If the proposed new government regulations on derivatives remains in the financial reform bill passed on Thursday, large financial institutions like JP Morgan (NYSE:JPM), Goldman (NYSE:GS), and Morgan Stanley (NYSE:MS) could have earnings demolished by up to 20 percent, according to the banks.
Assuming that’s close to being accurate, it’s going to be extremely challenging for banks to generate profits, as a number of other revenue and profit streams have been eliminated from them already by new regulations, especially connected to former banking fees and credit card fees.
Adding it all together, it is a strong attack on the financial health of the companies, in the name of, well, financial health of the companies.
The problem with the derivatives legislation is it treats all derivatives the same, and some are more risky than others, while some are necessary for hedging and risk protection, which if eliminated, could have the opposite of the desired regulations: creating more risk.
Obviously this is politically motivated, but it’s questionable as to whether or not the lawmakers actually want the legislation to remain intact as passed, or only want to be able to point out they voted for it in future elections.
Either way, this is interesting times for the banking industry, and politicians do need to be careful they don’t run with public sentiment too much and cause more damage from the new rules than the practices of the industry which led them to where we are today.