The "Analysis" page of the Financial Times this morning carries the descriptive heading, "Criticized for its timid approach to Wall Street, Barack Obama's task force has mauled JPMorgan (JPM) and is on the hunt for other prey." See "Regulation: The Paper Tiger Roars."
The article also carries the quote of Eric Schneiderman, New York attorney-general, who worked with the US attorney-general from the Department of Justice in Washington, D. C., Eric Holder, "It is my hope that this (the JPMorgan settlement) is the first of what collectively will be the largest financial settlement in US history."
The Federal Reserve System, this week, just proposed new rules that will tighten up rules on bank liquidity and capital positions that is even more restrictive than the ones proposed in Basel III in Europe.
The Dodd-Frank Wall Street Reform and Consumer Protection Act has not been fully implemented, and commercial banks, both large and small, are acting in a very timid manner not wanting to "step out of line" in any way and get their hands slapped further.
The existing commercial banking system in the United States now numbers less than 6,000 banks (5,980 to be exact as of June 30, 2013) and is shrinking by about 200 banks a year.
My guess is that the banking system will shrink to less than 3,000 commercial banks over the next ten years or so.
This is the "new" world of commercial banking.
And, this effort on the part of the federal government seems to have the full support of the public. Financial institutions, and especially commercial banks, are now the "punching bag" of the political world.
Significantly, this movement seems to have enough "legs" to continue on for some time. But, this is what a large segment of the American public has wanted.
Yet, the Federal Reserve and the federal government continue to cram credit inflation down our throats…and without any limit in sight.
As I have stated over and over again during the last five years or so, credit inflation creates an environment that supports greater risk taking, increases in financial leverage, the mismatch of the maturities of assets and liabilities, and financial innovation.
We saw how these responses played out in the US economy over the past fifty years and contributed to the financial collapse in 2007 and subsequent recovery. The continued pressure of credit inflation will encourage these kind of responses again, although the exact form in which they will arise will be different because of the changes that have taken place in the economy and in the rules and regulations that are now being applied to the financial system.
And, the financial system will respond…in fact, the financial system has already responded. Furthermore, the "unintended consequences" of these responses will not necessarily be what the people creating the change want.
For example, supporters of these efforts want the banks to lend more, especially to lend to the housing sector. Funny we see the sales of houses picking up but we don't see residential real estate loans increasing…yet commercial loans are increasing.
But, we see hedge funds, construction companies, asset management groups, and individuals getting commercial loans and buying up thousands of housing units (See A Glut of Opportunities--Part 2) and then renting them out. And, this is not all turning out good for the renter. (See "Here's What Happens When Wall Street Builds a Rental Empire)
However, this gets us into "Shadow Banking." Check out all the merchant lenders and merchant bankers that are building and growing their lending business. What about "peer-to-peer" lending? What about all the other ways that businesses are finding ways to lend to other businesses?
The crucial thing to be realized is that money is just information and information can be transformed into credit and this information can be cut up and divided in about any way you can imagine and sold to investors that are seeking higher yields in this low interest rate environment.
In fact, the continuation to the story mentioned in my post "A Glut of Opportunities-Part 2, is picked up in a following post "Blackstone Hits a Home Run." The essence is that Blackstone Group LP (BX), an organization that has acquired over 40,000 houses over the past two years has now, along with Deutsche Bank (DB), created a securitized asset that is backed by the cash flows coming from the leased properties. At least one major credit rating agency has given these securities a triple-A rating.
Here we go again.
And, Blackstone is not the only one doing this. Bloomberg BusinessWeek has a story this week about how Magnetar Capital, another hedge fund, is buying up properties the same way Blackstone is.
Credit inflation has consequences and we are seeing a lot of people take advantage of the opportunities that are created when the government produces an environment in which investors, primarily wealthy professional investors, come to expect that these opportunities will exist and are prepared to take advantage of them.
There are many other areas, some of which I have written about, in which these same kind of opportunities exist. And, some investors, primarily wealthy professional investors, are taking advantage of them.
For the reasons presented above, I try to avoid the investing in commercial banks…any commercial banks. The reason being is that in this environment that is creating the "new world" of financial institutions nothing is quite what it seems. Investors just don't know what they are investing when they invest in commercial banks, because they don't know what the legislators are going to do…and they don't know what the regulators are going to do.
A year ago, investing in JPMorgan Chase looked like as good an investment you could make from the commercial banking sector. Jamie Dimon, Chairman and CEO of the bank, was riding high as the one leader of a mega-bank that had gone through the financial upheaval unscathed. And, look where Dimon and JPMorgan Chase are today.
And, it seems as if Eric Schneiderman, the New York attorney-general, gets his way, the "mauling" of the banks will continue!