Corporate Subsidies, Anyone?

Yesterday, the stock market slid precariously with dire warning about the impediments to profitability we can expect if Obama's limitations on risk-taking by "too big to fail" banks are enacted.  Let's take a look.
I.  The Big Conglom-ocom
Bank in the 1980's, the savings and loan industry, which specialized in mortgage lending and savings accounts, was badly damaged during a period when the rate they could pay for deposit accounts was deregulated, and mortgage rates were not.  Paying extraordinarily high unregulated rates for deposits and charging low regulated mortgage rates was, as 747 failed institutions found, a flawed business plan.  Through corrective regulations that addressed these problems, the difference between commercial banks and so-called thrift institutions was blurred, and banks increased their mortgage lending as thrifts began opening checking accounts.
In the late 1990's, the Clinton administration, under the advice of Robert Rubin (soon to be Citibank CEO) and others, repealed the Glass Steagall Act, which had separated investment bankers (those who invest in capital markets and raise money with investors) from commercial bankers (those who lend to businesses and raise money with insured deposits).  As a result, after the turn of the century, JP Morgan was presented with an intriguing study from its newly-graduated MBA Quantitative Analysts, concluding that, at no time in recent history had the entire US mortgage market ever experienced a downward price correction.
Concluding that, based on this study, that mortgages could be packaged and sold as high grade investments, since payments on a diverse geographic basis be reliable even as there may be regional problems, investment bankers entered the mortgage business.  Relying on the "general rise in housing value" premise, they relaxed their lending standards, forcing commercial bankers to either compete on those relaxed terms or lose their business.
We all know the end of this story.
II.  All Banks Under One Roof
Just as the savings and loan mortgage lenders became virtually indistinguishable from commercial bankers, now investment bankers were becoming more like commercial bankers, and vice versa.  As the recent crisis progressed, nearly every investment bank ducked under a commercial banking charter, received Troubled Asset Relief Program money, and again, as you know, many have repaid that money, returned to profitability and began paying bonuses equivalent to those in 2008.
III.  TARP, TLGP, FDIC (and Other Four Letter Words)
What you may not know is that, as a benefit of acquiring a commercial banking charter, these investment bankers have benefited from another four lettered program - TLGP, or the FDIC Temporary Liquidity Guarantee Program.
Unlike TARP, a preferred stock investment to encourage bank lending through increasing capital, TLGP is more of an ultra-cheap bond program.  Here's how it works.
If, for instance, Goldman Sachs wanted to raise money by issuing bonds (loans) to capital investors, it would have to pay a competitive market rate for those borrowings.  Bond buyers, a notoriously skittish sort who prefer being repaid, demanded 7.5% for the 10-year $2 billion debt it raised in January last year.  Under the TLGP program, however, Goldman raised money for just 2%, with a 1% fee. 
For 4% less than market rate, Goldman borrowed from the FDIC and has acknowledged it can do more "at pretty attractive rates."
IV.  Glass Steagall Anyone?
TARP and TLGP were designed to encourage banks to increase lending.  Goldman's CFO has said, however, that it has "virtually no direct exposure to the consumer."
So, banks' allegations that Obama's requirement that banks who utilize FDIC insurance for their depositors in order to lend to commercial enterprises must not operate proprietary trading desks, hedge funds, etc., will derail the economic recovery is straddling the fence.  Using the government to insure high risk endeavors is clearly inappropriate.
Here is the question Obama poses.  Do you want to operate as a commercial bank or an investment bank?
Getting the benefit of FDIC insurance and cheap borrowings used to NOT lend to consumers is a bad deal for consumers and a good deal for banks. 
He's right on this one. 
I welcome discourse from anyone who disagrees. 

