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Why Hillary Clinton should stop bashing banks

Hillary Clinton and the other Democratic candidates are blaming the banks for irresponsible behavior. Consider the issues:

  • Congress, Treasury, and government are too close to the banks they regulate.
  • Banks influence government with groups such as the American Bankers Association.
  • Bank power is concentrated in the hands of a few.
  • Banks benefit in good times and push problems to the public in bad times.
  • Big banks got sweetheart deals from the government.
  • Banks insist to get left alone until a crisis when they cry for help.
  • Income inequality has gotten worse.
  • Nonbanks get into trouble.


Hillary Clinton
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Hillary Clinton

These sound like headlines from today, but the surprise is that they are from over a century ago, as recounted in a new book on the creation of the Federal Reserve by Roger Lowenstein. Then, politicians bashed banks often, such as during the Democratic convention of 1895 and elections in the early 1900s. They accused a small group called the "Money Trust" of controlling finance. Today, Democratic candidates continue to attack banks as they encourage new steps, from a tax based on the size of a bank to breaking-up the largest banks. Yet, much of this is unnecessary.

First, many of these issues, which are quite important, will not go away whether today's big banks are broken up or not. The book, which will be released next week, gives a reminder of how much history repeats itself, including efforts by politicians to bash big banks to gain votes. When it comes to issues such as the declining plight of the middle class, blaming these problems on the banks alone seems as unfair as blaming the industry for the poor record of the New York Knicks.


Second, shareholders should drive break-ups when they make sense. We estimate that the sum-of-the-parts is worth one-third to two-thirds more than the current valuations at Citigroup, JPMorgan Chase, and Bank of America. If the stocks remain inexpensive, we would encourage shareholders to be more aggressive in encouraging sales. This is how capitalism is supposed to work. Also, this is not an all-or-nothing proposition, as certain banks can divest parts of their franchises.

Third, regulators have successfully reinforced their efforts. We estimate that, even if there were another housing crisis over the next five years, the industry would still have more capital than it had before the last financial crisis. Also, more eyes look over the shoulders of banks. Despite today's macro uncertainty, it's doubtful that conditions will approach those applied to banks in the Fed's annual severe stress test. For their efforts this decade to ensure greater resiliency, we say "thank you, regulators." This is how regulation is supposed to work.


Fourth, banks are already penalized for size, which should eliminate the need for a new bank tax. The combination of the new Dodd-Frank law, higher capital requirements, and tougher oversight makes it more expensive to be a big bank. Also, Dodd-Frank outlaws bank bailouts. Even though we continue to have our doubts whether one of the largest banks would be allowed to truly fail, the FDIC continues to make progress in this direction with the requirement for "living wills." Moreover, efforts to further reduce risk at banks has side effects. Loans this decade have grown only one-third the pace as compared to the typical economic expansion.

Fifth, size has certain advantages. When it comes to geographic diversification, the largest national banks should look good versus Texas-only banks if oil prices stay lower for longer. Also, the combination of lending and debt underwriting is a customer friendly proposition that offers substitute products, in contrast to non-customer proprietary trading that get restricted by the Volcker Rule.


Sixth, the industry has performed better. Too many politicians are in search of the next crisis while dismissing the industry's greater strength. This decade, the industry has passed a series of tests such as those related to Greece, Russia, Taper Tantrum and more. The next two weeks should show third quarter bank earnings that are bruised but with balance sheets that remain strong despite issues in China, commodities and capital markets.

This is not to dismiss all the concerns. The ability of shareholders to push for accountability and break-ups gets limited by what we call "economies of clout," or the ability of the largest banks to run roughshod over those who get in their way. The good news is that there has been progress. Annual meetings and other governance matters are less check-the-box exercises. However, one disappointing data point was Bank of America's special shareholder meeting last month. One speaker representing two of the largest public pension funds (CalPERS/CalSTRS) was given only two minutes to speak. In the middle of his closing comments, a Bank of America employee pulled the microphone away even though he travelled 3000 miles and was representing $500 billion of assets and 2 million individuals in California. If banks further restrict the ability of shareholders to hold banks accountable, the views of politicians who are hostile to the industry can get validated, especially if banks were to have new large visible mishaps.

Until then, our view is — with apologies to Yogi Berra — today's bank bashing is political theater that seems like deja vu all over again.

Commentary by Mike Mayo, a banking analyst and managing director with CLSA, a global boutique brokerage firm, and author of the book "Exile on Wall Street: One Analyst's Fight to Save the Big Banks From Themselves" (John Wiley & Sons, 2011).

Disclosures: CLSA, CLSA Americas and/or CA Taiwan receives or has received compensation from Bank of NY Mellon and JPMorgan Chase for non-investment banking services (eg‚ brokerage services) in the past 12 months. The research analyst(s) or his/their household member(s)/associate(s) has/have a financial interest in the securities or related securities of Citigroup, KeyCorp, Morgan Stanley and State Street.