Dividends and House Financial Services Committee on Banking Regulation – Review of past 10 years

On April 10, the House Financial Services Committee met and you can watch the hearing on cspan. Look under Congress and similar to You Tube you can watch – learn some things and be entertained depending on your politics. Since the midterms the Democrats control the House of Representatives and it is reflected in the make up of the committees and the questions to be asked of guests. Prior to the midterms, the Republicans were very easy on guests they liked, now the reverse is true. Democrats tend to be harder on those they think have picked up more than their fair share of rewards.

10 years ago, the financials system including banks around the world were in dire trouble because they owned trillions of dollars of mortgage backed securities which had little value, prior to the collapse all the players were making lots of money from the system, then prices fell and the financial system collapsed, often the CEOs and Boards did not know or understand the risks they had. The Dodd-Frank Bill has passed to ensure banks understood the risks and had capital, better yet had excessive capital and decreased the ability of the banks to take on leverage and risk. During the mortgage backed crisis, some banks were leveraged up to 30 to 1, which is great for winning bets but not good when the market collapsed.

The House Committee brought in 7 CEOs of the largest financial instiutions in the US, it turned out for 5 hours to question and reflect about the past 10 years. The CEOs were from Citibank, JPMorgan Chase, Morgan Stanley, Bank of America, State Street, Bank of New York Mellon, and Goldman Sachs. Everyday trillions of dollars move through the banks and they play a large role in ensuring a quality banking system.

The good news is since the 10 years, all the financial instutions are profitable, have sufficient capital, made their businesses leaner, and have a great understanding of the risks they manage and take on a daily bais. All the banks believe if and when there is a downturn in the economy, they will not need government intervention to help them.

The hearings dealt with the big picture items – what keeps you up at night or what concerns you now? The answer included cyber crime, unregulated shadow banking, education loans and auto loans and the normal everyday economy.

The House representatives could ask any type of question they wanted to, from the non bank to underbank people; pay structures, stock buybacks, fees – if you are charged them they are a pain but represent less than 2% of the bank’s total income; the fines they were charged over the past 10 years etc.

All the questions were important because people see banking differently depending on your perspective, as access to capital is one of the important elements in how the economy can and will function.

Linking to dividend paying stocks, invariably some of the companies will have a relationship with one of the big banks. They are important to the on going normal operations of the country, but none are perfect. They have made mistakes, it is better when the companies recognize them and fix it, rather the regulators fining them and forcing them to do better. Two of the themes one could easily take is if cyber is a big concern and the banks are paying hundreds of millions of dollars to protect themselves, a cyber company should be in your portfolio; also the banks are doing very well and making healthy profits – it would be good to own a bank or two in your portfolio.

There are more questions than answers, till the next time –¬† to raising questions.

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