Game Over

By tamara on

Game over 2Last week, while at the gym near my office, I overheard two men talking, almost venting.  “It’s over” they said with constant repetition.  Normally, these words would have little meaning without the proper context, yet I knew exactly what they were talking about.   I too have been saying this for quite some time, and with greater frequency in the last few months.

What these gentlemen were referring to, was the slow death of the Banking Industry.  Many of the government regulations that were created in response to the financial crisis go into effect this year.  So now Wall Street is bracing itself for the changes that are being hard-wired into this industry.

To date, banks have still been reporting profitability, but for the first time, revenues, which is the most basic indicator of an industry’s health, stood still.  So in order to capture profits, banks have been aggressively cutting costs – including salaries and headcount.  Entire divisions are being shut down and salaries have shrunk substantially – I for one am making far less money than I’ve made in previous years.

And this is just the beginning.  A few weeks ago at an industry gathering, former Treasury Secretary Tim Geithner, acknowledged that impact of the government regulations will cut profitability of banking, roughly in half.  And with the increase in capital requirements that banks must hold against each dollar of risk that they assume, the impact of these regulations will be severe.

But who cares about the fat cats on Wall Street, right?  Well, you should care, because the health of banking system is critical to wellness of entire economy.  And although these regulations will have a direct and immediate effect on institutional clients and investors, it will eventually trickle down to retail customers, like you and me.  And here’s an example.

Banks will continue to seek profits and they will do so anyway they can.  We have already seen this as interest rates on credit cards have skyrocketed to their all-time high; And this at a time when money is cheap and interest rates are near their 50-year low.  I have even seen a credit card with an interest rate of 79.9% which is legal, as long as the credit card company properly discloses its terms.

So that is one implication on retail customers, but another segment that will be negatively impacted by these regulations is the small and mid-sized enterprises (SMEs).  SMEs play a vital role in the economy because they account for over half of the non-farm GDP and attribute to over 60% of new job creation.  But their inherent risk is high due to their failure rate.  And with risk being a critical variable that banks use in their financing determination, banks will deem loans to this segment as too risky and subsequently too expensive for them to do.

I ran into a friend of mine, who is a long time Wall Street guy.  We began to talk about the industry and I said that investment banking is dead.  But he replied with great conviction “No it isn’t!”  He then went on to state that investment banking is only dead at investment banks. But investment banking is very much alive and companies need financing more than ever.  AND when there is a need, there is always someone who is looking to capitalize on that need.  We are seeing this with “shadow banking.”

Shadow banking is a term used to describe the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks.  These financial intermediaries facilitate the creation of credit across the global financial system, but they are not subject to regulatory oversight.  And if you thought that fees charged by banks are high, try going to a shadow bank. And if that doesn’t work you can always go to your neighborhood loan shark – it may cost you two broken thumbs, but at least it will be cheaper than a bank.

2 comments

  1. Tamara-

    Perhaps we would have been better of if President Obama and the Fed had let the Banks fail during our Nations most catastrophic banking crisis in 2008. In that case all of the bank employees and Wall Street fat cats would already have been unemployed, we all would be living in poverty and the we could blame Obama for not bailing out the Banks. And while we are at it we can thank President Bush for all of his deregulation and costly wars that drove the banking industry off the cliff. Oh wait since Obama’s policies have been in place for six years unemployment has dramatically decreased, interest rates to responsible citizens remain at historic lows, the stock market has doubled since its 2008 bottom, real estate prices have risen in every market, car sales from every car manufacturer including the company that the government bailed out (GM) are at record highs and oil prices have dropped at least temporarily. All of our bail out money has been returned to the tax payers with interest.
    All of this is despite the obstructionist Right Wing Tea Baggers in Congress that have tried to derail our progress the last 6 years. So if Wall Street has to adjust and bankers only make $1,000,000 instead of $1,500,000 so that our banking system can survive the next crisis then so be it. Lets also remember that every dollar that the banking industry gambles with comes from individual tax payers, pension funds and retirement 401ks. Just Sayin

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