Risky Business: Hog-Tied and Over-Regulated
Dexter Van Dango looks at headlines in the financial industry, both recent and not so recent, with amusement and bewilderment. From JP Morgan’s $2 billion trading loss to the selloff of CitiCapital’s various business lines, he ponders the push for greater regulation. Yet in his customary fashion, he’s able to bring a sobering perspective to it all.
As I glanced through a few of the Monitor 100 rankings from years past, it became apparent that mergers and acquisitions have taken their toll among many of the companies once listed as top lessors, which are now part of other organizations, or altogether gone. I couldn’t help but think that we are all beginning to look more and more like banks and less and less like independent lessors — banks that Congress and the public want to protect against another financial collapse similar to the one we witnessed in 2008.
The drawing on the cover of the May 25, 2012 edition of THE WEEK magazine gave me a chuckle. The drawing depicts former Fed chairman Paul Volker towering over JPMorgan CEO Jamie Dimon, who is tossing dice on a craps table as Volker snatches him like a heavyweight casino pit boss preparing to throw him out on the street. The heading reads “Risky Business — Does JPMorgan’s $2 Billion Loss Prove the Need for Regulation?,” a reference to the hot topic of that week when JPMorgan Chase announced that it had lost at least $2 billion on risky derivative trades.
JPMorgan’s losses have sparked new interest and debate over the Dodd-Frank Act and the so-called Volker Rule — new financial regulatory oversight recommended by Volker and vocally challenged by Dimon and other Wall Street bankers. It begs the question of whether the U.S. financial services market is adequately protected against the shenanigans that gave rise to the financial crisis just a few short years ago. I guess we will find out soon, as on June 1, 2012 Reuters announced that Dimon will testify before the U.S. Senate Banking Committee, which is examining what led to the losses before making any decisions about whether JPMorgan and other large banks will have to take steps to scale back the risk taking that led to the losses.
Heavily pushed by Democrats — led by President Obama — the Volker Rule is scheduled for implementation in July, though banks have two years to comply. Republicans are fighting to water down the current version and push back at any further regulatory oversight. Mitt Romney has stated that he will repeal Dodd-Frank if elected president.
Banks are still viewed unfavorably by investors and the public in general. Just ask any of the 99% that occupied Wall Street, LA, Seattle, or Chicago. You get the idea.
Risky Business…The bigger they are the harder they fall…Too big to fail. We’ve heard it all before, but it never fails to pique our interest when we learn about new revelations, challenges and mishaps of our industry’s leading companies. JPMorgan’s mistake brought back memories of bank bailouts, TARP and, for some, financial meltdown. Have folks forgotten how bad things were in the height of the financial crisis? Do we really want to go back to the recklessness we saw before the crash?
Many of us watched from the sidelines as CIT crumbled before it crashed and filed for bankruptcy protection. Over the years CIT had gone through multiple transformations first when it swallowed Newcourt and then sold out to Tyco, before being spun off in a separate IPO. Then it was off to the races — grow, grow, grow. The rest is history…some risky decisions and dire consequences. Today, CIT Group, Inc. is the 35th largest bank holding company in the U.S. with a bit more than $44 billion in assets as of March 31, 2012.* It is back in the market aggressively bidding for business in real estate, aviation, rail, healthcare, energy and other key markets. A recent Wall Street Journal headline read, “CIT Angling to Steal Share From Big Banks.” Let’s hope it has learned its lesson and operates a bit more conservatively this time around.
And who can forget the way industry stalwarts General Electric and Goldman Sachs were destabilized to the core when in 2008 the market for short-term commercial paper seized up. Both companies resorted to expensive rescue cash injections from Warren Buffet in exchange for preferred stock. In late May of this year, GE chairman Jeff Immelt announced that “smaller is better” as he referenced the contributions of GE Capital to the company’s overall results. The division remains the largest of GE’s six divisions, though Immelt forecasts single-digit growth as he aims to shrink his finance arm. He also aims to use less short-term commercial paper debt to finance its operations, cutting the amount to about $25 billion, down from first-quarter 2012 outstanding amounts of $43 billion, measurably less than the $105 billion outstanding in early 2008 before the financial crisis.
Yet in his letter to shareholders in the GE 2011 annual report, Immelt addressed the competitive advantages GE Capital holds over banks. He stated, “There are large segments where GE Capital will lead and build upon GE’s strengths. These include mid-market lending and leasing, financing in GE domains and a few other specialty finance segments. Here, we have a clear advantage over banks and can grow profitably.” Historically, GE Capital and GE have been regulated by the Office of Thrift Supervision as a Savings and Loan Holding Company. Last year, that responsibility shifted to the Federal Reserve, where they will be equally scrutinized under parts of the Dodd-Frank Act. If GE Capital was listed among the U.S. top bank holding companies, it would rank eight with $545 billion in assets.