Farewell, Banker Welfare

US women seem to have an innate sense of fairness.  Whether it is because of nature or nurture, even with our more liberated world position, it is women who empathize with the plight of those who have had seemingly insurmountable obstacles in their lives, and we endeavor to help them to help themselves.  Our maternal instincts appear to apply to more than our offspring.
Mothers, however, are more than nurturers.  They also prepare their children to be self-sufficient, self-reliant members of society, and that requires more than giving.  It also requires knowing when to practice "tough love," knowing when not giving is appropriate.
During the early years of the Clinton Administration, most US women supported welfare reform, after seeing that government spending toward our poor sisters seemed to have the effect of a pattern of generational poverty from which it was nearly impossible to extricate themselves.  Paying for the opportunity for self-sufficiency was a more effective solution than an endless number of monthly checks that stubbornly kept women at the poverty level.
We've spoken often about the causes of the latest recession, which could have easily been a depression, had governments not doled out dollars that paled against those paid for welfare during the 1980s and 1990s.  For our investment, we avoided a certain economic meltdown, but for the 16% who are unemployed and looking for jobs, the resentment for that deal could not be higher, particularly when the bonuses paid to bankers, some of whom were the direct cause of the melt-down, have never been higher.
It is instructive to not only examine the root of this anger, but also, like the angry middle-class in the 1980s that paid the cost of welfare, look to a long term solution.
Changing welfare from an incentive NOT to work to an incentive to work reformed the system to one that both provided a safety net for those who were truly in need and an incentive for those who could better themselves to do so.  What such incentive have we given for bankers who lowered lending standards, then sliced up, securitized risk and sold it throughout the world NOT to take inordinate levels of risk again?
None.  Not one piece of financial reform legislation has passed.  Bonuses based on short term profits, largely made by merely buying long term US debt we created to save them with the money we gave them, continue largely unabated.
Our bankers are the urban poor of twenty years past, incented to do the wrong thing by the money we pay them. 
It's time to show some tough love to our bankers, and pressure our lawmakers to pass meaningful financial reform that incents long term capital growth over high risk short term behavior. 
An email to your legislators is an excellent place to start.

Who's Smarter, the Pros or the Little Guy?

Last September, I published the 2010 investment advice given by several market professionals and posed the question,
"What would earn you the most money,

• Buying the entire S and P 500 Index or 
• Buying just the sectors of that Index that the market pros suggest?"

Buying the S and P 500 Index would initially cost you a commission, but since you would to pay for no advice, you could pay under $10 commission at a deep discount broker like ScotTrade or ETrade. 

Taking the advice of the market pros would cost you a much higher fee, because

1. You'd need, not only to know what to buy, but also when to sell. 
2. You pay a commission when buying and selling, and must pay capital gain taxes on any gain on your gain on sale, unless you buy in a tax-deferred retirement account.
3. Then, you pay an additional commission when replacing the sold securities with another investment.

So, here's our little 2010 experiment.  We're going to track how much you'd make by just buying the index (consisting of Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Telecom Services and Utilities) versus buying just the sectors in that index recommended by the pros.  Here's where we'll start:

Who,
What Sector, Price


Kitty,
S and P 500, 1115.10
                                            
Black Rock,
Energy, 429.95
Health Care, 362.22
                                                          
Deutche Bank Private Wealth Mgmt   
Technology, 370.71
Health Care, 362.22
Industrials, 242.99

Morgan Stanley                          
Health Care, 362.22
Technology, 370.71
Energy, 429.95

Prudential 
Financials, 193.78                                
Technology, 370.71
Material, 199.81
Industrials, 242.99

US Trust                                        
Technology, 370.71
 Materials,199.81
,Energy, 429.95
Industrials, 242.99

Barclays Capital                      
Industrials, 242.99
Technology. 370.71

Citigroup                                     
Materials, 199.81
Financials, 193.78
Technology, 370.71
Energy, 429.95

Goldman Sachs                         
Energy, 429.95
Materials, 199.81
Financials, 193.78
Technology, 370.71

JPMorgan/Chase                     
Energy, 429.95
Industrials, 242.99
Financials, 193.78
Technology, 370.71
Materials, 199.81


RBC Capital Mkts                     
Technology, 370.71
Consumer Discretionary, 235.07
Financials, 193.78
Industrials, 242.99

I'll give you an update at the end of every calendar quarter.  What do you think?  Will trading make you more money than just buying the Index?

It will be an interesting experiment, and one that just may result in you taking charge of your investments yourself.

President Obama's Financial Regulation Proposal - Part V

A smart businesswoman in the Portland area asked for a synopsis of this proposal, saying, "It seems like everywhere we read doom and gloom doom and gloom. I would like to read some kind of balanced piece for once." Thanks for the suggestion, Kelly. Parts I through IV of the proposal were discussed in the three previous posts. Here's the fourth, and final installment.

