Reform Bill Discourages Wall Street

Wall Street takes a sour view of the new banking bill, says James McDermott, 40, president of Keefe, Bruyette & Woods Inc., a securities firm that specializes in banks and thrifts. For one thing, even as banks cut costs by laying off workers and streamlining operations, Congress ends up imposing more costs in the form of increased regulation.

With their hands tied tighter than before, some bankers might be more likely than ever to shuck their bank charters in disgust in order to compete as nonbanks, he tells Washington bureau chief Jim McTague.

American Banker: What does Wall Street think about the new bank law? Jim McDermott: I think the Street is discouraged. Expectations were built up fairly high early in the year with the introduction of the administration's bank reform plan. I think the defeat of the original bill in its entirety suggests a certain paralysis of action.

AB: Was there a premium built into stock prices in anticipation that something good might happen? JMcD: I don't think so. This hopefulness was much more long-range in orientation rather than based on things that might have a noticeable and immediate profit impact. None of the things in the original bill - the new powers, the branching rights - were viewed as a profit panacea per se, but rather as part of a mosaic to develop a competitive banking system over the long term.

AB: But bank stock prices are down. JMcD: That has more to do with disenchantment with the overall level of the stock market. Our index of 24 money-center and regional banks shows prices up 40% to 50% [since Jan. 1]. The index [had been] up 60%.

AB: What made them go up? JMcD: The merger action was part of it. And there was a rebound in prices as bank valuations came off 1990's depressed levels.

AB: What's your opinion about buying bank stocks? JMcD: We used to take a shotgun approach to the group. Now, we have to take the rifle approach. We think the consolidation plays represent viable options to investors going into 1992. It's a ticket out of the recession for bankers who can realize alleged savings of consolidation to boost earnings rather than being dependent on volume growth.

AB: You said "alleged." Are you unconvinced? JMcD: It depends on the deal and the management. Conceptually, I think the deals do leave money on the table.

AB: What about the bill? JMcD: The lack of action reflects not only the ineptitude of Congress but [also] infighting of the financial-service interest groups. It's gridlocked the whole process of bank modernization, and in the aggregate, the nonbank sector will continue to eat away at bank market share. They have to let banks leverage their delivery systems and provide more products to level the playing field.

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