Wall Street Faces Capital Shortfalls Of As Much As $250 Billion From Banking Bill

Posted By on April 29, 2010

By Dawn Kopecki

April 29 (Bloomberg) — JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among U.S. investment banks that may be forced to raise an additional $250 billion in capital, cut executive pay and divest some of their most lucrative assets under a bill on the U.S. Senate floor today, analysts say.

A two-page provision tucked inside the 1,558-page bill on April 21 would change the structure of about 40 of the largest U.S. investment banks by forcing them to spin off their derivatives businesses. Another measure added this month would require derivatives dealers to maintain a “fiduciary duty” to municipal, pension and retirement plan investors, which some analysts say would wipe out that market altogether.

“The bill has moved so far left so hard, that it’s caught everybody by surprise,” said FBR Capital Markets analyst Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia. He said the bill was a “big, big hot button issue with voters.” “The Street now is just realizing that all of this stuff is getting in the bill.”

The spin-off provision would result in a capital deficit of $85 billion at eight of the largest global investment banks, analysts led by Kian Abouhossein at JPMorgan Securities in London estimated in a research note today. It prohibits swaps dealers from taking any federal assistance, including access to the Federal Reserve discount window or deposit insurance from the Federal Deposit Insurance Corp.

At a minimum, the measure would require banks to spin out their derivatives business into a separately capitalized affiliate, analysts say. It was actually designed to force about 40 of the largest U.S. swaps dealers that also have federally insured banks to divest all swaps activities, said Courtney Rowe, a spokeswoman for bill sponsor Senator Blanche Lincoln, who sponsored the bill.

“This would be a sweeping change to our financial system and it was introduced 11 days ago without a hearing, without a study on its impact,” said Luke Zubrod of Pennsylvania-based Chatham Financial Corp., which advises more than 1,000 firms on derivatives.


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