Raise International Regulatory Standards and Improve International Cooperation

As we discussed previously, without international cooperation, money will move to countries with the most lax regulation and continue the type of high risk/high reward behavior that caused our current crisis. A good example is Stanford Financial, which is under investigation for defrauding investors, where the Texas founder operated freely in the Caribbean. Last April, the G-20 issued a declaration which included:

1. Strengthening the 1988 "Basel Accord" to include financial institution capital requirements that are consistent throughout the world
2. Define "capital" consistently, i.e., what can and cannot be used to substitute for cash in meeting capital requirements
3. Define how leveraged a financial institution may be
4. Set accounting standards that are similar throughout the world.

To improve oversight, the G-20 is working on contracts, to be available this Fall, to standardize and centralize the clearing of derivatives, e.g., credit default swaps, options, etc., as well as strenthening the oversight of all goals stated in the declaration.

So, where's the "gloom and doom?"

US

The US is pushing for financial reforms to address problems that we caused. This weakens our negotiating position for countries that object to more stringent financial requirements, at a time when they are weakened because of buying our Auction Rate Securities and the like.

Some countries are telling us to clean up our mess before telling them what to do. It's hard not to see their point.

Overall, these proposals are strong, having defined the root causes of the problems we face and providing logical, if sometimes politically based, solutions. The weaknesses in the proposal seem to be outweighed by the strengths. To attack the weaknesses without providing a superior solution IS politically based, and to fail to address these problems will all but guarantee that they are repeated.

The full draft of these proposals can be found at http://documents.nytimes.com/draft-of-president-obama-s-financial-regulation-proposal#p=1 I welcome your comments and discussion about any points in this proposal. And thanks, Kelly, for your suggestion to discuss this important issue.

President Obama's Financial Regulation Proposal - Part IV

A smart businesswoman in the Portland area asked for a synopsis of this proposal, saying, "It seems like everywhere we read doom and gloom doom and gloom. I would like to read some kind of balanced piece for once." Thanks for the suggestion, Kelly. Parts I, II and III of the proposal were discussed in the two previous posts. Here's the third installment.

Creation of the Consumer Financial Protection Agency

The seven government agencies named in the prior post did not prevent or address financial problems adequately during the recent crisis. The administration has proposed the creation of the Consumer Financial Protection Agency as one solution. The creation of this agency was discussed in the prior post. In addition to this agency, the administration also seeks to create "resolution regime" for failing Bank Holding Companies and so-called "Tier 1" (too big to fail) Financial Holding Companies.

Resolution Regime

This "regime" will be led by the Treasury Department, and can act only after

• consulting with the President, and
• having obtained the approval of 2/3 of the Fed board, and 2/3 of the FDIC board (if the failing institution is a bank) or 2/3 of the SEC commissioners (if the failing institution is a brokerage firm)

This, with the previously discussed increased capital requirements for "too big to fail" financial institutions, is the solution proposed to avoid situations like those seen recently with AIG and Bear Stearns. Again, the Treasury is the "big boss" when institutions that are large enough to cause widespread financial harm are seen to have significant developing problems.

As the "big boss," the Treasury now must approve loans made by the Fed to such institutions.

Where's the doom and gloom?

MORE Power for the Treasury?

Many people, as discussed before, are uncomfortable with the Treasury Department in the position as the "regulator's regulator." Now, the Fed has to consult with Treasury prior to authorize lending practices related to "too big to fail" institutions.

In reality, the Treasury Secretary was consulted in every instance when action was recently taken by the Fed. This provision makes that practice mandatory.

More Power for the President?

The Treasury must consult with the President before initiating the resolution regime for failing institutions. Some worry that the President may take the initiative and pressure Treasury to take such action. Those who make such accusations fail, in my opinion, to consider that 2/3 of the Fed board and 2/3 of either the FDIC board or SEC commissioners must also approve taking such action. The checks and balances, in this case, seem to be in place to assure that the Executive Branch not have undue influence in making these decisions.

I look forward to your comments, and will address the final part of these proposals in the next post.

Obama Administration Financial Regulation Proposal - Part III

A smart businesswoman in the Portland area asked for a synopsis of this proposal, saying, "It seems like everywhere we read doom and gloom doom and gloom. I would like to read some kind of balanced piece for once." Thanks for the suggestion, Kelly. Parts I and II of the proposal were discussed in the previous post. Here's the second installment.

