The ChamberPost

For Banks - One Day, Two Tales

by Tom Quaadman

This morning, the front page of the Wall Street Journal blared, Lending Falls at Epic Pace. The first paragraph of the story states: "U.S. Banks posted last year their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover."

The Article continues that the FDIC rates more banks at risk this year than in the past 16 and that bank failures in 2010 will probably eclipse the number that failed in 2009.

Later today the President gave a speech to the Business Roundtable and said:

The lobbyists up on the Hill right now are trying to kill reform by claiming that it would undermine businesses outside the financial sector. That couldn't be further from the truth. This is about putting in place rules that encourage drive and innovation instead of short-cuts and abuse. And those are rules that will benefit everyone.

Hmmm, what might the lobbyists be fighting—maybe the Bank Tax proposed by the administration?

With lending hitting historic lows, would it make sense to go after the lenders that provide the fuel for business expansion and job creation? Indeed this week, it was reported that tax bill drafters are looking to junk the administration's proposal to use the Bank Tax to recover TARP losses and instead slap a surtax on the operating income of financial institutions.

This could dramatically broaden the scope of the institutions covered by the tax and the amount raised. Of course, it will also impact the amount of capital available for lending crimping efforts at recovery and job creation. There are a many proposals floating around that seek to tax capital formation in the United States. That is similar to putting sugar in one's gas tank—you can ride for a little while but eventually your car grinds to a halt.

The statistics don't lie. Instead of rhetoric, we should all be working together to insure a vibrant and growing economy for the next generation. Sensible financial reform and tax policy are an indispensible part of the equation.

Does Size Matter?

by Tom Quaadman

One of the most vexing issues that have been considered during the ongoing financial regulatory reform debate has been systemic risk. In delving into systemic risk there have debates about regulators and powers, as well as new taxes and permanent TARP bailout authority. However, there are other sticky issues that need to be watched as well.

One of the concepts that has arisen and taken hold is the concept of “Too Big to Fail”. Under this theory, if a financial services firm gets to be too large, the federal government will have the preemptive power to break a firm up. Now the federal government already has anti-trust powers and these are normally geared at preventing a company from becoming a monopoly or having too much control of the market place. Under too big to fail, the federal government can arbitrarily decide if a firm is too large and break it up. While the Senate is still drafting bills for consideration, Rep. Paul Kanjorski successfully inserted preemptive breakup authority in the House financial regulatory reform bill that passed in December.

Additionally, the consideration of systemic risk and size can also lead to unintended consequences. For instance, many public companies have financing arms to assist in the purchase of the products that they produce. Therefore, many companies, whose business is the production and sale of goods, could get sucked into a systemic risk regime while other financial services firms may receive less scrutiny. The Chamber raised many of these concerns in letters that were sent to the House last fall.

The Property Casualty Insurers Association of America released a report yesterday on systemic risk: ‘Too Big to Fail’, Too Short-Sighted to Succeed. The study was written for PCIAA by NERA Economic Consulting.

The PCIAA-NERA study, not only gets into many of the same issues that the Chamber and others have raised about the potential application of systemic risk theories, it also elevates the specter of potential unintended consequences. The press release encapsulates it well by stating:

NERA’s study reached a number of conclusions that should give lawmakers pause before they create a systemic risk calculation based solely on a firm’s size. Among those findings:

• U.S. job losses and other economic inefficiencies;
• Consumer price increases for basic financial services; and
• Heightened systemic risk as a result of increased moral hazard.

These are concerns that should give pause and I would suggest a further reading of the report to obtain a more thorough understanding.

Systemic risk and resolution authority are issues that need to be addressed in order for financial regulatory reform to be truly credible. Whatever package is finally signed into law, we must be cognizant that it will create the economic rules of the road for the next generation. We don’t need a financial regulatory reform bill for its own sake. In order to provide America with the economic growth and job creation it needs, we need to make sure that we get the right answers to the right questions.

The stakes are that high.

"Greecing" the Skids for the Volcker Rule

by Thomas Quaadman

This week, the European Union Finance Ministers met to deal with the Greek financial crisis. While the Greek crisis has potentially enormous financial and political ramifications, the E.U. Ministers decided to put off any action for 30 days.

