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Big Pay Off for Big Bank

Resulting in … what exactly?

12:00 AM, Aug 23, 2014 • By IRWIN M. STELZER
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Now does not seem a good time to whine about the adverse effect of regulation on bank profits, even though there is little doubt that Dodd-Frank and the tens of thousands of pages of regulations it has spawned and will spawn are making life difficult. The $40.24 billion in net income that U.S. banks earned in the past quarter was the second largest total in 23 years, according to researchers at SNL Financial, only a tad below the $40.36 billion record in the first quarter of 2013.

Nor, in the face of near-record earnings and headlines about mortgage-market abuses, money laundering, and poor control procedures, does it seem wise for the largest banks to seek relief from what the Wall Street Journal calls “a central provision” of the Dodd-Frank law. That provision, generally known as the Volcker rule, requires banks to reduce their risk by disposing of their investments, estimated to be in the range of tens of billions of dollars, in private equity and venture capital funds. Reports from Washington are that the banks’ lobbyists are seeking a seven-year delay in the implementation of this aspect of the Volcker rule. If they get the regulatory relief they seek, and if there is even a mild repeat of the recent near-meltdown in the financial system, a break-up of the big banks would be the inevitable solution to too-big-to fail.

Nor, given mounting concern, justified or not, about rising income inequality, and stagnant middle class wages, is it a propitious moment for major banks to use their rising profits to raise compensation, including bonuses, of recent college graduates to something like the $140,000 compensation experts Johnson Associates estimates, while reducing work schedules. “There’s little left to control your banker envy….Young employees can have their cake (money) and eat it too (life-style balance),” joked (?) Bloomberg Businessweek. The banks say they had to do it to meet competition for talented entry-level employees. For those of us who believe in markets that is reason enough, and surely better than the decision of Silicon Valley CEOs to form a no-poaching cartel that is forcing them to settle claims of thousands of employees whose salaries were depressed. The cartel was put together after Steve Jobs threatened to declare “war” on any company making offers to his staff.

And yet, and yet … If necessity was indeed the mother of the invention of the salary-increases, better not to whine about the pressure new regulations put on profits.

Meanwhile, the hold of the too-big-to-fail banks on the financial system is being loosened by the emergence of boutique lending institutions, peer-to-peer lending, and regional banks. No “disrupter” with the impact Uber has had on the taxi industry is in sight, but just a few years ago no one had ever heard of Uber.

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