Protect Consumers and Investors

The Administration seeks to protect consumers against fraud and promote understanding of financial products, like credit cards, savings vehicles, mortgages, and the like. This goal is addressed through the creation of the CFPA (Consumer Financial Protection Agency), which is charged with the responsibility to ensure that consumer protection regulations are "written fairly and enforced vigorously." This new agency will have no jurisdiction over financial products governed by the Securities and Exchange Commission or the Federal Trade Commission, but both existing agencies will have new authorities and resources.

When non-traditional mortgage lenders entered the mortgage market after new mortgage securitization produces were developed by Wall St., the regulatory framework that protected consumers of banks and thrifts did not cover those new lenders. Countrywide Mortgage, for example, incented its sales staff to sell mortgage instruments that were not necessarily risk appropriate for borrowers. While other more traditional mortgage products were available, loan agents were encouraged by amount of incentive paid by product to sell Adjustable Rate Mortgages through "no-doc" (no, or low documentation required) programs that had high up-front fee structures.

And, with respect to credit card lending, certain "fine print" issues have arisen that clearly show that, if given the power to raise interest rates for situations unrelated to current repayment history (like applying for additional credit elsewhere), financial institutions can, and will, categorically raise expenses. In the past, this situation could have been rectified by the market, i.e., customers could merely close accounts with more onerous conditions and transfer them to institutions with more consumer friendly agreements. But, as credit lines froze, such alternative credit providers were unavailable.

The mission of this new Consumer Financial Protection Agency is to ensure that

1. Consumers have the information they need to make responsible financial decisions
   
   
2. Consumers are protected from abuse, unfairness, deception and discrimination
   
   
3. Consumers' markets operate fairly and efficiently with ample room for sustainable growth and innovation
   
   
4. Traditionally underserved consumer markets have access to lending, investment and financial services
   

The CFPA will be the "consumers' seat at the table" as regards the

• Truth in Lending Act
  
• Home Ownership and Equity Protection Act


• Real Estate Settlement and Procedures Act


• Community Reinvestment Act


• Equal Credit Opportunity Act


• Home Mortgage Disclosure Act


• Fair Debt Collection Practices Act

All those Acts were in place during the mortgage crisis. The Administration proposes to solve the lack of understanding by consumers that played some part in this crisis by creating another agency and ensuring a "consumer voice," noting that its mission is to provide "a floor, not a ceiling." This means that the Agency will represent minimum and consistent standard

Examples?

• No more "mandatory arbitration clauses."


• Requiring "plain English" disclosures.


• Holding brokers to a "fiduciary" as opposed to "suitability" standard.


• Holding companies responsible to clients, as well as investors.


• Require "non-binding" shareholder votes for executive compensation.


• Increase retirement savings incentives.

So where's the "doom and gloom" here, you ask? Well, it certainly isn't in the rhetoric.

ANOTHER Agency?

I add my voice to this groan. Government agencies are expensive, unwieldy and, judging from the number which existed prior to the crisis, ineffective. The fact remains that, even with those seven agencies listed above, the housing crisis ensued.

I hesitate to unilaterally cry, "Poor little consumer" in every case. Many borrowers who KNEW they couldn't afford a $400,000 house with a $50,000 annual salary, bought one anyway. I cringe at the thought that the we as consumers are too stupid to make up our own minds. Then, I look at my credit card statement, and pause. It's ridiculous. It's incomprehensible.

So, what's the answer? The fact is, it doesn't matter. The consumer has screamed to the top of Congress that every Tom Dick and Harry financial whatever has received a squillion dollar bail-out, and she the individual is left to mind her finances properly and pay her bills on time with no help. Consumer protection is going to be written in this proposal as a political reality.

It is my hope that we don't over-correct. It is my hope that we do not swing to the extreme of the so-called "nanny state," and attempt to hold everyone's hand, make doing business more costly, and become non-competitive in world financial markets. But, reality is reality and consumer protection is the current political reality.

As a matter of full disclosure, I come from the financial industry. As a matter of fuller disclosure, I spent years in "Regulatory Compliance," which was charged with the responsibility of taking recently promulgated regulation and integrating it into daily operations. I admit to reading regulations and thinking, "Have the persons who wrote this EVER been in an actual business?" I admit to seeing the regulatory pendulum swing wildly back and forth, and hating the tendency to over-regulate after a crisis. I predict that this legislation will be analogous to affirmative action, where administrations will use it as a political symbol as "pro-consumer" and "pro-business" stands that will result in its being more or less consumer friendly. It will undoubtedly, however, be expensive. Read on.

