Goldman and JPMorgan sit safely behind the walls of Dodd-Frank

Big government may be the best thing to happen to the big banks — and they know it. Do the big-government Democrats in Washington know it, too?

“More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history,” Goldman Sachs CEO Lloyd Blankfein said this week, according to the Wall Street Journal. “This is an expensive business to be in, if you don’t have the market share in scale. Consider the numerous business exits that have been announced by our peers as they reassessed their competitive positioning and relative returns.”

This was an ode to Dodd-Frank, the Wall Street Journal editorial page concluded. “Lloyd Blankfein and Elizabeth Warren find common ground,” the editorial’s online edition proclaimed.

Blankfein’s comments were probably one part spin (wooing investors), but they were also a candid admission of how the big guys benefit when government gets bigger.

Blankfein has been talking this way for a while. “We will be among the biggest beneficiaries of reform,” the CEO said on a May 2010 conference call as Dodd-Frank made its way through Congress. In the firm’s 2009 annual report, Blankfein and Goldman President Gary Cohn cheered some of Dodd-Frank’s provisions, writing: “we support measures that would require higher capital and liquidity levels, as well as the use of clearinghouses for standardized derivative transactions.”

JPMorgan CEO Jamie Dimon explained in 2013 that Dodd-Frank helped create a “bigger moat” around the megabanks. The Business Insider reported that Dimon “pointed out that while margins may come down, market share may increase due to a ‘bigger moat’” created by regulations. “In Dimon’s eyes, higher capital rules, Volcker, and [over-the-counter] derivative reforms longer-term make it more expensive and tend to make it tougher for smaller players to enter the market, effectively widening JPM’s ‘moat’.”

Dodd-Frank is indeed killing community banks, a recent study from Harvard’s Kennedy School of Government suggests. Marshall Lux of the Kennedy School found that just before and during the financial crisis, these small banks lost market share — about 6 percent total from mid-2006 through mid-2010. Then, it seems, the real threat to community banks’ emerged: Dodd-Frank. Since mid-2010, community banks have lost 12 percent of market share.

The bitter irony is that the very thing that makes community banks still valuable in an age of megabanks is the thing that makes them so vulnerable to regulation. “Community banks generally are relationship banks,” Lux writes in his study. “Their competitive advantage is a knowledge and history of their customers and a willingness to be flexible. (This is sometimes a problem, particularly in a regulatory system that reflects big bank processes, which are transactional, quantitative and dependent on standardization and mark-to-market accounting practices.)"

Regulation not only squeezes small banks, but it also heightens those “barriers to entry,” for which Blankfein is so grateful. About 100 new banks entered the economy every year between 1990 and the financial crisis in 2008, according to a December study by two members of the Federal Reserve Board. From 2009 through 2013, only about seven new banks have been formed — total.

This stagnation has persisted even as the financial sector has rebounded beautifully from the recession it caused. Banks’ shares are up 60.4 percent in the past two years, as measured by the KBW bank index — that’s 10 percent more growth than the S&P 500, which is up 53.9 percent in the same period.

The Fed members who wrote the study attribute most of the decline to market forces, not regulatory forces. But even they find that there would have been dozens of new banks every year — more than 100 in aggregate — if not for regulations keeping them out.

“There are economies of scale when dealing with regulation,” said Lux’s co-author Robert Greene.

Beyond barriers to entry, new regulation protects the giants because politics and lobbying are home games for the big guys. Goldman is famously close with Washington, and the revolving door between Goldman and its regulators is well-trafficked. More regulation typically increases the value of lobbyists and lawyers, particularly the lobbyists and lawyers who used to be lawmakers and regulators. Wauwatosa Community Bank can’t afford to hire many former members of the House Financial Services Committee.

Goldman and JPMorgan have complained about many aspects of Dodd-Frank and worked to weaken many provisions. But they realize that the policies that cramp their profits also kill their competitors. That's a win-lose for the big guys. It's a lose-lose for the economy.

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