Nothing like a transparent effort to talk your own book. Private equity fund manager Chris Flowers, who focuses on financial services industry plays, complained to the Financial Times that regulators are messing up his business:
One of the biggest private equity investors in the banking sector has warned that regulation has depressed profitability so much that lenders will struggle to attract sufficient investors to survive the next financial crisis.
“All the stuff that has happened and all the rules we’ve introduced have depressed profitability and that is a real vulnerability,” Christopher Flowers, the US private equity investor specialising in financial services, told the Financial Times in an interview. “Nobody is going to invest in an industry with returns of 5 per cent.”…
Mr Flowers, who has invested in banks in the US, UK, Japan, Germany and the Netherlands, said it was impossible to turn banking into a risk-free utility, no matter how much capital regulators force the industry to hold. He asked: “How do you make something that lends money at risk a utility?”
“That you could design this so that there would never be another banking crisis again is a utopian idea. I guarantee that we will have another banking crisis.”
Mind you, as Simon Johnson pointed out in his famed May 2009 Atlantic article, The Quiet Coup, the banking industry not only grew much faster than the rest of the economy, but pay levels rose handsomely as well. Prior to the early 1980s, banking industry wages were generally on par with private sector pay. Given that finance is a service to the real economy, the more it takes, the more of a drag it is on productive activity.
Thus the trend that Chris Flowers is decrying is exactly what should be happening in the post-crisis era. This is a feature, not a bug. Having the financial services sector shrink is an outcome sorely to be wished. It would be terrific to see mathematicians and physicists seeing somewhere other than Wall Street as their best career choice.
The fact that Flowers is discussing banking as a utility, defensively, is another great sign. It means the idea is becoming legitimate enough for it to worry him. And contrary to Flowers, in the days when banking was strictly regulated (from the 1930s through the 1970s) it was free of crises.
And Flowers can’t even make credible arguments as to why that might be hard to achieve. The issue is not lending money at risk; banks did that when they were kept on a short leash. The conundrum now is that interest rates have been and presumably will again be highly volatile if the Fed figures out how to exit its ZIRP/QE corner, which is tricky for banks to manage (although they did in the 1980s, by focusing strictly on matching the maturity of funding with their lending. No “borrow short/lend long” aka “yield curve intermediation” profits).
All of Flowers’ caviling ignores the elephant in the room: it is better to be an employee of a Wall Street firm than own shares in it. If Flowers is really so concerned about whether banks have enough equity to withstand the next crisis, where was he in 2009 and 2010, when bank pay rose to record levels, higher even than the previous record in 2007? Why wasn’t he criticizing the likes of Jamie Dimon, Brian Moynihan, and Lloyd Blankfein for presiding over such irresponsible behavior? Compensation level becomes even more of an issue when you realize, contra Flowers, that the biggest source of capital for all companies is retained earnings. Second is debt. Selling shares, which is what Flowers is worrying about, is a distant third. And if banks need to shrink, why are we that worried about them raising new equity?
If profits fall, presumably banks will start exiting activities where they aren’t competitive and when they reach the limits of that approach, they might finally be forced to rein in pay levels. The ginormous number of bank branches in Manhattan alone (which grew strongly in the 2000s and continued to grow like weeds even after the crisis) suggests that there is a lot of fat to be trimmed before the TBTF banks start addressing compensation levels. Banks might even start welcoming a return to Glass Steagall, since the highly routinized operation of retail banking and payment services never fit well with the high-flying, highly adaptive cultures of investment banks. It’s not hard to make the case that the management systems that have evolved at the TBTF banks that are capital markets players represents the worst of both worlds.
What is most amusing about Flowers’ article is that it met with withering responses in the comments section. Virtually no one was buying what Flowers was selling. As of this hour, the tally was at 25 nay sayers, one neutral, and only one in favor. And remember, the pink paper is read almost entirely by finance professionals. Representative remarks:
Poor Chris Flowers isn’t being allowed to lever his banks’ equity to the eyeballs by regulators who want stable, capitalised, boring banks? Go find me the world’s smallest violinist…
Meanwhile, if regulators succeed in making banks less-volatile and more-utility like, there’ll be plenty of takers of the stock. They just won’t be leverage junkies like Flowers.So, in typical arrogant financial services fashion: “let us do as we please, or there will be another crisis.”
