Basel III Barks Up the Wrong Tree

By Eric Jackson
RealMoney Contributor
9/13/2010 5:00 PM EDT
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All the bank stocks are rallying this morning on news that the Basel III requirements are not as taxing as feared. Many analysts are applauding the new rules, saying that the Basel Committee struck the right balance between stability and growth. The committee did no such thing, in my view, because these new standards will have no bearing on causing future growth or preventing future crises.

The new rules which came out yesterday in the Basel Committee press release state that banks with now have to put aside 7% in capital for every loan they make. What's more, the banks will have eight years to get in compliance with this new standard. This 7% includes a 2.5% "buffer," which, I suppose, suggests that the committee believes it's really unnecessary. It's like the committee is saying that this buffer is the equivalent of putting banks under "extreme stress tests."

The market feared much higher levels than 7%, thus leading to this morning's rally. But, put another way, 7% capital requirements really mean that for every $1 in deposits, banks can make $14.29 in loans -- eight years from now.

Perhaps the Basel Committee thought 20:1 leverage -- when banks were asked to set aside only 5% of their capital on loans -- was perfectly acceptable and now 14:1 is severely conservative. Maybe when you compare it with the 25:1 ratio carried by Goldman Sachs (GS - commentary -Trade Now) or the 32:1 ratio carried by Morgan Stanley (MS - commentary - Trade Now) back in 2007, these new standards seem austere.

Yet the Canadian banks such as Royal Bank(RY - commentary - Trade Now), Bank of Nova Scotia (BNS - commentary - Trade Now), Bank of Montreal (BMO - commentary - Trade Now) and Canadian Imperial Bank of Commerce(CM - commentary - Trade Now) have current leverage ratios (and did through the crisis) of 21x, 23x, 19x, and 29x respectively. Yes, you read that last one correctly: Canadian Imperial Bank of Commerce has a current leverage ratio of 29:1.

I thought the Canadian banks were the ones we were supposed to emulate. I thought they were smart. I thought they were conservative. They had a single regulator who was on the job. Even men's magazines are writing articles declaring these obvious facts, so it must be true.

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FinReg: Best and Worst Parts

By Eric Jackson07/21/10 - 05:59 AM EDT

Stock quotes in this article: FNM , FMCC , MCO , MHP

There has been a lot of complaining about the new Dodd-Frank financial regulation reform bill -- or FinReg -- by bloggers and politicians. However, most critics (and supporters) haven't read the 2,200+ pages of the bill. The reactions are driven more by pre-existing politics and shorthand biases for the general concept of governmental regulation.

If you think market actors are greedy and that the government keeps everyone honest, you support FinReg. If you think the government is made up of incompetent bureaucrats who get in the way of efficient markets and choice, then you think FinReg is terrible.

It's easy to be cynical about a big reform bill like this (and I am about a number of points in the bill). However, there is some good here. I believe that the politicians have used this bill as an opportunity to move a lot of little balls forward.

Critics trot out phrases like "this bill will do nothing to stop the next crisis." On one hand, they're right that it's hard for traders (let alone politicians) to predict the future. On the other hand, do they seriously think it's best to sit back after 2008 and do nothing?

In my view, here are the best parts of FinReg:

Derivatives OTC clearinghouses

Some estimate that the global market for derivatives is more than $700 trillion. Yet, a large part of it has operated between parties rather than through a clearinghouse. Now, it will and bank profits will go down. I think the system is better off and safer with this change.

Resolution authority

Former Treasury Secretary Paulson argued that he never had the "authority" to take over Lehman Brothers. Barney Frank has backed up Paulson's explanation, which is why he strongly supported the creation of this authority process to specifically deal with that one challenge.

Proxy access

This bill punted the idea to the SEC to define. Proxy access will determine whether shareholders can nominate directors to appear on the company's proxy statement for all shareholders to vote on at the annual meeting. This is good though. At the last minute, Chuck Schumer, Chris Dodd, and Evan Bayh (all Democrats) tried to water down proxy access by stating that shareholders should have to own 5% of the company's stock for over 3 years before being allowed to make a nomination -- thereby making 99% of shareholders ineligible. I'm grateful that Barney Frank pushed back.

A watered down version of Volcker Rule

I supported the Volcker Rule because I saw its intent was to lower the risk of financial institutions by getting them out of proprietary trading with assets that they would not have if not for the depositors' money sitting in "safe" bank accounts. Critics again howled that it wasn't part of the 2008 meltdown. This is one of those issues where I would ask the banks if they want to be short-term rich or long-term rich. Separating the trading from banking will allow all these banks to prosper in the long-term, even if they lose a few pennies in EPS over the next couple of quarters. It's discouraging that the bill version of this rule got watered down.

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Indiana Senator Looks Out for His Pocketbook

By Eric Jackson

06/23/10 - 10:15 AM EDT

Stock quotes in this article: WLP , C , GS , TWX

Eight months ago, I wrote about Sen. Evan Bayh's (D., Ind.) self-interested views on the proposed health care reform.

His wife, Susan Bayh, sits on the board of WellPoint(WLP) from her hometown of Indianapolis. Over the last six years, Susan Bayh has received at least $2 million in compensation from WellPoint alone for serving on its board. What's more, she has four other lucrative corporate directorships. In 2008, she collected $656,062 in cash and stock for all her board work.

Sen. Evan Bayh (D., Ind.) and wife Susan

Sen. Bayh receives $165,000 in annual salary. According to 2008 reports filed, Susan Bayh's stock holdings were worth between $1.3 million and $2.7 million. Their family's total net worth was between $4.3 million and $15.1 million. And they owned a $1 million home in Washington in the name of Susan Bayh.

Why wouldn't Susan Bayh's financial relationships have a material impact on shaping Evan Bayh's views on health care reform and the countless other political issues he voted on through the years?

Last November, Bayh surprisingly announced he wouldn't seek re-election this fall. After all, he was a strong front-runner to be Obama's vice presidential candidate back in 2008. So the 54-year old went from potentially being a heartbeat away from the presidency to -- a year later -- professing that he no longer wanted to be in politics.

Politicians -- even lame duck ones -- just can't seem to leave without trying to polish up their image before they go. Sen. Dodd has been feverishly trying to pass his financial reform bill before the clock strikes midnight on his political career. On the surface, you would think that -- given the state of the economy after Wall Street basically stopped functioning two years ago and given the Democratic majorities in both the Senate and the House -- financial reform would be a slam dunk to pass. Not so.

One of the latest changes to have emerged as part of the plan is the issue of "proxy access." Despite the fact that our free market system is the most open and transparent in the world -- and despite us believing that CEOs work for their shareholders -- our current system allows CEOs to have a huge influence in selecting their board of directors who is charged with overseeing their performance and setting their salary.

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