ABA Banking Journal - November 2008 - (Page 16)

briefing tions among those 2,000, he predicts. “The competitive environment never grows less competitive next year,” says Dunne. “It will still be very brisk.” He expects that financial institutions specialists will migrate from the large firms mentioned earlier, and find new posts. One advantage he sees for firms like Sandler O’Neill is a preference for public equity, rather than private equity. Even though regulators have eased certain restrictions on private equity minority investments in bank holding companies, Dunne doubts that private equity deals for entire institutions will dominate. “I think that the regulators would really prefer that well-capitalized, well-known institutions acquire other institutions,” says Dunne. when a bank undergoes an ownership change, tax code limits on deductions arising from loan losses and bad debts will not be applied to the acquiring organization. Thus, if a bank is acquired and sells off a portfolio at a loss, or is taken over with bad debt, the acquirer will be able to deduct the losses or bad debt against income. There will be additional help for banks raising large amounts of capital, through this notice, as well. (And this comes on top of another recent IRS shift, in Notice 2008-78, relating to capital-raising plans. At press time ABA was pursuing changes in related accounting requirements.) The shift seen in Notice 2008-03 “makes the M&A business a much stronger reality sooner,” says Dunne, “because you’ll see strong companies acquiring weaker companies, because they’ll be able to get a lot of favorable tax treatment, much more than they would have been able to get prior to the change.”BJ Shifts in investment banking Many institutions that seek more capital will tap the talents of investment banks. Investment banking has seen its own share of trouble and change in the current crisis. Lehman Brothers filed for bankruptcy in September, Bear Stearns became part of JP Morgan Chase last spring, Merrill Lynch became part of Bank of America, Goldman Sachs and Morgan Stanley converted themselves into bank holding companies in late September. For its part, Sandler O’Neill and its rival, Keefe, Bruyette & Woods, continue as investment banks and still concentrate on financial services companies. Dunne says that while his firm intends to go after every bit of the banking industry’s capital building business that it can, he has no illusions that the misfortunes of the big houses will bring much long-term competitive advantage for his firm. CAPITAL MARKETS OBSERVER Tax law change supports M&A A factor favoring his thinking, says Dunne, is an early October action taken by the Internal Revenue Service. In Notice 2008-83, IRS announced that Back to the future? W hen JPMorgan Chase acquired Bear Stearns in March, 2008, an organization was created reminiscent of American banks of the 1920s. When Bank of America acquired Merrill Lynch, the commercial bank’s capital and deposits were used to stabilize the investment bank’s balance sheet deterioration that had resulted from excessive investment in bad securities. To many observers, the proximity of bank deposits and the defaulting securities of investment banks was an uncomfortable reminder of the abusive conditions that led to passage of the GlassSteagall Act in 1933. Of course, there are many differences between market conditions then and now. The Federal Deposit Insurance Corporation guarantees substantial retail deposits (temporarily increased to even greater coverage). The Securities and Exchange Commission protects against securities market abuses. The advance of telecommunications capabilities allows investors and regulators to monitor market conditions more efficiently than at any time in history. On the other hand, several developments in technology are not at all constructive, at least from the bank customers’ and bank investors’ perspective. The methodology used to compute capital adequacy of financial institutions has become so complex that individual investors cannot reverse-engineer the reported capital ratios using public disclosures. Technology has also made it possible to create a lattice of interconnected counterparty relationships that cannot be monitored by anyone outside the network. This complexity of financial assets is not unique to our market system. In Russia, a leading mutual fund manager recently told a reporter that he would not invest in any business where the assets cannot be counted in physical terms. Are our more advanced Western financial markets essentially at the same stage of development as emerging markets such as Russia? The collapse of Western financial markets in the 1930s was traced to the exploitation of everyday depositors by devious investment bankers. While today’s financial crisis may be traced to the complexity in securitization products, the mass media seems to have adopted a similar refrain as the populist press of the Great Depression. Greed and corruption on Wall Street, according to newspapers, as well as politicians, has led to a situation where the government must rescue commercial and investment banks. It is an inescapable irony that the rescue often results only after combining the two business models, and that the law that undid the Glass-Steagall restrictions—the 1999 Gramm-Leach-Bliley Act—made such rescues possible. From a technology perspective, the times are certainly different. But people have not changed, nor has their fear and distrust of complex financial institutions. Unless some device can be found to salvage respective financial institutions, it seems inevitable that the deregulatory gains of the last generation will soon be replaced by the heavier hand of the federal overseer. And, given the interconnectivity of global market systems, those regulatory reform initiatives may be expected to encompass all developed markets, not just those on this side of the Atlantic and Pacific. —Ed Blount, Executive Director, Center for the Study of Financial Market Evolution 16 NOVEMBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.kbw.com http://www.csfme.org http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - November 2008

ABA Banking Journal - November 2008 Contents Editor's Column Banking 2.0: Credit, Banking's Essence, Set for Rethinking Snapshot: The Few, the Proud, the Banks that Can Raise Capital Will Strong and Simple Banks Inherit the Business? Back to the Future ABA Resources ABA Chairman's Position Farm Lenders Must Take Care When Lending in Indian Country Pass the Aspirin Into the Breach Adventures Across A Century What the Future Holds, Post Crisis Paul Volcker: A Financial Legend Still Speaks Strong Ed Yingling: Weathering the Storm Dick Kovacevich: "Boring" Banking to Dynamic Financial Services Jim Culberson: Community Banking: What has Changed and What Shouldn't Walter Shipley: How a Chemical Reaction Helped to Mold Today's JPMorgan Chase William Isaac: Challenges and Opportunities Ahead for Banks A Hundred Years from Our Pages Eight Tech Innovations that Brought Banks into 21st Century Bank Cherokee: Third Generaton Marks 100th Year The First National Bank of Altavista: Railroad Gave Birth to a Town, a Hope Chest, and a Bank Rosedales Federal Savings and Loan Association: How a Friendly Game of Cards Turned into a 100-Year Mutual New Washington State Bank: Cooking Up the Next 100 Years Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2008

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