It Will Make Financial Institutions Less Profitable

Absolutely right. Between the increase in capital and liquidity requirements discussed in the prior post and the increase in regulation that will require new forms, new procedures, new training, etc., etc., banks will definitely be less profitable. And, since one of the stated goals of this new agency is to give access to traditionally underserved markets, i.e., the poor, non-English speaking residents, etc., the expenses inherent in this proposal will likely result in higher fees paid by the rest of us. Speaking for myself, I will pay higher fees in order that the most vulnerable of us not be subjected to the usurious rates charged by "payday loan" and "rent to own" firms, but I am speaking only for myself. Banking is going to cost more, just as health care will cost more as we insure the uninsured. This is a social, as opposed to business issue. If you think that the poor should not have access to basic financial services, this is not the time to voice your opinion. You're not in the majority

Non-Binding Executive Compensaton Shareholder Votes

Non-binding means that you are not bound by what I say. Non-binding votes by shareholders about executive compensation is a paper tiger. By this, the Administration seeks to let shareholders tell executives that they think they're getting paid too much, but stops before giving them any power to do anything about it. In some ways, I like this, as "capping compensation" is basically wage controls, and anyone who lived through the 1970's will tell you how well that worked out. Also, imagine the press you'll get if you're one of those executives. The 24-hour business channels will be all over you, forcing you to justify your compensation, and making you say why you should have your job. It's an interesting solution. I'm on the fence on this aspect of the proposal, but think public outcry a far superior recommendation than salary caps. We shall see.

That said, this part of the financial proposal has some potential land mines, and I'll be watching it very closely. Hopefully, we won't over regulate and make a bad situation worse.

Obama Administration Financial Regulation Proposal - Parts I & II

A smart businesswoman in the Portland area asked for a synopsis of this proposal, saying, "It seems like everywhere we read doom and gloom doom and gloom. I would like to read some kind of balanced piece for once." Thanks for the suggestion, Kelly.

Since there are five key objectives in this proposal (which is 87 pages long), I'll do this in a series that will include

• Supervision and Regulation of Financial Firms
• Regulation of Financial Markets
• Consumer and Investor Protection
• Government Tools to Meet Objectives
• International Standards and Regulation.

We'll start with the first two - Supervision and Regulation of Financial Firms and Regulation of Financial Markets. Please feel free to comment on this, and all subsequent articles.

Supervision and Regulation of Financial Firms

To fix a problem, it must first be properly defined. The proposal notes that leverage, or borrowing, by consumers and financial institutions alike, expanded dramatically during the housing bubble. This is an inarguable fact. People were borrowing more and more money against houses with prices that were rising at an unsustainable pace. Lenders were lending more and more money against these (and other) assets, with declining lending standards. Neither consumers nor lenders were prepared for the inevitable fall in prices. The root problem, however, was that no regulatory body had sufficient jurisdiction (or power) to address these problems.

The specific problems were:

• Capital and liquidity standards were too low
• The widespread effect that financial institutions would have on the entire financial system if they failed
• Splintered, fragmented regulatory bodies, none of which had responsibility or authority for the overall system
• Insufficient oversight for investment bankers (brokerage firms)

Capital standards are the required amount of money that must be put aside, and are based on assets. At its worst, some investment banks were leveraged 47:1. That means for every $47 dollars it had in loans, swaps, etc., it had $1 in actual cash. In other words, that would be like putting $8500 down on a $400,000 house, and thinking you had a sufficient down payment.

The second issue is"too big to fail," which basically means that, if that particular financial institution failed, it would severely damage the entire financial system. This type of systemic risk was present in AIG, a mammoth insurance company. Because of the number of credit default swaps (unregulated inter-financial institution agreements to cover loan amounts, if the borrower defaulted) and other risks assumed by the company, had the government allowed it to fail, the result would likely be catastrophic for, not only the US, but the world-wide financial markets.

Regulatory oversight for financial institutions was very like the issue that arose after 9/11, when the CIA, FBI and local law enforcement agencies in total may have had the intelligence to prevent the attacks, but had no inter-communication, and in some cases competing and proprietary interests. Insurance companies are state regulated, and every state is different. Banks are regulated by the either the Comptroller of the Currency or FDIC and the Federal Reserve Bank, thrifts, by the OTC, and investment bankers, by the SEC. There's no coordination. So, when investment bankers went into the mortgage business, the OTC had no jurisdiction.

