(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Feb 13 That the Trump agenda is good for banks
is self-evident; that shareholders will get their cut is a lot
Friday's news of the resignation of Daniel Tarullo, the
Federal Reserve official who served as quarterback of the effort
to tame systemic risk in the banking system, touched off another
leg in a sustained and powerful rally of U.S. bank shares, which
are up nearly 30 percent since shortly before the election.
Coming just after Trump's order to review and likely gut
Dodd-Frank Act legislation, Tarullo's exit, planned for April,
cements the view that U.S. banks will be allowed to carry less
capital. A move to delay implementation of the application of
the Fiduciary Rule to retirement advisors is a good indicator
that highly profitable but low-value (for clients) products will
continue to generate revenues.
To an investor from Mars more revenue spread across less
equity would seem to be a sure thing.
Those of us who've lived on Earth these past two decades
should have our doubts. There is a reason banks, especially the
largest and those which operate investment banks, trade at such
low multiples of earnings, and it is not because they have a
proud track record of rewarding shareholders.
Since February 1993 the KBW index of bank shares has
returned only about 60 percent as much as the S&P 500 and
done so while treating investors to teeth-rattling sell-offs in
1998, 1999, 2001, 2002, 2007, 2008 and 2009.
The winners? Well, bank employees of course, who've
trousered serial fortunes at the expense of taxpayers and
shareholders. A move to relax oversight or put the capital bar
lower will set taxpayers up to fund a bailout once again, but
probably not before we see a couple of explosive rallies and
some just as explosive sell-offs in banking shares over the next
three to five years.
Complexity will come back into vogue, creating more
opportunities for banks to sell clients, and bankers their
banks, risks they don't understand. You can hardly blame them.
Opportunities to take the upside when others own the risks are
few and far between in this life.
Expecting Trump and his appointees to govern otherwise
ignores the lessons his own business career teaches. Expecting
bankers to police themselves is just silly.
SHORT TERM VS LONG TERM
Two elements in the Trump agenda are fundamentally positive
for banking profitability: deregulation and reflation. While the
former leaves shareholders as likely fall guys for
self-interested risk-taking by insiders, the second is
Fiscal stimulus and tax cuts pose a problem down the road
but over the short term even their prospect has already driven
interest rate expectations higher and increased the gap between
short- and long-term interest rates. As the banking business
model is predicated on borrowing short and lending long, a flat
yield curve is bad news and negative interest rates, as seen in
much of the world last year, are poison. A bit of inflation,
even more than a bit, is just what banks need; it makes them
more profitable and helps whet clients' appetite for debt.
And don't expect the Fed to spoil the party. With Tarullo's
exit Trump will be able to fill three of the seven governor
positions at the Fed. If he does not offer Janet Yellen another
term at chair next February he may get another.
So why, if they will only get shafted in the end, do
investors persist in backing the banking sector follies? An
insight from Paul Woolley, of the London School of Economics,
about how asset managers are punished and rewarded helps to
Most fund managers are asked to beat a stock market index,
or one which tracks other funds, without taking too many huge
bets. Outperform, or at least stay close to the pack, and you
will probably continue to draw a hefty pay packet. Trail the
market badly and out the door you go.
That forces money managers to buy what is going up strongly,
and as we are seeing few sectors can rally as explosively as
banks when the going is good. Just as bankers have perverse
incentives to make money while times are good, so do fund
managers, whose performance is judged quarter to quarter or at
best over three-year intervals.
We've seen this movie before, and though we may like the
popcorn we won't enjoy the ending.
(Editing by James Dalgleish)