Unfortunately for Goldman Sachs, it was deemed to be a bank and received $10 billion in TARP funds. Today, The Goldman Sachs Group, Inc. ranks fifth among U.S. bank holding companies with $951 billion in assets. We don’t see it directly in the equipment finance and leasing business, but it plays an important role in the world of M&A, as does Morgan Stanley, number seven on the list with $781 billion in assets.
Wells Fargo navigated the nuances of the credit crisis better than most. Despite its shotgun wedding merger with Wachovia, the bank performed well and is now churning out record profits. One outcome of the merger was an overall assessment and inventory of combined leasing company assets. Wells Fargo Equipment Finance, Wachovia Equipment Finance and Wells Fargo Financial Leasing were each listed separately among the Monitor 100 in 2008 in positions 12, 19 and 36, respectively. While there remains some separation of powers — for the most part, Wells Fargo Equipment Finance came out on top in the fusion of the leasing companies. Wells Fargo & Company is listed in fourth place among U.S. bank holding companies with $1.334 trillion in assets.
CitiCapital, once a leading provider of equipment finance and leasing, was impacted by the woes of Citibank — at one time the largest U.S. bank. CitiCapital was broken into pieces. Its technology business was sold to CIT and later its transportation, healthcare and remaining pieces were picked up by GE Capital just as the credit crisis was unfolding. There are rumors that Citibank is getting back into the equipment finance business, but I think the management team is too busy disassembling its banking business to worry about building out another leasing business. I could be wrong. Citigroup, Inc. is the third largest bank holding company in the U.S. with $1.944 trillion in assets.
Bank of America has not gone without challenges. Like Citi, the bank’s problems rubbed off on the leasing operations. A set of layoffs occurred in late 2007 and again in 2008 when the investment bank was struggling. First with its purchase of Countrywide followed by Merrill Lynch — the bank’s balance sheet grew enormously. Then the damage from collapsing home values caused a waterfall effect on home mortgage foreclosures.
BofA was one of the “too big to fail” banks. It received $45 billion in TARP funds from the U.S. government. Fallouts in the executive suite and the boardroom led to the ouster of Ken Lewis and the appointment of Brian Moynihan as CEO. Though its stock has suffered immensely, current management seems to be righting the ship. Banc of America Leasing remains the largest bank on the list of volume producers in the 2012 Monitor 100, while Bank of America Corporation is number two on the list of top U.S. bank holding companies with $2.18 trillion in assets.
Now back to JPMorgan Chase & Co. According to Wikipedia, “JPMorgan Chase, in its current structure, is the result of the combination of several large U.S. banking companies over the last decade including Chase Manhattan Bank, J.P. Morgan & Co., Bank One, Bear Stearns and Washington Mutual. Going back further, its predecessors include major banking firms among which are Chemical Bank, Manufacturers Hanover, First Chicago Bank, National Bank of Detroit, Texas Commerce Bank, Providian Financial and Great Western Bank.”
Search through some back issues of the Monitor 100 listings and you will find several of JPMorgan’s ancestral banks included from year to year. Hence, before the markets crashed and before the demise of certain banks and investment firms JPMorgan was the third largest bank holding company. Today it is number one among U.S. bank holding companies with $2.32 trillion in assets.
There are many additional banks included on this year’s Monitor 100. Regional banks with good sized leasing company subsidiaries include KeyBank, U.S. Bank, PNC, Fifth Third, SunTrust and others. Foreign banks with investment in U.S. leasing companies are Rabobank, Société Générale, BNP Paribas, Bank of Tokyo-Mitsubishi and Royal Bank of Scotland. As you look toward the top of this year’s list, you will also see the major captives in enviable positions. So far those captives have avoided the regulatory oversight of the bank lessors. Will that continue? It’s hard to say.
Let’s close where we started by examining the “tempest in a teapot” surrounding JPMorgan and its trading losses. JPMorgan is considered, by most, to be a well-run bank. And Dimon is considered one of the best bankers in the world. To create such a hubbub over $2 billion in losses fails to look at relativity and scale. The loss represents 0.0862% of the bank’s assets. Applying that percentage against the balance sheet of CIT with just over $44 billion in assets shows that a comparable loss would be roughly $38 million. Do you think CIT has made any $38 million mistakes? Would CNBC highlight the loss and make it a lead story? I doubt it.
I guess it is no mystery why the press claims that banks aren’t lending. It is because the banks are hog-tied, overly scrutinized and unfairly judged. Do we need regulation? Yes. Do we need overly regulated banks? No. Do you have a different opinion? Share it with me at email@example.com.
* Source: Federal Reserve’s National Information Center: http://www.ffiec.gov/nicpubweb/nicweb/Top50Form.aspx.
Dexter Van Dango is a pen name for a real person who is a senior executive with more than 25 years of experience in the equipment leasing industry. A self-described portly, middle-aged, graying, balding leasing guy in the twilight of a mediocre career, Van Dango will provide occasional insight from the front lines via the Monitor.