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CommentP&M Notebook

P&M Notebook: a week of madness

It’s been, by any stretch of the imagination, a crazy week. Financial markets may have mostly snapped back from the Trump-induced panic of Tuesday night, and are now positioning for a US government stimulus of some sort. Meanwhile, there’s everything to play for on financial regulation.

Apparently ignoring issues of societal breakdown, the security of eastern Europe and catastrophic climate change, bank shares are bouncing on the prospect that president-elect Trump might ease some of the regulatory burden of the last eight years.

But the market is parsing a real mess of information, compounded, as ever, by Trump’s mix of contradiction, hyperbole and downright lies. Trump on the campaign trail hammered Hilary Clinton’s connections to Wall Street and her speeches to Goldman Sachs — but Trump as president-elect might end up appointing Jamie Dimon, chief executive and chairman of JP Morgan, as Treasury Secretary.

Dimon has said in the past he wasn’t interested in politics, but it never sounds quite convincing. He joked at the Institute of International Finance annual conference that he would love to be president, but “we torture those people”. Perhaps Treasury Secretary would be a suitable alternative. Were he on the campaign trail, he said his slogan would be “Make America fun again”.

Other ambiguities include plans to dismantle lots of Dodd-Frank — but to introduce a “21st century Glass-Steagall”. Which was, after all, the intention of Dodd-Frank.

With a Republican House and Senate, there might be enough political will to overhaul the regulatory infrastructure, and perhaps, to cut the number of overlapping regulators who oversee the US financial system. But Trump’s ascent to the Republican nomination didn’t exactly endear him to party grandees, and Republican representatives have spent so long trying simply to sabotage the legislative progress in Congress that the hard choices involved in governing might come as a shock.

It’s also not all good news for the banks. Sure, investment banks aren’t thrilled with today’s regulatory burden. But many institutions, certainly the large US firms, are already able to comply with the rules as drafted.

They’ve strained every nerve to build up their compliance departments, buttress their capital ratios, and demonstrate their stress test competence — and as a result, they’ve built a deep moat around the business of being a major investment bank. Competitors, even some of Europe’s largest banks, are struggling to get across it, and having to sink massive amounts of time and money into preparing for CCAR and structuring intermediate holding companies.

Any proposal to scrap some regulation also adds to uncertainty. Though banks dislike higher capital requirements, what they particularly object to is higher and constantly changing capital requirements. Businesses can structure their business for more or less any set of rules, and banks can happily sell themselves as offering utility-like RoEs for utility-like risks, if they must. But constantly changing rules make this impossible, and scrapping Dodd-Frank would mean a whole lot of extra uncertainty.

 Away from the US election, life goes on, and bonds carry on getting sold. But the way this is done is set to be revamped from December, when Ipreo’s pilot project to let investors submit orders directly into the book goes live.

Some commentators see this as the beginning of the end of traditional investment bank intermediation, but most of the project’s backers see it more as a technical change, that should enhance efficiency in the bookbuilding process, and straighten out some of the wrinkles in the deal execution process. They see it as a way to do more, bigger deals faster, with less donkey work for syndicate and sales. The world didn’t end when the pot system for syndication came in; it won’t end when investors submit their own orders either.

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