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 âfiduciary dutyâ to municipal, pension and retirement plan investors, which some analysts say would wipe out that market altogether.
âThe bill has moved so far left so hard, that itâs caught everybody by surprise,â said FBR Capital Markets analyst Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia. He said the bill was a âbig, big hot button issue with voters.â âThe Street now is just realizing that all of this stuff is getting in the bill.â
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.
Spinning out Derivatives
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.
âThis 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,â said Luke Zubrod of Pennsylvania-based Chatham Financial Corp., which advises more than 1,000 firms on derivatives.
If passed, analysts say the provision would drive business to foreign broker dealers that donât take deposits in the U.S., such as Societe Generale, Franceâs No. 2 bank by market value. The Securities Industry and Financial Markets Association, which represents Citigroup Inc., Bank of America and other large derivatives dealers, estimates the provision would require as much as $250 billion in new capital.
âWe continue to believe that the proposed regulatory changes would have a significant impact on global return on equities, declining from 19 percent pre-regulation to 12 percent,â Abouhossein wrote. âGiven the political pressure in various geographies, we believe investment bank compensation reduction would be a key driverâ to boost profitability.
