Will regulation cut investment banking profits by a third?
Filed under: JP Morgan Chase, Goldman Sachs , Morgan Stanley
A JPMorgan Chase (JPM) analyst believes that regulation of the investment banking industry could cut its profits by a third. As a result, he thinks investors should dump their shares of investment banks and buy those of traditional commercial banks.
I'm not sure how this analyst, Kian Abouhossein, reached his conclusions, which are included in a JPMorgan study released Wednesday, but I think he grossly underestimates the power of those investment banks to influence regulation and find their way around it to make more money for themselves.
Nevertheless, Abouhossein had the courage to put some numbers on his predictions. He believes that Deutsche Bank's return on equity (ROE) -- net income divided by shareholders' equity -- will decline from 10 percent today to 6.7 percent in 2011; Goldman Sachs (GS)'s ROE will shrink by 4.4 percentage points and Barclays' by 4.3 points.
Abouhossein expects banks to be required to hold more capital and to move more derivatives trading onto exchanges. And he thinks that the only way that banks will be able to make up for the lost revenues will be to pay people less. Meanwhile, JPMorgan upgraded the shares of Morgan Stanley (MS) on the strength of its lesser dependence on borrowing money to trade -- a feature of Goldman Sachs' business strategy.
Abouhossein's analysis seems to be predicated on the idea that global governments will be able to rein in Goldman Sachs. And yet the last several decades of actual outcomes suggest that it's the other way around. That's why I think his analysis is wrong.
Goldman Sachs will either thwart the passage of regulation that prevents it from making money trading, or it will find a way around that regulation. Meanwhile the more conservative banks will continue to lag.
Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
9-09-2009 @ 11:05AM
Analyze This said...
This may be a good thing! It all but guarantees Obama a one term administration. Taxpayers vote!
Reply
9-09-2009 @ 11:53AM
Alan said...
This will almost guarantee that O'bama will be a one time President and to think that l voted for him.
While l do not agree with him l don't think the Republicans could have done any better and the Conservatives
Reply
9-09-2009 @ 11:56AM
Soullife said...
not fair
Reply
9-09-2009 @ 12:00PM
Alan said...
This will almost guarantee that O'bama will be a one time President and to think that l voted for him.
While l do not agree with him l don't think the Republicans could have done any better and the Conservatives would most likely cause a Depression.
If you listen to the morons on the radio like Hannity, Malsberg (?) and Levin they you might as well listen to the tooth fairy.
They are entertainers get it through your skulls.
Reply
9-09-2009 @ 12:06PM
stan said...
Just a note, JPM is doing great. Why, they rip off everyone possible especially the small guy. Chase pays the lower interest rate on checking accounts and MMS accounts in the entire financial industry. They pay the lowest interest on CD's. On the flip side they charge the higher interest rate of all card issurers in the industry. They only offer one thing lots of banking locations. Why not, they make money the old fashion way, rip the littel guy off!!!!
Reply
9-09-2009 @ 12:14PM
RJ said...
Just google "Chase credit card problems" and you will see yourselves what kind of criminal empire Chase has evolved into.....
Reply
9-09-2009 @ 12:31PM
steven ruza said...
the financial system in america is the biggest scam business ever invented. i know know why the rest of the world hates us. wall street is sham a real joke
Reply
9-09-2009 @ 1:22PM
Lori said...
HEY ALAN You have your head on back asswards Hannity, ORiely and the gang, and our hero, Glen Beck are educated common variety good hard working men coming from the love of country Your bitter your boy was a fake and your fisrt thought is to strike out We are coming back YEAH We are coming back and we are not letting Obummer ruin this country before we do Thats why the watch dogs and the bell ringers like Hannity and Beck, etc Children should not vote, so stay home next time
Reply
10-27-2009 @ 6:30PM
fatehsingh said...
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Reply