Wall Street Faces Capital Shortfalls, Pay Cuts in Banking Bill

By Dawn Kopecki

April 29 (Bloomberg) -- JPMorgan Chase & Co. and GoldmanSachs Group Inc. are among U.S. investment banks that may beforced to raise an additional $250 billion in capital, cutexecutive pay and divest some of their most lucrative assetsunder a bill on the U.S. Senate floor today, analysts say.

A two-page provision tucked inside the 1,558-page bill onApril 21 would change the structure of about 40 of the largestU.S. investment banks by forcing them to spin off theirderivatives businesses. Another measure added this month wouldrequire derivatives dealers to maintain a “fiduciary duty” tomunicipal, pension and retirement plan investors, which someanalysts say would wipe out that market altogether.

“The bill has moved so far left so hard, that it’s caughteverybody by surprise,” said FBR Capital Markets analyst PaulMiller, a former examiner for the Federal Reserve Bank ofPhiladelphia. He said the bill was a “big, big hot button issuewith voters.” “The Street now is just realizing that all ofthis stuff is getting in the bill.”

The spin-off provision would result in a capital deficit of$85 billion at eight of the largest global investment banks,analysts led by Kian Abouhossein at JPMorgan Securities inLondon estimated in a research note today. It prohibits swapsdealers from taking any federal assistance, including access tothe Federal Reserve discount window or deposit insurance fromthe Federal Deposit Insurance Corp.

Spinning out Derivatives

At a minimum, the measure would require banks to spin outtheir derivatives business into a separately capitalizedaffiliate, analysts say. It was actually designed to force about40 of the largest U.S. swaps dealers that also have federallyinsured banks to divest all swaps activities, said CourtneyRowe, a spokeswoman for bill sponsor Senator Blanche Lincoln,who sponsored the bill.

“This would be a sweeping change to our financial systemand it was introduced 11 days ago without a hearing, without astudy on its impact,” said Luke Zubrod of Pennsylvania-basedChatham Financial Corp., which advises more than 1,000 firms onderivatives.

If passed, analysts say the provision would drive businessto foreign broker dealers that don’t take deposits in the U.S.,such as Societe Generale, France’s No. 2 bank by market value.The Securities Industry and Financial Markets Association, whichrepresents Citigroup Inc., Bank of America and other largederivatives dealers, estimates the provision would require asmuch as $250 billion in new capital.

“We continue to believe that the proposed regulatorychanges would have a significant impact on global return onequities, declining from 19 percent pre-regulation to 12percent,” Abouhossein wrote. “Given the political pressure invarious geographies, we believe investment bank compensationreduction would be a key driver” to boost profitability.

‘Banks Should Be Banks’

Lincoln, an Arkansas Democrat, said she may not have thevotes to pass the measure, and several other amendments arepending in the Senate that would potentially separate certaininvestment-banking activities from the traditional business oftaking deposits and lending money.

“Banks should be banks,” Rowe said. “We’ve heard fromArkansans, especially our community banks in Arkansas, that theyneed a level playing field.”

Analysts say they fear that anger over Wall Street maydrive support for more burdensome amendments, like reinstatingGlass-Steagall-like regulations that separated investment andcommercial banking.

“There really is a new kind of political model at workhere,” said Brian Gardner, an analyst for KBW Inc. inWashington and a former staff director for LouisianaRepresentative Richard Baker, who was chair of the HouseFinancial Services committee sub-committee before he leftCongress in 2008. “The dissatisfaction with Wall Street andthen the Goldman news has just changed the political dynamic.”

To contact the reporter on this story:Dawn Kopecki in New York at [e-mail].