The Senate just passed The Economic Growth, Regulatory Relief, and Consumer Protection Act, which, for all intents and purposes, is a bank deregulation bill.
Of course, this comes on the heels of the U.S. House of Representatives' Systemic Risk Designation Improvement Act, a like-minded bill passed on Dec. 19, 2017.
Next, as we all remember from high school civics, the two chambers will reconcile their versions and deliver legislation to the president for signing, which he will almost certainly do, with great relish.
It's no surprise that Congress is pushing bank deregulation. After all, it's a midterm election year, and both parties want bank and financial services money directed their way.
The Senate's 67-31 vote, with 16 Democrats siding with the Republican majority, proves it's a bipartisan push, despite some compulsory, loud Democratic opposition.
Nor will it come as any surprise that after blowing huge holes in the post-crisis-era Dodd-Frank wall that protects consumers, the economy, and taxpayers from bad bank behavior, more rules and regulations will be whittled away soon.
That's going to be great for big banks and big financial services companies... for a while.
It's not hard to envision them coming up with new and interesting ways - and some old "classic" ways - to leverage up their balance sheets in pursuit of profits and blow themselves up again.
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Look, I'm all for growth. I'm all for capitalism. But I'm not for putting the entire economy at hazard... all over again.
That's what's wrong with what Congress is doing. I can show them what they should be doing to fix this problem once and for all.
And I can show you how to make some extra cash on the upcoming "bubble-and-bust" this is going to create...
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Two Marquee Bills, One Essential Purpose
The House's bill seeks to repeal the $50 billion in assets threshold imposed under Dodd-Frank, above which banks are labeled "systemically important financial institutions" (SIFIs) and subject to tougher rules and regulations, including stress tests.
The bill reduces the number of so-called SIFIs from 38 to eight, even though the 30 institutions it wants to let fly under a higher radar screen, combined, hold $5.3 trillion in assets - 25% of the total assets in the banking sector.
The House bill additionally sets high hurdles for regulators to reapply tough regulations to the 30 deregulated banks.
The Senate bill raises the level of assets to qualify as a SIFI to $250 billion. Institutions in the $100 to $250 billion in assets range would no longer be subject to stress tests, unless the U.S. Federal Reserve orders them to comply, and would enjoy greater regulatory freedoms.
What's an absolute crock about both bills is they're being pushed as "community bank relief" bills.
Community banks don't have $100 billion in assets. None have ever come close to $50 billion in assets.
The FDIC definition of a community bank used to be a bank with less than $1 billion in assets, but, according to the 2014 FDIC Community Bank Study, "more recently, a $10 billion size limit has come to be used more frequently to define community banks."
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The problem with deregulating big banks and financial services companies, which are essentially shadow banks, is they compete against each other and constantly need to increase the scale of everything they do, to grow revenue and profits to be able to compete.
With increasing scale a necessity and banks given leeway to get bigger while lightening their regulatory burdens, it's just a matter of time before their drive for revenue and profits manifests outsized schemes to meet financial goals.
I don't need to tell you - it's happened before.
TBTF Will Get Bigger and More Dangerous
The seeds of growth have already been sown, as lower regulatory pressures and higher interest rates in the years ahead unlock what some expect to be "a new era of high banking returns and growth."
But in a March 2018 McKinsey & Co. article titled "For U.S. Banks: A Time for Transformation," authors Danilo Gargiulo, Tolga Oguz, and Victor Pinto point out that current, "market-to-book multiples imply fundamentals - returns on equity (ROE) and revenue growth - that banks have not achieved in over a decade, raising questions about banks' ability to deliver on such high expectations."
The authors say, "valuations imply either a 14 percent ROE (at current growth levels of 2 percent) - a level not reached by banks since before the financial crisis (and a 28 percent increase from the 11 percent average of the last three years) - or a growth rate of more than three times the historical average."
That expected growth might be driven by overreaching, overleveraging, and greater risk-taking. The McKinsey article points out the difficulty making money in the future will be "complicated by three trends that are radically changing the banking landscape: low economic growth, economies of scale through digitization, and the threat of disintermediation."
What this means is only the biggest banks and financial institutions that Congress wants to free up from "overburdensome regulations" will survive and strive to thrive in the new, bigger-is-better banking and financial services universe.
Look, Dodd-Frank was never meant to be a forever cure to the "Too-Big-to-Fail" dilemma. It was only ever a kludge - a cobbled together, unwieldy stop-gap placeholder constructed in such a way it could eventually be sliced and diced into oblivion, the same way Glass-Steagall was eviscerated and eventually eliminated.
TBTF is not going away - it's only going to get worse.
Here's How to Fix It... and How to Profit
There's only one way to end the outsized influence of big banks on lawmakers and their ability to oppress consumers, the economy, and taxpayers. That's to "utilitize" banks. Make capital requirements and reserve requirements 25%, and prohibit depository institutions from trading.
Who says banking can't be safe?
We were better off under Glass-Steagall, which separated commercial banks from investment banks. We should re-erect some of those rules and regulations, as well as the separation of capital raising and risk-taking, loan-making functions.
As for new disintermediators, they need to separate banking-like services from other ecosystem services and adhere to strict capital requirements themselves.
Of course, none of that's going to happen. So now's the time to play bank consolidation.
It's simple: To scale up, regional banks are going to buy smaller banks and combine with other regionals to form "super regionals." Successful community banks with scalable branch networks and smart digitization plans will be sought out and bought up. There'll be plenty of money to be made in these two sectors.
And as the big banks seek greater economies of scale to reap greater profits, they'll come up with more products and schemes and that will be great... for a while.
One really easy way to cash in while the bubble expands would be the Vanguard Financials ETF (NYSE Arca: VFH), while ProShares Short Financials ETF (NYSE Arca: SEF) is a decent way to rake it in when bank stocks plunge after the bubble burst.
And - if you're really aggressive - a leveraged "short" ETF that provides three times the gains on the S&P 500 financials' decline, like ProShares UltraPro Short Financial Select Sector ETF (NYSE Arca: FINZ), will skyrocket while banks hit the floor. Just keep in mind that an "ultra-short" position should be for the short term; watch it closely.
Now, those are smart moves for boom, bubble, and bust situations, but I'm working on something big.
Really big. It could be embarrassingly profitable.
You see, I made a "hit list" of wild, up-and-down retail stocks - some dinosaurs, others not so much -to recommend to my Zenith Trading Circle readers to play the "Retail Apocalypse."
We did pretty well there.
Just to give you an idea of how powerful targeted plays can be, last month, half of one of the recommendations closed out for 1,156% returns, while the second half closed for 1,138% the next day. It doesn't really matter what the broad markets do.
So right now, I'm working on a trigger list of the financials I believe are merger candidates and buyout prospects. You better believe I'll be cheerleading (all the way to the bank) the big schemes that will inflate the next gigantic bubble.
Why? Because there's always a ton of money to be made when bubbles are inflated.
And of course, there's even more to be made when they pop.
Cashing In When Stocks Soar, Cleaning Up When They Plunge
Like I said, I like recommending plays with the potential to make money no matter where the broad markets go - up or down.
These moves are crushing the markets, too. Case in point: Our closed positions in 2018 - I'm talking winners and losers - returned whopping average 74.28% altogether... while the S&P 500 has declined 1.22% year to date. I'm giving my readers the chance to learn how to cash in fast and cash in big on the market's best and worst stocks. It's not hard to do, either. Click here to listen to what I'm about to tell you...
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.