Could not happen to a more deserving band of thieves.
Flowers is one of the least successful PE investors ever – few have lost more money more quickly – and then had the hubris to blame ‘regulators’ for their own blind stupidity
Maybe Mr. Flowers should notice that there was a financial crisis BEFORE any of the new regulations – while, in fact, the financial sector was making money hand over fist!…Where he gets the idea that banking should be some giant profit producer is, well, just self-serving BS and the FT should refrain from even reporting on such flim-flam malarchey coming from conflicted sources!
If regulation gives me 5% virtually risk free, I’ll take it.
The fact that Chris Flowers is squealing, in other words, is a very good omen indeed.
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I too was going to comment on the FT Flowers piece, but it was one of those instances where it was so bad, I simply didn’t know where to start. The FT’s sophisticated reader base is doing a far better job that I could anyway, so I thought I’d leave it to the experts.
One nuance which didn’t get drawn out in the FT’s feature and needs a little bit more longform that is better put here in NC is, the banking industry has fallen so far down the rabbit hole that (and Flowers typifies the prevailing mentality) it simply cannot fathom that bad business is bad for profits in anything but the shortest of short terms.
The fees which Standard Chartered, HSBC and BNP Paribas incurred for money laundering and sanction evasion could never become a sustainable source of income. Eventually — and it would be here a “when” not an “if” — the game was up and law enforcement decided that enough was enough and that these banks had to stop the illegal conduct then that revenue stream would end. For those banks’ shareholders, the sooner it ended the better because the longer it went on for, the more capital would be allocated to these business units, the less would be left over for legitimate areas of operation and, like the bindweed that is attempting to perniciously engulf my hydrangeas, the harmful opportunistic thugs in the business would start to kill off healthy, wanted, aspects. Bad business drives out good, until the state realises what that business has now become and, as it is then a threat to the state, the state (which will always win eventually) moves in to crush the cuckold.
And the sooner action is taken (and if misaligned incentives prevent the banks’ management teams from taking action then Flowers should consider it a blessing that the industry has got oversight protecting investors from deranged management because most other sectors don’t have this luxury and shareholders often far too late in the day discover that the enterprise has been looted) the better. Working in the industry, I knew for an absolute fact that for at least 10 years, more like 15, that a certain type of junk insurance (well-know here in the UK, called “PPI” or Payment Protection Insurance) was being mis-sold and the product itself was being re-engineered to magnify the junk elements of it. The whole company knew it. Top execs knew it. But no-one could take any action because it amounted to 30%+ of profits and was a golden goose that couldn’t be killed. No matter that the goose in question was eating all the corn that the village could ever produce and the farmer had to keep stealing from the villagers to feed the said goose…
The eventual cost is still being counted, but stands at £8.9bn http://www.fsa.gov.uk/consumerinformation/product_news/insurance/payment_protection_insurance_/latest/monthly-ppi-payouts — and that is net redress to customers, not counting the cost to the banks of processing the compensation which I can assure you is pretty huge too.
So Mr. Flowers, I think you’ll find that, in the long term, regulation is a cost-saver.
Oops, old PPI compensation figure in the above. Its now http://www.fca.org.uk/news/consumers/monthly-ppi-refunds-and-compensation £15.1bn !
The reason Chris complains about regulation is that he makes money punishing banksters for bad behavior. His great trade was buying Long-Term Credit Bank of Japan and then breaking ranks in the traditional No charade of propping up deadbeat borrowers. Other Japanese banks bought up LTCB’s dud loans at par to go on pretending that their drinking buddies/borrowers ran going concerns. More regulation means less bad behavior he can punish through arbitrage. Chris competes with regulators.