The E.U. ministers did manage to take time out of their weighty deliberations to opine on the much publicized Volcker Rule. In a statement the ministers said,

"[m]embers expressed their concerns that the Volcker rule in the E.U. may not be consistent with the current principles of internal market and universal banking."

Historically, European nations have not separated commercial and investment banking activities. While the United States did so following the passage of the Glass-Steagall legislation during the Depression, those restrictions were lifted in the late 1990’s to allow that American financial services sector to operate on par with global competitors.

Paul Volcker has put his finger on problems that need to be addressed in restoring stability to the financial markets. The Volcker Rule may be too restrictive in limiting the activities that firms need to engage in and based on the E.U. response may place American firms at a competitive disadvantage. Capital requirements may be a tool that can provide stabilizing features, while allowing for pro-growth and job creation strategies.

The Volcker Rule has also received a cool reception in Congress, particularly in statements issues by Senate Banking Committee Chairman Christopher Dodd. One of the complaints is that the proposal was sprung very late in the debate and drafting of financial regulatory reform legislation. With the whirlwind of on-again, off-again, on-again bi-partisan negotiations, it is difficult to handicap if Congress will undertake serious consideration.

Nonetheless, it appears that businesses are hedging their bets. It was reported in this morning’s Heard on the Street column in the Wall Street Journal that J.P. Morgan scaled back an investment for Sempra Energy’s joint trading venture with the Royal Bank of Scotland. J.P. Morgan stepped back from a $4 billion outright purchase of the business and instead only invested a $1.7 billion stake in the profitable trading entity because of regulatory uncertainty posed by the Volcker Rule. Apparently, J.P. Morgan is concerned that the imposition of the Volcker Rule would prohibit it from engaging in the trading that this venture engages in.

It seems that we have the E.U.’s answer, while we don’t know where Congress will land. Not the type of situation that gives the certainty needed for businesses to go out, invest and create jobs.

A Blizzard of Corporate Governance, Grab the Shovels

by Thomas Quaadman

Over the past week, Washington, DC has been hit with 2 blizzards, but the legislative activity continued unabated.

Since December, Senators Dodd (D-CT) and Shelby (R-AL) have been engaged in negotiations to craft a financial regulatory reform bill. Senators Schumer (D-NY) and Crapo (R-ID) were the bi-partisan negotiators on corporate governance matters.  In reading the tea leaves, as the negotiations progressed, it appeared that the Schumer-Crapo talks reached an impasse and that there was a possibility that corporate governance would not be covered by a financial regulatory bill.

As the snows began to fall last Friday, February 5th, Dodd and Shelby announced that their negotiations had broken down and that they had broken off talks. Senator Dodd announced that he was drafting a partisan bill and it appeared that the Schumer Shareholder Bill of Rights could either be inserted in such a bill, or serve as the foundation for the corporate governance sections of such an effort. As a new storm was raging on Wednesday, February 10th, Senator Corker (R-TN) met with Senator Dodd and they announced that they were trying to jump start a new bi-partisan effort.

What does this all mean?  While the situation is in flux and it is still unclear what the Dodd-Corker negotiations will bear, it seems that the Schumer Shareholder Bill of Rights is in play. Those provisions--proxy access, Say on Pay, mandating leadership structures, prohibiting staggered boards, requiring majority voting for uncontested directors and creating risk management provisions, could become the basis for new federal corporate governance legislation.

What can be done? Plenty. It is important for companies and individuals to reach out to Senators on the Banking Committee and make them understand the potential ramifications of these provisions and how they will impact the day to day operations of public companies. The unintended consequences of these provisions and the economic fallout need to be put out in the open for public debate.

We have seen over the past year how robust public debate can shape legislative action. Many Senators are not familiar with the everyday operations of public companies or the impacts legislation can have upon them. Input is important for the legislative process and educating Senators and their staff on the adverse consequences of the Schumer Shareholder Bill of Rights is critical, particularly at this stage of the process. 
When you shovel snow, it is easy to track your progress. With the drafting of legislation, you may not be able to chart progress until you see the draft of a bill. However, once a bill is drafted it is awfully difficult to change. So, if you are concerned about the provisions of the Schumer Shareholder Bill of Rights, grab a phone, write a letter, schedule a meeting, but make your voice heard.

