Wall Street Banks Would Love President Elizabeth Warren
(Bloomberg Opinion) -- Surprisingly for someone who made her name in part by criticizing the practices of Wall Street, Senator Elizabeth Warren is slowly winning the respect of the industry. Tech billionaire Peter Thiel fears a Warren administration, and it would most likely take on certain players in finance – private equity and hedge funds, CEOs, and the very wealthiest Americans. On Thursday she announced her plans to rein in private equity. But for banks themselves, Warren would make the best president of the 2020 field.
A decade after the financial crisis, banks find themselves relatively boring companies, a shell of their pre-crisis selves. Yet with that more subdued profile has come some benefits. They've become reliably profitable without the level of risk-taking and leverage that was a hallmark of the old days. They've now had a decade to absorb the additional regulation and scrutiny that came in the wake of the crisis. They've become experts in managing the annual stress tests dictated by the Federal Reserve, and are returning tens of billions of dollars to shareholders annually in the form of buybacks and dividends. They were one of the biggest beneficiaries of the Tax Cuts and Jobs Act, with the slashing of the corporate tax rate.
The typical bank in 2019 runs a boring operation, managing through the reality of subdued credit demand and low interest rates, and returns nearly all its profits to shareholders. Investors at the moment deem that worthy of low valuations reflecting the level of interest rates and lack of credit growth.
The changes that Warren envisions would largely help banks. Her overarching economic goal is strengthening the middle class. Any policy that would benefit middle-class workers, increase the supply of housing or provide would-be homeowners with down-payment assistance would flow through to the banks in the form of increased consumer credit demand and housing activity.
The senator’s idea to more actively manage the dollar to benefit American workers and firms would have similar benefits. While the Federal Reserve doesn't like to be in the currency management business, Warren could appoint nominees to the Fed who feel differently – as President Donald Trump has advocated. A Fed that held interest rates "artificially low" would probably weaken the dollar, which all else equal should lead to higher inflation in the U.S. Higher inflation, in turn, might result in long-term interest rates rising. Lower short-term interest rates and higher long-term interest rates would result in a steeper yield curve, which tends to be beneficial to bank profits in the form of higher net interest margins.
Warren's call to break up large tech companies would be indirectly good for banks as well. We've seen in recent days how frosty a reception Facebook's Libra has gotten on Capitol Hill. While it's doubtful whether a Warren administration would actually be able to follow through on breaking up large tech companies, it might be more effective in preventing them from launching new products that seek to disrupt the financial industry. In that world banks, may find their competitive position strengthened by an activist government preventing the adoption of new unregulated financial products.
Investors initially thought a Trump administration would be great for banks, with financial stocks outperforming the broader market significantly in the weeks following the 2016 election. They have since changed their mind, with bank stocks giving back all of that outperformance. While the Tax Cuts and Jobs Act did lead to an increase in after-tax profit margins for the banks, because tax reform primarily benefited investors and the wealthy who didn't need any additional credit, bank stock investors have been more focused on the muted prospects for growth and shrinking net interest margins as interest rates have declined.
Based on Warren’s campaign positions, her approach would be different –more focused on improving the housing market and the economic fortunes of Americans who aren’t wealthy, financing those plans by taxing the Americans who don't have much need for additional credit.
Big tech companies and the wealthiest Americans may have cause for concern in a Warren administration, but bank investors shouldn't.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.
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