The past week has seen an anti-regulatory echo chamber to presage the House GOP’s latest “report” against Dodd-Frank, to be released today.
Here’s how SEC Commissioner Michael S. Piwowar described the Financial Stability Oversight Council last week:
“I thought a lot about what moniker I could use to best describe the FSOC. The Firing Squad On Capitalism. The Vast Left Wing Conspiracy to Hinder Capital Formation. The Bully Pulpit of Failed Prudential Regulators. The Dodd-Frank Politburo. The Modern-Day Star Chamber….”
http://www.sec.gov/News/Speech/Detail/Speech/1370542309109#.U8z9fI1dWnk
In “OVERHEARD” in today’s Wall Street Journal reference is made to a working paper (which I haven’t found) by Jussi Keppoy and Josef Kortez that major banks have “reduced the size of their trading books. But they haven’t cut the risks, they take. [T]hey have reduced the hedging of their banking books and increased the speculative uses of trading assets not limited by the Volcker rule. Those assets would include Treasurys.”
Why wasn’t he criticizing the likes of Jamie Dimon, Brian Moynihan, and Lloyd Blankfein for presiding over such irresponsible behavior?
It is actually a criminal enterprise. Calling their actions “irresponsible behavior”, is irresponsible.
From the post, it isn’t entirely clear as to what Chris Flowers is, as he is described as “private equity fund manager” and as a “US private equity investor specialising in financial services”, but he is very clear about one thing.
I guarantee that we will have another banking crisis.
When that happens, Capitalism should have the opportunity to finish the job it was prevented from doing in the last banking crisis, and use their effen neckties as a hangman’s noose, and put the horrible banksters out of our misery.
If it moves, tax it. If it keeps moving, regulate it. If it’s still moving, nationalize it. And if it stops moving, subsidize it.
It would be a real shame if this sort of thing was regulated or, god forbid, eliminated, wouldn’t it?
“The fact that Chris Flowers is squealing, in other words, is a very good omen indeed.”…shiver, i sure hope so or he might be warning of some godzilla margin call he can’t cover. dang Chris’s skeer me!
It was like a breath of fresh air to hear that nobody will invest their private wealth in a hedge fund for a mere 5% return. Please tell me this is true. Because “growth” is gone and there will never be a better return than 5%. Ergo all that money might find its way into much better projects and social causes. If that isn’t stability, what is? How is it these giant hedge hogs do not see profiteering as a crisis? Are they just crazy?
Regulations ? Hell, I want to see them all in irons
Oh Yves, I love you so much. Whereas my first reaction to the unbelievable gall of this putz was to think “No Fraud, No Profits,” you as usual meticulously dissected his mendacious B.S. It is so odd to me given the bailouts, ZIRP, tiny Injustice Dept. wrist slaps, (while “Place” Holder works the knob) etc., that anyone can actually think the banks are being anything but coddled and subsidized. Along the lines of calling Obama, a socialist. Thank God for you Yves, because when I am assailed with this level of b.s., my mind rebels and I want to get on plane and punch this schmuck in the nose. You, on the other hand, get out your scalpel, and dissect him alive. Well done.
I think we should take Mr. Flowers up on his offer, with the proviso to separate commercial banking from investment banking. Like the 1930s to the 1970s.
Let the rich play any game they want with their own money, speculating on social media stocks, modern art, precious metals, horse races, etc., while the rest of us keep our boring utility banking. Since their piles of lucre do no good for the rest of us anyway, if they evaporate, it will do us no harm. Let the MOTU be as unregulated as they wish, while the real people in the real economy go about our dull little productive lives.
Returning to separate banking systems would also be a step toward income equality. Without control of real assets, speculators eventually run up against the cold reality of house odds and join the ranks of the broke. Works about the same in paper trading as in casinos.
Here’s a similar article in American Banker by Paul H. Kupiec,a resident scholar at the American Enterprise Institute: http://www.americanbanker.com/bankthink/in-year-four-of-dodd-frank-over-regulation-is-getting-old-1068849-1.html
Perhaps there’s some connection?