Monday, January 25, 2010

Death of The Investment Bank

United States President Barack Obama proposed on Thursday a novel set of stringent restrictions his administration plans to implement in order to exile “risk” from Wall Street. The new directives include limiting Prop Trading, restricting investment in Hedge Fund and Private Equity groups, and curbing the size of an individual bank based on deposits.

"You can choose to engage in proprietary trading, or you can own a bank, but you can't do both," an administration official said. Do these same rules apply to Credit Agricole, Deutsche bank, Société Générale, UBS, Credit Suisse, Barclays, HSBC, ING Group, RBS, Mitsubishi UFJ Financial Group, etc…? This much is not yet clear. However, one can presume the answer to be no. So then why is Washington hell-bent on wringing out U.S. based financial institutions? U.S. banks received “bailout” money from the infamous Troubled Asset Relief Program. Let’s examine the “Tarp” for a moment.

As of February 9, 2009, $388 billion had been allotted, and $296 billion spent, according to the Committee for a Responsible Federal Budget

Of these banks, JPMorgan Chase & Co., Morgan Stanley, American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., BB&T Corp, and Bank of America have repaid TARP money. Most of these have been done with capital raised from the issuance of equity securities and debt not guaranteed by the federal government.

The largest outstanding Tarp repayments come from AIG, General Motors, GMAC, and Chrysler. So I ask the question: “Are any of these companies Bank holding companies? Back to my original question: Why has the Obama Administration harped on Bank holding Companies?

The answer is quite simple. It builds political capital. The new administration has struggled time and again to justify spending $787 B in stimulus money, Health care overhaul with a public option, the war in Afghanistan, and most importantly create jobs. Many Americans remain unemployed, more than 10%. When those Americans read Goldman Sachs makes record profits and allocates funds for record payouts, anger and frustration ensue.

Also, even the most educated American does not understand what an Investment Bank does or its purpose in the global macro economy. Hence, it is easy for President Obama to say "Never again will the American taxpayer be held hostage by a bank that is too big to fail." What bank is holding us hostage? As the above chart indicates most all Banks with the exception of few smaller players have repaid Tarp funds with dividends. For example, Goldman Sachs paid a $1.3B dividend. Not to mention, The Federal Reserve is sitting on billions of dollars in paper profits from its controversial effort to unwind credit insurance contracts that AIG provided to banks such as Goldman Sachs.

However, there is no news like bad news. I point the finger at the media in this case for failing to educate the general public with these headlines. Yet, it is not all their fault. The Global Financial System barely dodged the Asteroid that could have been the trigger to a greater Apocalypse. I do agree that reform, new regulation, and risk management need to be considered in order to prevent things from spiraling out of control again. Though, I am disappointed that Washington officials are spinning this for personal reasons rather then taking the time to educate Americans on the causes of the crisis.

What will happen to the once ironclad Investment Banking model going forward? It is hard to say. Surely, lobbyists will be hired and lawsuits will arise. Not to mention regulation takes years to truly make an impact. One thing is for sure; this is a dangerous game of Liar’s Poker.

Patrick M. Ambrus
Analyze Capital LLC
Managing Partner

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