The recent move by the American Bankers Association to stall the implementation of a portion of the Volcker Rule relating to CDO is a welcome move for America, notes Richard X. Bove.
Richard X. Bove, Vice President Equity Research of Rafferty Capital Markets LLC points out that it is necessary for banks and their trade groups to sue the government and the regulators to demand some restraint out of an out-of-control system.
ABA urged regulators to scrap a portion of Volcker Rule
Earlier this week, the American Bankers Association urged regulators to scarp new provisions under the Volcker Rule, threatening legal action if the agencies keep the requirements in place. The ABA said in a federal court filing that it was seeking relief from a portion of the regulation that analysts, bankers and lawyers have said may force some financial institutions to dispose of certain types of investments which could result in write-downs for lenders.
Richard Bove of Rafferty Capital points out that ABA moved to stall a portion of the Volcker Rule dealing with collateralized debt obligations backed by trust-preferred securities, after bankers complained that the regulators have shown utter disregard for the costs the provision would impose on the banks. Interestingly, the initial requests for comment by the regulators didn’t indicate that this particular provision would be part of the Volcker Rule.
Recently Sterne Agee analysts pointed out that the Volcker Rule will force Zions Bancorporation to reclassify the entirely of its predominantly bank and insurance Trust-Preferred Collateralized Debt Obligation portfolio as ‘Available for Sale’ and Zions Bancorporation will record a $629 million pre-tax non-cash charge to 4Q13 earnings. This would translate into post-tax charge of $387 million.
Richard Bove: Lawsuit critically necessary
Richard Bove strongly believes that the law suit by ABA is critically necessary, though he is not sure whether the law suit will succeed or not. He points out that regulators were put in place who have understood that they can attack the banks without limit. Moreover, he believes regulators’ actions are politically driven and they understand they are ‘playing to the crowd’ not the health of the banking and / or financial system in the U.S.
Richard Bove: Impact of regulator’s actions
Richard Bove believes the regulators’ actions penalize the users of banking services by essentially making the consumer pay more for less and making money scarce for lending. Moreover, he believes the regulators’ actions would weaken the ability of the U.S. to compete in financial markets and pounding smaller banks out of business in favor of unregulated monoline financial companies.
As reported earlier, IBISWorld pointed out many opponents of the Volcker Rule question its shift of speculative activity to less-regulated hedge funds and away from heavily regulated investment banks.