Levine on Wall Street: Fees on Fees
J. Tomilson Hill is keeping busy
If business journalism consisted solely of where-are-they-now profiles of characters from "Barbarians at the Gate," that'd be fine. One such ex-barbarian is J. Tomilson Hill, credited in the book as "merger chief" at Shearson Lehman Hutton. Hill now runs the Blackstone Group's fund-of-funds business, which he calls "the largest investor in hedge funds in the world." Despite that newfangled job, Hill comes off as an old-school banker, saying that "he used 'an M.&A. approach instead of a product approach,' building the business by asking clients what they needed 'and not trying to sell them something.' " His next effort is to expand the fund-of-hedge-funds business to retail investors, perhaps because he's asked retail investors what they need and the answer is more fees.
Higher capital requirements, and opportunistic bankers, make loans more expensive
Increased banking regulation, particularly increased capital requirements, naturally increase the cost of providing capital-intensive banking services like loans. Since banking is a competitive industry, banking services are sold at their marginal cost, and increasing that cost through capital regulation naturally increases the price of those services. Wait, no, that last sentence is not true. Here is a lovely article about how banks are passing on the costs of new regulation to customers, but it will not fill you with admiration for the efficiency and competitiveness of banking. It does have this quote from a banker: "Just drop the words 'Basel III' and the whole conversation is very friendly and no one does the back of the envelope calculation. The client doesn't want to do simple calculations because treasuries are full of morons."
Opportunistic bankers also make collateral more collateral-y
Meanwhile, in another part of town, an expensive banking service is taking clients' investment portfolios and swapping them for the sorts of high-quality liquid collateral that can be posted with central counterparties to clear derivatives transactions. Capital regulations make this collateral transformation service more expensive too, which means that only banks with "relatively large, unconstrained balance sheets, high leverage ratios, a cheap cost of funds and a global franchise that reaches into all corners of the collateral-rich buy side" can really provide it. This has its problems if the goal of clearing derivatives through central counterparties is to reduce the risk of bank failure: As one person puts it, "you won't reduce interconnectedness by requiring banks to add another level of regulatory intermediation with CCPs -- you will increase it."
In March, JPMorgan and Goldman technically passed the Federal Reserve's Comprehensive Capital Analysis & Review and were allowed to return capital to shareholders, but they were embarrassed by having to fix and resubmit some of their analysis because their plans "exhibited weaknesses." Everything's fine now though. Since actually increasing capital requirements seems to be expensive, this approach -- nonsubstantive embarrassment -- seems as good a way as any for the Fed to keep an eye on the big banks.
Before you drill for gas you have to mine for sand
I don't really have much to say about this but really how can you resist reading about the companies that mine sand in Wisconsin and then ship it to Texas or Pennsylvania to pump into the ground to make natural gas come out via hydraulic fracturing. "Prepping sand to be used in fracking involves sifting it for the right-sized crystals, separating out contaminates, washing it and drying it." The world is amazing. Of course also the sand causes cancer, so that's sad.
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Matthew S Levine at email@example.com