If the Old Lion Roars…

by Tom Quaadman

…you should listen.

Paul Volcker is testifying before the Senate Banking Committee on the President's announcement a few weeks ago on the "Volcker Rule."

In short, the Volcker rule would prohibit commercial banks from engaging in proprietary trading, or operating hedge funds or private equity funds. The administration also embraced support for resolution authority to break up firms that are determined to be too big to fail.

Today's hearing is the first opportunity for any details to emerge regarding the Volcker rule. While many have withheld judgment of the Volcker Rule, the continued uncertainty because of a lack of details has sent the financial services stocks in a tizzy as of late. A few things to think about in watching Volcker's testimony:

1. How will these proposals boost lending to small businesses to spark economic expansion and job creation?
2. Will the Volcker Rule create missed opportunities for the financial sector and American economy?
3. Will the Volcker Rule assist stabilization, but a permanent bail out authority reinforce moral hazard?
4. Are their legitimate options to achieve Paul Volcker's goals?

Today, the Financial Times ran a story describing the continued shut down of lending for small businesses. This morning's hearing will continue the debate about regulatory reform, hopefully small business expansion and job creation will enter the discussion.

The devil is in the details, and today we are getting some of those details. Hopefully, some angels will emerge and we can keep the devil out of the equation.

Proxy Access: Another Round

by Tom Quaadman

Just before Christmas, the SEC unexpectedly opened a second comment period on their proposed rule to create a federal right to a company's proxy statement. The SEC requested comments on studies pro and con to the proposal.

The Chamber filed the this comment letter in opposing this misguided rule making. Our letter again restated the points we have made for almost the past year: the SEC has exceeded its legal authority, the proposal would be costly and disruptive to companies, proxy access would impair the directors to the detriment of shareholders, no compelling reason has been made for the new rules and the SEC has ignored pressing issues such as the renting of voting interests of a large number of shares.

The Chamber also filed a report by Professor Brian Cheffins of the University of Cambridge. The Cheffins reports looks at the performance of the S&P 500 during 2008, particularly the companies most impacted by the financial crisis. Professor Cheffins found that the corporate governance systems worked and that boards were quite engaged in dealing with the financial crisis. The report concluded that these companies suffered from a financial crisis, not a governance crack-up and that the case for corporate governance reforms was not made.

This report joins a growing chorus that proxy access is simply a solution in search of a problem. A solution that the SEC has already rejected twice over the past 6 years.

Distracting directors, alienating shareholders and destroying the value of stocks, never seems like a good idea, particularly when the SEC should be looking at its ever growing to do list. Maybe the reforms to prevent a Madoff, or getting Mom and Pop shareholders to vote in corporate elections would be better than yet another consideration of proxy access.

Proxy access sure is a clunker, too bad we can't cash it in for something better, maybe like the CCMC's proposals to make the SEC a better and more efficient agency. 

Taxing Recovery

by Tom Quaadman

Over the past several weeks we have seen several proposals mover forward to raise the taxes on capital.

The House last month passed a bill that will assess fees for bailouts, stock transaction taxes were proposed in the House and the Senate, bonus taxes were proposed last week, as the Obama administration proposed a tax on banks.

What these proposals all have in common is that they will raise the cost of capital, in other words, it will be harder for individuals and businesses to raise money. Decades ago, increased capital costs forced money into other uses that may have been economically inefficient or produced lower returns. Today, in the global economy, capital can leave the country with the click of a button.

Higher costs means less capital, less capital means less available for loans, less loans means less opportunity for business expansion and job creation. These proposals seem to be going in the opposite direction, unless job creation has become less of a priority.

Fanning the flames of populist anger might satisfy some, but the long-term policy results can only cause more harm and pain. Just like the time I ate a bag of Frito’s after working late one night. The snack tasted good, but the cholesterol test I took the next day didn’t turn out so well.

Short term shenanigans cause long-term pain. Hopefully, wiser heads will prevail.

Capital Markets: Job Creator or Political Football?

by Tom Quaadman

The Chamber has been in the forefront of working for financial regulatory reform for many years to insure that businesses have access to capital and credit. Simply put, businesses need dynamic financial markets to expand and grow jobs. While the financial markets are every changing, they need the certainty of clear rational rules of the road in order to function properly. Regulatory dead-zones and arbitrage were a part of the problem and we have been willing to work with partners to correct the problems of the past and insure that businesses have access to the financial markets needed for a 21st century economy.