And, speaking of the investment bankers, they were convinced that, since the overall housing market hadn't fallen for 50 years, it followed that a geographically diverse portfolio of mortgages would be safe no matter how little the down payment, whether income was verified, etc., etc. After all, an overall rising market would protect investors. They even convinced the rating agencies that reviewed their portfolios that they were right. The fact that this business needs more oversight could not be more apparent in hindsight.

So, the Administration proposes seeks to put the Treasury Department in charge. They'll be the "big boss" over all the other agencies, and have the authority to stop these problems before they become systemic. A Financial Oversight Council, consisting of the heads of supervisory agencies, will be established to identify such risks before the problems become too large, and agencies will be consolidated in order that responsibilities not overlap or compete, with the Fed responsible for implementing more stringent standards for the operation of these companies.

All financial institutions will have more stringent capital requirements and executive compensation standards. Capital requirements for reserves covering potential loan losses will be set by both accounting standards boards and the SEC.

Regulation of Financial Markets

The problem having been defined, the Administration seeks to address these issues through the following regulatory reforms.

• Strengthening of "firewalls" between banks and their affiliates to curtail conflicts of interest
• Closing loopholes in bank regulation (to prevent financial institutions from changing their charter from one type of bank to another to enable certain practices)
• Eliminating the thrift (the old "savings and loan") charter and unifying those institutions under the supervision of commercial banks
• Hedge funds will no longer be unregulated
• Insurance companies will be regulated on the federal, instead of state level
• The future of Federal "agencies" (Like Fannie Mae and Freddie Mac) will be considered
• Regulating "over-the-counter" instruments, like credit default swaps, derivatives and commodities
• Strengthen regulation of securitization markets (like "asset backed securities" that consist of mortgages)
• Tie compensation with long term performance
• Provide means to eliminate conflict of interest by the Rating Agencies

That's a synopsis of the proposals. So, where is the "doom and gloom?"

Too Powerful Treasury

First, many people feel that this proposal gives the Treasury too much power. I agree that the "regulator's regulator" is a powerful position. But, I have heard no one provide an alternative. In reading this objection by many authors, I have noticed a common thread. Generally, the objectors seemed more concerned about the current Treasury Secretary than the fact that Treasury is the agency in charge. After all, what is the alternative? The Fed? Another agency? I agree that, as with all complex issues, often the key players are more important than the structure in which they operate. But, that argument is fallacious in criticizing the structure.

Reinstate Glass-Steagall

Many feel that strengthening firewalls between banks and their affiliates is an inadequate solution, and want the Glass-Steagall Act, repealed under the Clinton Administration, to be reinstated. While that may or may not be a valid point, the fact is that those who recommend this action do not say how it will be accomplished. Since most investment bankers now operate under a commercial bank charter, would you require that the banks divest themselves of the investment banking portion of their operation? This would require a new board of directors, management team, central operation, etc. Who would pay for the additional expense this would require?

Government Has No Business in the Compensation Business

Many object to "capping" executive pay. I am one of these people. However, close reading of the proposals does no such thing. It ties compensation with long term, as compared with short term objectives. While I concur that this will be difficult, allow me a bit of pontificating. Short term financial goals can be achieved by taking action that is not necessarily in the best long term interests of a company.

As an example, lax underwriting standards for mortgages may allow people who really can't afford a home to qualify to buy one. When one significantly increases the demand for something, many more people are bidding on that thing, and the price goes up. That is called demand-push, and that pushes up prices. At some point, demand will level off. During the "push" prices - and profits - increase. If "everybody's doing it," and you are the company that is NOT, your profits are lower, and your stock is less valuable. However, your decision not to participate (if you survived), was in the long term interests of your company, your stockholders and the economy.

It's not going to be easy to change the short term profit motive, but it's worth a try.

Banks, Especially Multi-National Banks, Will Be Less Profitable

With stricter capitalization requirements, this is undoubtedly true. After all, if you're putting more money aside to cover potential problems, that money will not be earning what it would if it were invested. But, the profitability that was derived from participation in the unsustainable rise in housing prices cannot be considered "the norm." To compare properly regulated bank profits with those derived during the housing bubble is inappropriate when considering that the goal is long term sustainablility as compared with short term profitability.

These are the major objections I've seen raised and what I believe to be an appropriate response. Feel free, as mentioned before, to comment, and I'll do my best to answer.