Financial overhaul to hit Wall Street firms’ bottom line
On the first business day after the financial regulatory overhaul took its final shape in Congress, industry analysts focused on the gains made by Wall Street in the last round of horse trading.
“The compromises made in the 11th hour of negotiations provided some relief, and the bill was not as severe as many investors had feared,” analysts at investment Keefe, Bruyette & Woods wrote in a note to clients Monday.
The legislation, approved Friday by a House-Senate conference committee, could eventually reduce the earnings power of more than 25 of the largest banks by an average of 5%, analysts at Citigroup Inc. estimated Monday. That was down from an 11% hit estimated by Citigroup less than two weeks ago.
Citigroup said Goldman Sachs Group Inc. would be most affected, with an 11% cut at the bottom line, less than half Citi’s previous estimate.
Demonstrating how much uncertainty remains about the legislation, especially regarding how regulators would implement the law, Keefe Bruyette projected that the hit to Goldman’s profit could be as high as 21%.
Among the six biggest U.S. banks, San Francisco-based Wells Fargo & Co. would be hurt the least, losing perhaps 6% of its earnings, Citi said.
Many of the provisions will be phased in, so it could be years for their full effects to be felt.
The evolution of the bill, which legislative leaders hope to send to President Obama this week, reflects the success of industry lobbying, said Raymond Stewart, chief investment officer at Rasara Strategies, which invests in the financial sector.
“They may not come right out and say it,” Stewart said, “but they know that the regulations as they are going to end up are going to be a lot more palatable than anyone would have suspected several months ago.”
Not everyone on Wall Street was so upbeat. Dick Bove, an analyst at Rochdale Securities and a critic of government intervention, said the bill would create an “extremely expensive regulatory structure.” But in the long run, he said, bank customers would pay the price, not the banks themselves.
“The banks will restore their profits,” Bove wrote Monday. “The economy, however, will pay a higher price for all banking services.”
Big banks appeared to dodge their biggest bullet with a provision that could have barred banks from investing any of their own money in hedge funds, private equity funds or securities trading.
The final bill would let the banks invest as much as 3% of their capital in hedge funds and private equity funds.
The limits on so-called proprietary trading remained relatively strict. Goldman, which has done well trading its own funds, may have to close some in-house trading desks, costing the company as much as 4% of its earnings, the Citi analysts said.
The legislation grew weaker in the area of complex securities known as derivatives. The Senate bill would have forced banks to move all trading of derivatives into separately capitalized entities, but the final bill would let banks keep most of that trading in-house except for the riskiest instruments.
