Cohn vs Goldman vs Dimon

Change is coming to Wall Street, not all of it good.
At Closing, April 20st
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Does anyone have a clue as to where Wall Street regulation is headed?

Back in February, Gary Cohn, President Trump adviser and former Goldman Sachs Group Inc. executive, said it was time to "attack" the red tape of Dodd-Frank. Every dollar of capital a bank has to set aside to absorb potential losses prohibits them from lending, he said. Bank stocks soared as investors imagined billions of dollars in buybacks and dividends flowing back into their pockets. De-regulation!

Now, the same Gary Cohn says it's time to separate consumer and investment banking. He supports some kind of re-imposition of the Glass-Steagall Act -- an idea which the U.S.'s two main political parties back but which the country's top banks hate. The costs of implementing this and the impact on liquidity would be bad for the industry, according to CreditSights analysts. Re-regulation!

The logic of a former investment banker supporting a break-up of the financial industry isn't entirely warped. Goldman Sachs, like Morgan Stanley, only became a bank proper in 2008, a fairly recent twist in its history that brought in plenty of extra supervision, regulation and box-ticking along with the stable funding source of lucrative retail deposits.

Trump Bump

Banks have outperformed the benchmark since November's U.S. election

Source: Bloomberg

A new Glass-Steagall Act might allow Goldman to turn back the clock to happier days, when it was free from intrusive stress testing and U.S. Federal Reserve oversight, even if it would also force the bank to strengthen its balance sheet and absorb higher costs as a pure-play broker dealer.

This, combined with a rolled-back Dodd-Frank, actually wouldn't be the worst thing in the world for Gary Cohn's former employer versus other banks on the street. The consumer banking business is a small (albeit lucrative) way for Goldman to diversify earnings. 

Its a different story for JPMorgan Chase & Co., which in 2015 said its business diversification generated about $15 billion in revenue benefits and around $3 billion in cost savings. Given Jamie Dimon -- who sits on a Trump advisory panel -- said that year that breaking up big banks would be bad for America, it's hard to see him sharing Cohn's apparent enthusiasm for this kind of shake-up.

But rather than a game of Wall Street poker, this looks more like a case of highly symbolic signalling to the industry at large and to investors who have begun to doubt the Trump administration's ability to push through campaign promises.

By falling in line with cross-party political support for Glass-Steagall -- also shared by Treasury Secretary Steven Mnuchin and FDIC Vice Chairman Thomas Hoenig -- Cohn is backing a consensus view that Wall Street might prefer to influence than sabotage. Mnuchin has already said that a blunt separation would be harmful for markets, leaving some room for debate over what exactly a "21st-century" Glass-Steagall actually means.

Election Rebound

Bank of America has led the rebound in banking stocks since the election

Source: Bloomberg

Shows positive price return in local currency

For investors, though, the message should serve as a warning: with the government opening up the full Pandora's box of financial rules, CEOs and investors should get ready for change on Wall Street -- and not all of it good.

Christopher Wheeler, an analyst at Atlantic Equities, reckons stock markets aren’t positioned for a break-up of banks that would likely impede, rather than accelerate, the return of billions of dollars in capital investors had been hoping for from deregulation.

Assume, for a moment, a new Glass-Steagall structure would force the top 10 U.S. banks to hold capital equal to 10 percent of their assets. The shortfall would be as much as $400 billion, according to analysts at CreditSights.

If that's the price for more Wall Street freedom, it's not one that would be paid gladly.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Lionel Laurent in London at

    To contact the editor responsible for this story:
    Edward Evans at

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