Expect More Bank Regulation (Morningstar)

Pat Dorsey: Hi1 I’m Pat Dorsey, Director of Equity Research at Morningstar. Will, next to the healthcare system our financial systems. Our banks are one of the most heavily regulated industry out there so thinks is were thinking about what a new in administration and a new comers might been for increase or decrease to those regulation in our banking system. I have with me Senior Analyst to may banking team Jaime Peters. Thanks for joining me Jaime. Jaime Peters: Glad to be here. Pat Dorsey: So, we’ve obviously seen government participation in our banking system increase over the past few month sorts we’re thinking about sort of what may continue and what may change, let’s start with Tarp. Jaime Peters: Here we have the first half go through the Bush administration. Basically the second half is going to go the new Obama administration. And that’s going to be very interesting we’ve already done direct capital injections into the banks. And except of a few restriction associated with it. But we’ve a lot of grumbling that are associated with that. And the second half is probably going with more restrictions. Possibly more on dividends, definitely more on the month you’re going to pay the senior people at a bank. And potentially even this is our big fair, government directed lending. Pat Dorsey: Do you think it’s a real possibility that you might actually have you know lending in a non-economic sense you know at the behest of the feeds? Jaime Peters: I think that we’ve seen a little bit of evidence of the government in giving involve with like the second city group bill out into more of the day did the operation to know more terms and strategic thinking. They have in gotten into individual lending yet, are we really hope they won’t. However, the government has an fairly strong arm and as a result your seeing announce especially needs quarterly earnings about how much people are done because they want to try to stop it and it seems like we’re not the only one to worry about, thank management it is as well. Pat Dorsey: And aside from Tarp what changes do you see for incoming administration, you know? Jaime Peters: Definitely more regulation, we are going to a systemic financial crisis and a large part of it is a result of several years of very bad lounge of the government. You know the banks made and that the government is now balling them out of. As result we’re going to see a lot more strengthening of the regulators. Especially if you’re big, Ben Bernakie earlier this week suggested that if you are too big to fail you better expect to see the regulators on your doorstep seen. And increase scrutiny and potentially even a little bit maybe of limitations that you might have because you can’t present a systemic feeling in the market without the government having to coming and bail you out and they don’t want to be in that business long term. Pat Dorsey: Well, this is certainly case we made that you know perhaps regulation is a little bit lax especially in some of the larger banks over the past several years. But there are some things that are been on the table little bit recently that it’s in going too far such as the crime down haven’t been discuss. Jaime Peters: Exactly, actually the component of CEO, city group came out and endorses the idea that bankruptcy judge should have the ability to modify loan. That’s the cram down we’re talking about, where they could either change the principal balance or the interest rates on during a bankruptcy case. That is a very bad for the banks because if the banks were the ones they’re going to taking the losses on those loans. And there they’re the ones to you know have experience looking at it and say okay this is how much your probably might be able to afford and redoing modification. No modification don’t have a great history of success either so, if your having a activist judge or somebody trying to do a lot of cram downs that’s probably going to be a very bad ranks. We worry that Bank of America will have similar pressure to try to endorse the plan now. Not sure if they will or not but we think with the latest tarp infusion that you know they are going to see increase pressure. Pat Dorsey: Aside from cram downs, tarp you know possible kind of a not directed lending but more in government sort of you know encouragement of lending. Any other brilliant issues that we should have on real screens? Jaime Peters: It is going to be general overview; we have the FTIC who up to there amount in deposit that they are going to ensure. They are also kind of backing government bank as you debt right now. It’s going to be very hard for them to get out of that business I think and although Obama’s team probably once to strengthen regulation and in also back away from the tarp eventually. That’s going to be a major challenge his going to face, because the market is going to start getting dependent on that type of guarantee. Pat Dorsey: And to that will be risks and once the economy recovers you know whenever that is sort of pulling back maybe more difficult to may thank. Jaime Peters: I agree. Pat Dorsey: Thanks for joining me Jaime; I’m Pat Dorsey and thanks for watching.