JPMorgan Chase & Co., Citigroup Inc. and Morgan Stanley were among lenders arguing that the limit was poorly constructed, overstated risk and would restrain the economy. It could cut U.S. economic growth and destroy 300,000 jobs, Goldman Sachs Group Inc. warned last year.
“The fact that they find counterparty exposure limits so onerous shows you how interconnected they are,” said Anat Admati, a Stanford University finance professor and member of the Federal Deposit Insurance Corp.’s Systemic Resolution Advisory Committee.
Bankers and their lobbyists have made similar arguments attacking higher capital requirements and restrictions on trading. They say too much regulation harms average Americans along with Wall Street.
“You obviously don’t want crises, but if you stifle innovation, you might not expand the pie,” said John Neary, who ran U.S. equities trading at Morgan Stanley and left the bank this year. “It’s bad for U.S. growth any time you have highly complex regulation for an uncertain payoff.”
Losing Leverage
For all their groaning, banks have taken steps to improve their defenses. Morgan Stanley, whose assets at the end of 2007 were 38 times its equity, is an example. It sold a preferred stake to a Japanese bank after Lehman’s bankruptcy, raised $6.9 billion in 2009 and curtailed dividends and share buybacks. Leverage fell to 14 times equity as of June.
Morgan Stanley, the sixth-largest U.S. bank, has doubled equity and customer deposits to cut reliance on short-term borrowing, which accounted for more than half of its funding in 2008, leaving it helpless when markets froze. Gorman reshaped the company’s business model, buying Smith Barney from Citigroup to build the world’s largest wealth-management firm.
The bank also rewrote contracts with hedge funds to clarify how much cash they can pull out quickly. The goal is to buy the bank more time to react if markets plunge. Morgan Stanley now has enough cash and easy-to-sell assets to survive a year of dysfunctional markets, according to Porat.
“The most important thing is addressing and eradicating the notion of a weekend event,” Porat said, referring to the short time regulators and other banks had to react to Lehman.
New Crisis