Banks Fight Higher Capital Requirements

Posted by Ray on October 27, 2009 under Main | Read the First Comment

According to a Bloomberg article the Too Big to Fail Banks are crying over higher capital requirements that would take effect next year. I am sure your hearts, like mine, go out to these institutions as they struggle to scratch out a living, it is tough when the industry can only payout some $140B in bonuses for 2009 when they wanted $150B, but hey, we are all sacrificing aren’t we? The institutions are requesting a 3 year period to phase in the new requirements instead of doing it all at once and, once again, they are putting the gun to America’s head threatening the economy and the, cough, cough, recovery if their wish is not granted.

The threat is that lending, as if there is any to begin with as banks are buying some $1.2T in US government debt, would cease as it would impact securitization of consumer debt. First, let me explain what is happening and why they are fighting these new regulations, then you will see what the real agenda is and why they are fighting for a phase in period. As many of you know, banks have off-balance sheet accounts called all sorts of things from SIV’s, Special Investment Vehicles to Qualifying Special Purpose Entities, these gems are where banks move their products of questionable quality to be sold or securitized. Now, the rule is past and the asses are coming on the boost, period. The question is how fast will the assets come on the books, now or over 3 years.

Lehman made them famous because they did the granddaddy of all accounting sleight of hand tricks and would sell their CDO’s to their SIV’s and then report the sale as a profit, not bad, huh? It works until the value of these things completely blows up, see September of 2008 for the results. Well, the FASB in conjunction with Fed and FDIC want to move these off balance sheet items to the balance sheet, finally! This way, you the investor, can value the bank properly because you can see the “assets” or lack thereof in the day light. Now do you understand why the banks are fighting this move?

The banks want a 3 year window for the assets to come onto their balance sheets, I think you know why, but I will tell you anyhow. If the assets came on all at once it might break their balance sheets and a portion f these banks could fail or require more government assistance, we know this. However, my feeling is so what? Let them fail, do we really need a Citi Group or Bank of America or any other too big to fail bank anyhow? No, we don’t as there are plenty of banks to fill their shoes. Frankly, these institutions should not exist anyhow and they are not really lending, sorry FHA loans do not really count as lending.

These new assets are a significant problem, I am not saying they are not, but this is what the industry did to itself. Wells Fargo claims that every $1B it brings on in new assets will crowd out $15B in new loans. This sounds an awful lot like last year when the industry put a gun to its head and said save us or we will pull the trigger and take you with us. I don’t like it and I don’t buy it, sorry. Let them go and do it now. Cram down the rule on them without a phase in period at all and while you’re at it reinstate mark-to-market so we can truly value the bank’s assets. I know the ramifications and I am willing to accept them as I am tired of this one industry that blew up the whole world still wielding all this power over us when they should be begging for forgiveness. Just to fuel the fire, here is what John Gerspach from Citigroup and JP Morgan wrote:

Citi:

“We do not plan to reduce lending in only those businesses specifically impacted by the incremental regulatory capital requirements,” Gerspach wrote.

JP Morgan:

The capital requirements “will have a significant and negative impact on the amount of consumer-conduit funding that will be made available by U.S. banks,” said the letter from JPMorgan, the New York-based bank that this week reported its biggest quarterly profit since the subprime-mortgage market collapsed in 2007.

“We strongly support a phase-in period for the rule changes,” according to JPMorgan’s letter, which was signed by Managing Director Adam Gilbert.

These statements sound like threats to me, don’t they? To me they sound like they are going to reduce lending to every business line, which is surprising since they are not really lending anyhow. So, record profits are rolling in while they are clearly hiding huge losses offshore, which is what it looks like to me at least, but we will not know until we see what is there. However, if they are made to put these assets on their balance sheets all at once, they will bring down the house of cards all over again, how convenient.

Regardless of what happens the change will have to take effect for annual reports on November 15, 2009. Guess what I will be doing on that date? Hopefully the same thing you will be doing because this is a big deal.