The new tailwinds of regulations and its potential impact

Doug Horn

The current administration wants to move forward with changes in the regulations governing many of the country’s financial institutions, as stated by President Obama Thursday of last week. While I believe anything can be improved, I also believe something as delicate as our country’s financial system requires a soft-touch in order to avoid unexpected negative consequences.

Before moving forward, I understand this is a hot topic with many different sides and beliefs, and it can be filled with a great deal of emotions. There are individuals and professionals that believe it would have been better had the government let the financial institutions fail rather than injecting cash into the banking system. Others believe not enough was done, and that is why unemployment is still so high. Add to this the record profits being reported by some of the institutions, and the cries to regulate and tax them grows in volume.

Clearly I am not in the “inner circle” of Washington and thus my comments are my personal beliefs, and in some cases, speculation; however, they may provide perspective into some of the actions being proposed and taken. As we all know, it is easier to pass popular legislation, and it seems the administration believes the points presented last week is what the country wants.

The objectives I believe they are seeking are: 1.) limit the risk banks can take, 2.) avoid a single institution from becoming a systemic risk to the U.S. economy, 3.) recover through taxes more of the funds not recovered during the past crisis, and 4.) limit the size banks can become. While these objectives are sound, the announcement by President Obama came without details, dates, how these objectives will be implemented, and without significant warning. This led to an immediate selloff in the markets during the announcement and continued weakness on Friday.

While it may be popular to beat up on the banks and Wall Street, doing so during a fragile recovery could stop the market’s recovery. Like so many complex issues, a tug here could result in a tear in another area. Part of what is being proposed is a $90 billion tax on the largest financial institutions to recover part of the $700 billion in tarp funds not repaid. Which institutions will be in the group of the “largest” and be taxed is not known yet, and how the economy will be protected is unclear. The steps proposed though do not make sense to me.

First, to be taxed, the business obviously survived the recession and thus may be a better run organization than those that failed and those not paying the government back. Hence, the reward for getting help and paying it back for the largest institutions will be a new tax! Next, these businesses are publically owned and the owners (which are you, me, and the rest of us in the U.S. since most of us either own shares directly in some of these banks or own shares in a mutual fund in our retirement which owns shares in the bank) require a satisfactory return on their investment. As expenses go up such as taxes, businesses increase fees or other revenue sources, so profits are maintained. So when the largest institutions are paying the new tax, the millions of customers will be helping the banks pay this tax by earning lower interest rates or paying higher banking fees. Individuals are paying an ever increasing amount of taxes through what they do not see than what they see on their income tax return (ie: higher prices on tires because of an excise tax, possibly higher fees at banks because of a tax the bank has to pay, etc.).

While it may be popular to tax and regulate these institutions, we may be very surprised by the unexpected out comes should this legislation move forward. Regardless of the anticipation by the authors of the new laws, it seems the target of the laws often have better resources and take steps to avoid the law’s impact. While we have seen banks consolidating for years creating what are now institutions thought to be too big, we may see a move to downsize in this industry. While this may not seem harmful, it may have side effects such as reduction in the U.S. financial leadership in the world. There are hundreds of companies that are huge, such as GE which is valued around $173 billion. When GE needs to borrow cash, where will it go if all of the large banks have downsized to avoid additional regulations and taxes? This may also have an impact of the growth of our economy.

While a recovery was expected to continue during 2010, it will be advantageous to stay abreast of new legislation and the potential impact it may have on the economy and the markets.

For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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