US bankers shrug off Obama's fiscal control plans

Bankers, and their lobbyists, were careful not to attack the plan, which was broadly outlined in a Washington Post op-ed piece by Treasury Secretary Timothy Geithner and White House National Economic Council Director Lawrence Summers, head on.  Instead they talked about waiting to see the details due on Wednesday. “Have we had enough say yet? No, but the process has really just gotten started,” said Wayne Abernathy, Executive Director for financial institutions policy at American Bankers Association. The plan includes raising capital and liquidity requirements for all banks, controls on asset-backed securities including requirement that their creators retain some risk, and regulation of derivatives contracts and dealers. The proposals will have to travel through congressional committees in a process that will likely extend through fall. One financial industry lobbyist estimated that even after amendments, the bill would have less than 60 per cent chance of passing.

Some parts, such as consumer protection and rules requiring banks securitising assets to retain some of the risk, might be stripped out, he predicted. But what he perceived to be administration’s two highest priorities — forming a systemic risk regulator and granting resolution authority for the US Treasury — would likely remain.

Wait & watch

At stake is a complete overall of a system that allowed high risks and high rewards. “We are going to have to wait and see what actually is announced and then make an evaluation,” Richard Parsons, Chairman of Citigroup board said. Some bank executives said the financial crisis has already altered banks’ businesses to such an extent that it is hard to see days of high leverage and high profits returning even without additional regulation.

“I’m not so sure we go back to the world we were in,” said Vikram Pandit, Chief Executive of Citigroup. He noted that the “cost of capital” is higher than five years ago.

Additional regulation may further raise cost of capital. The government is wary of toppling the fragile financial markets’ recovery with onerous regulation, while also seeking to prevent a crisis on this scale from recurring.

The banks may also be hoping that, as with proposals earlier this year to tax 90 per cent of bank executives’ bonuses, a sophisticated lobbying effort in Washington, could persuade lawmakers that parts of the bill go too far.