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<nettime> FT: Too much profit on Wall Street
nettime's avid reader on Tue, 16 Jul 2013 23:09:27 +0200 (CEST)


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<nettime> FT: Too much profit on Wall Street


<< http://ft.com > Inside Business > July 15, 2013 >>

Too much profit on Wall Street

By Tom Braithwaite

Banks have issued so many warnings about regulation that they cannot now
admit that they are thriving

The biggest US banks are wrestling with an intractable problem. It is
not a surge in loan defaults, a wave of cyber attacks or mounting
lawsuits. It is far more serious: they are on the verge of making too
much money.

JPMorgan Chase is on track to make $25bn or more this year -- as much as
the gross domestic product of Paraguay -- with at least a 17 per cent
return on common equity that takes the bank back to the heady levels of
2007.

In a different political atmosphere this might be a moment for
celebration. Not only have banks such as JPMorgan and Wells Fargo
survived the crisis, they are thriving again, as they showed in their
results on Friday. Even Citigroup and Bank of America, which took $90bn
of bailout money between them, are out of the emergency room, working
their way through bad assets and competing for new business. Their
shares are up 95 and 78 per cent respectively in 12 months.

At another time, excess cash would be handed over to shareholders and
employees. Half of revenues from investment banking would be paid out to
staff and up to -- and sometimes more than -- 100 per cent of earnings
would be distributed to investors via dividends and share buybacks.

But in the prevailing climate, the celebrations must remain muted and
bank chiefs miserly. A meagre 31 per cent of revenues were set aside for
remuneration from JPMorgan's investment bank in its earnings on Friday.
For their part, shareholders might appreciate the rapid stock price
appreciation, but they are not expecting bumper dividends -- partly
because the Federal Reserve now blocks generous payouts.

Sensible bankers are accentuating the negative -- Jamie Dimon warned of
a "dramatic reduction" of mortgage profits last Friday and fretted that
foreigners were going to steal US business. On the earnings call a
puzzled analyst pointed to "extremely good" trading results and asked
the JPMorgan chief executive "if you could brag a little bit?" The
never-normally-shy Mr Dimon would not.

Here is the problem: banks have spent a lot of time, energy and money
warning of the potential ill-effects of ramping up regulation. But since
the crisis, international regulators have kept demanding more capital,
including a surcharge for the biggest banks. Lenders have doubled their
capital levels as a result, hitting the new Basel III targets six years
early in some cases and, yet, where are the ill effects? The best of
them continue to set new profit records.

Now US regulators and politicians have found a new energy, quite
possibly because we are a distance from the crisis and banks look
healthier, to go much further in imposing tougher regulations on the
banks. In the next 12 months the Fed will hit the banks with a new
flurry of measures: a stricter leverage rule requiring more capital held
against assets, a requirement to hold a minimum amount of long-term debt
to be used to recapitalise a failing bank, a new capital tax on those
banks who rely too much on short-term wholesale funding and the
long-in-the-works proprietary trading ban known as the Volcker rule.

Those are coming, they are serious and the banks fear them. There is an
outside chance that lawmakers will go even further, such as by restoring
the split between investment banking and commercial banking known as
Glass-Steagall. There is still plenty to play for in deciding how
painful the next round of regulations will be.

But, with every earnings season, warnings of calamity look more and more
hollow. The Financial Services Roundtable said last week that adding an
extra percentage point or two to the leverage requirement would set back
the recovery. It's a dubious contention.

A very precise recent survey found that regulation had increased by 117
per cent in the past 12 months, forcing banks to add 2.3 more people
each to deal with it. For all the silliness of those numbers, there is a
regulatory challenge for small banks. But that merely underscores the
slow but steady industry consolidation, where JPMorgan, Wells Fargo and
their top peers are enjoying more and more share as their smaller rivals
crumble.

There are clouds on the horizon. Mr Dimon was not bluffing entirely when
he warned of the slowdown in the mortgage business. The Fed's withdrawal
from financial markets will remove an important tailwind.

The banks' only hope is that regulators and politicians pay more
attention to these grim threats than the more upbeat evidence from their
own rosy bottom lines.

Tom Braithwaite is the Financial Times' US banking editor

tom.braithwaite {AT} ft.com


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