Estimated Implications Of Reform Proposals by Bank

In BarCap’s opinion, it’s that `Financial Crisis Responsibility Fee’ that has the most chance of being implemented legally since, as a budget item, it will likely be introduced to the Senate as a less-onerous reconciliation bill, which requires only 51 votes. The Financial Reform bill, by contrast, has already been passsed by the House of Representatives but needs to get through the Senate (normally) too.

Anyway, BarCap have also provided another handy little thing; their estimates of the impact of the four proposals on the various banks:



You can see that, in BarCap’s opinion, Bank of America and Citigroup will be most affected, with, interestingly, the possibility of ratings downgrades “if resolution authority passes.” Resolution authority being the ability to place any large financial co. into conservator- or receivership. To date, the US government has only really been able to do one of two things for bailed banks; allow them to go bankrupt, or bail them out.

Here’s a bit more detail from the BarCap analysts:

If the regulators gain this right, bondholders will be at greater risk because they will no longer benefit from the government’s unwillingness to allow a destabilizing bankruptcy and the capital infusions that usually prevent it. Rather, resolution authority will be used, which carries much greater risk for bondholders. We note that in the House bill, unsecured creditors must take losses if the resolution process begins. Because of this, we believe passage of financial reform into law could lead to lower ratings for systemically important financial companies. Currently, many financial companies are rated higher than their fundamentals justify because the rating agencies believe systemic support is likely. If systemic support includes losses for bondholders, then this rating “uplift” could be eliminated, in our opinion.

Goldman Sachs and Morgan Stanley are also rather affected — not because of their proprietary trading — but because of their reliance on the repo market for funding, and the impact the Financial Reform bill is expected to have on that market (which is, incidentally, something we’ve heard before from BarCap):

The House Bill also has an amendment that we believe has important implications for secured creditors and for financial institutions that rely on secured borrowings. The amendment allows up to 10% of a secured claim to be treated as an unsecured claim, regardless of the value of the collateral securing the debt. The provision would encompass fully secured creditors with an original term of 30 days or less secured by collateral other than Treasuries, agencies, or real estate. Essentially, repurchase agreements, in our opinion. As shown in Figure 7, many large financials, particularly those that operate capital markets businesses, still rely on the repo market for funding. We believe repo would become less available and less stable if this amendment becomes law, making it more difficult to carry trading inventory. Again, the secured funding amendment is not included in the Senate bill.

http://ftalphaville.ft.com/blog/2010/01/27/135261/financial-reform-checklist/

 

Those firms will collectively have to bring about more crises in order to pay the fee out of their proprietary trading gains.