CaptainJJack

Reinstituting Glass-Steagall: Not as Easy as It Sounds

The issue is leverage.

If you do not allow investment banks to lever up, they cannot make an ROE sufficient enough to stay in business. It is risky, the margins are thin, given the risk, and the good ones mark to market their entire portfolios every day, but if the ROEs are there, they do not need retail charters.

On the other hand, Commercial Banks had generally been in higher risk loans, concentrated regionally, using retail deposits. Their margins are much higher, there is much more book value accounting, versus mark to market, and prudence dictates that they keep low leverage ratios.

The beauty of Glass Steagall was that it established clear boundaries between the two, and I believe it was tossed out as part of a larger effort to allow banks to operate in more than one state.

The other argument that G-S makes the US less competitive is nonsense. Anybody who has followed Investment Banking knows that it is a business of celebrities, and Commercial Banks have not been very effective competitors. And, the only foreign banks that have done well in the investment banking area are those that focus on investment banking.

Finally, allowing Investment Banks to accept retail deposits is setting us up for disaster. The Goldman and Morgan Stanley Commercial bank charters should cease to exist ---like tomorrow.

Large Caps Could Lead the Market Much Higher

We have had a HUGE run-up of P/E multiples since March. In fact, I could argue that the ONLY thing that has really changed since March are the P/E multiples.

Anybody who has been in this market over the last year knows how notoriously bad the forward earnings numbers are -- just take a look at forward estimates at the start of this year for THIS year.

While there is a lot of manufacturing leverage now that companies have cut so much payroll, the current fixed infrastructure is currently being supported by large government (both US and Abroad) stimulus.

The key question is: What happens when the stimulus is withdrawn?

The key metric is the top line, not the bottom line: Those forward earnings are only as good as the sales projections.

As an aside, there has been a significant tax cut which, if I remember the numbers right, amounted to 2/3 of the tax stimulus proposed by some Republicans ( there never was a unified Republican stimulus alternative, but the number $400 billion was often used as the tax cut required --- and the only stimulus needed).

We should have seen the top line numbers rising by now if the tax cuts were as powerful as they were being promoted, and I for one, do not see it.

As far as I can see, the $250 Billion tax cuts have had almost zero effect, and this is similar to the tax rebates of last year--coming into effect in at the end of the 2nd quarter, after the recession was 2 quarters old, and just before the economy tanked.

Chevron's Whopping Tax Burden

This is not unusual for a resource company, and similar things happen in other industries.

For example, the insurance industry typically pays 2% premium tax, and in many cases, such as health insurance, this amounts to a HUGE tax rate as a percentage of their margins, and as a percentage of their net income.

I would not spend a lot of time fretting over Chevron's tax bill. I am pretty sure they don't.