My Blackberry started filling up last night with e-mails last night that President Obama will make an announcement later this morning proposing a new separation between investment and commercial functions for large financial services firms. The United States has had a separation of investment and commercial banking before through Depression-era legislation known as Glass-Steagall.

What this proposal means or how it will impact American capital markets and businesses is going to have to wait for the details. However, we have seen over the past several weeks, proposals to tax banks, tax stock transactions, etc. These proposals have to be viewed through the lens of job creation and economic growth. If they created artificial obstacles to capital inhibiting growth or place our markets at a global competitive disadvantage, then they shouldn’t be pursued. If those proposals put the markets on a firm footing and help business gain access to credit, then they need to be looked at seriously.

While I am sure we will have a running debate on the President’s proposal, one tale about the Glass-Steagall law may be instructive. Glass-Steagall was enacted to limit the power of J.P. Morgan, Jr. and his bank. J.P. Morgan’s response? He sent his son and a partner across the street to start a new firm called Morgan Stanley.

Financial Services Go Through the Looking Glass

by Tom Quaadman

Yesterday’s announcement about the bank tax had an Alice in Wonderland feel to it. The administration acknowledged that the majority of the financial services portion of TARP had been repaid (often with high rates of return), but that those who had repaid the assistance must meet their obligation. Many of these are the same institutions that were called to the White House in December and asked to issue more loans, but now they will be taxed for the loans that they write.

This would almost be comical if the ramifications weren’t so scary. I read a report in a publication that the $90 billion tax may take as much as $1 trillion in lending capability away from the financial services industry. That number is eye popping and even if the estimate is off by half that is a jaw dropping amount.

This proposal comes as our economy is hitting a fork in the road. If businesses decide to expand, they need access to credit ultimately spurring economic growth and job creation. If they decide to continue hunkering down, we face the possibility of a jobless recovery, or maybe even a double dip recession.

Restricting credit to businesses can have devastating ramifications for years to come. It’s time to move away from the looking glass and take a long hard look in the mirror. Tough choices need to be made and Main Street won’t survive on a sound bite.

The Bank Tax - History Repeating Itself?

by Tom Quaadman

Following his State of American Business address, Tom Donohue mentioned at a press conference that protectionist policies and tax increases transformed a severe recession into the Great Depression. Is history repeating itself?

Well, we have a severe recession. The failure to enact trade agreements, like the one with South Korea, I will leave for other to opine on. However, the administration is poised to propose one new tax on banks, while others in Congress are pushing a tax on stock transactions. The reasons for these tax increases are to raise revenue, curb risky bank practices and stop excessive trading of stocks.

These taxes are most troubling because they will hurt the ability of business to access capital. If we think of the economy as our circulatory system, capital liquidity is like the blood that courses through our veins and arteries. The financial crisis that erupted in full with the collapse of Lehman Brothers was like a cardiac arrest. Liquidity evaporated, the real economy began to contract at an alarming rate and unemployment skyrocketed. TARP stabilized the system and the economy has slowly started coming back to life. But we are not out of the woods.

The potential tax on banks will make it less likely for banks to make the loans that businesses need to expand and create jobs. In fact, the tax may be linked to the liabilities a bank holds. The more loans a bank writes, the more liabilities held the more taxes to pay. Yesterday, the Chamber sent the administration a letter asking to reconsider a bank tax.

The proposed tax on stock transactions will increase the costs for individual investors and make it harder for businesses to raise money, or for a small business to become a large business. Capital will simply leave our shores and our economy will suffer as a result.

Ironically, in 1932 President Hoover had Congress pass a dramatic increase to the then existing stock transaction tax to stop what he thought was needless speculation. The result- 60 days after the increase was enacted the stock market hit its low for the Great Depression and two years later the Treasury Department issued a study stating that the tax failed to end speculation or raise much revenue. Over 30 years later, the tax was repealed as a part of the Tax Reforms first proposed by President Kennedy.

200 years ago it was a common practice for a doctor to bleed a patient and very often the cure would kill. These proposals may be well intentioned, but the ramifications could be deadly.