amount of capital in hedge funds and private equity investments. The measure would prohibit a banks from investing more than 3 percent of their capital in private equity or hedge funds. It was one of a number of provisions tailored to hold onto key votes as the bill heads toward final passage.
Jim…
Great article! I’ve been watching GS like a hawk for a while now…
Juxtaposing this post:
Jobless Bill Dies Amid Deficit Fears
http://online.wsj.com/article/SB10001424052748704227304575327273014747664.html
Now, get ready for scenes from the Great Depression. Sad, very sad… 🙁