The Sky is Falling: Doomsday Regulation Scenario

The FT has an ominous article today quoting research done by JPMorgan Chase (a completely disinterested party, by the way) on what will happen to banks if all the regulations currently being considered are imposed on banks.

It's actually quite scary.  The projected average return on equity would drop to 5.4% from a projected 13.3%.  This could cause untold pain on shareholders and management.  And no doubt could have a very bad effect on the functioning of the economy because banks wouldn't engage in the sort of behavior that has given us our recent prosperity.

Or on the other hand banks could simply raise their prices - 33% we are warned - and the poor consumer would be hurt.  And you will notice that is really the focus of JPM's study.  They are warning against over regulation not for their own selfish purposes but to protect the innocent consumer.  I'd like to stop here for an observation.  You know if more of us would show just a bit of the concern for our fellow men that JPM displays in this research report the world would be a much much nicer place.

There's only one rub with this dire scenario:  the bit about "if all the regulations ... are implemented".

If a bright person at Motors Liquidation Corporation discovers a way to make a highly energy efficient  battery to power an electric car, MLC's stock will increase at least 20x.

Of course,  the probability of either of these happening is not high.  

The purpose of studies like these is to oppose attempts to impose greater regulations on banks by painting "doomsday" scenarios in a future that will never come to pass.  In the final analysis I suspect the  financial "reform" in the USA though perhaps at least or even more "radical" than the current health care bill in the Congress will prove to be "small beer".  Though one cannot discount that "death panels" for bankers may be just around the corner.

As usual, Suq Al Mal was way ahead of the market in identifying this manifest danger  See  SAM's earlier post - "Mr. Obama's War".  Though I'd note this post may not be suitable for the faint of heart.  It is rather graphic.

Analyst Disclosure:  The author of this blog holds a significant block of shares in a single "money center" US bank holding corporation. Suq Al Mal, however, does not trade in the shares of any company mentioned in this report  or any banking corporation or provide any investment banking or other advisory services to them.