Bank shares dive as Obama starts 'War on Wall Street'

Hugo Duncan
22 Jan 2010

Banking shares across Europe tumbled today as Barack Obama's declaration of war on Wall Street spooked investors.

Barclays and Royal Bank of Scotland were among the biggest losers in London, while Société Générale, UBS, BNP Paribas and Deutsche Bank fell on the continent.

The FTSE 100 index was down 78.26 points to 5256.84 after dropping more than 85 points last night.

It came amid fears that the President's proposals will hit European bank earnings in the US and could be mirrored on this side of the Atlantic.

Obama called for banks to be banned from betting on markets with their own money — known as proprietary trading — and running hedge funds and private equity groups.

Alistair Darling, the Chancellor, distanced himself from the plans, but Shadow Chancellor George Osborne suggested that the UK could follow suit if the Conservatives win this year's general election.

Barclays shares fell 24p to 259p and RBS was down 2.92p to 32.4p on speculation that the two banks could be forced to split their traditional retail operations from their investment banking arms. Analysts warned that this would leave them vulnerable to takeovers by European rivals if less draconian measures are taken on the continent.

Both Barclays and RBS said they had little or no exposure to hedge funds or private equity and insisted they were not involved in proprietary trading.

Banking analyst James Hamilton, of Numis Securities in London, said: “Banks have constantly told the markets they have little to do with prop' trading but that is a bare-faced lie.”

Shares in interdealer broker Icap and London Stock Exchange also fell on the prospect of a loss in trading volume and revenue if prop trading is banned.

Icap was down 32.1p to 393.6p and LSE dropped 35p to 659.5p.

City analysts said there was little detail in the Obama proposals and that it was hard to tell what impact they would have on UK banks.

Simon Maughan of MF Global said: “It looks like regulation by the mob. How serious the reforms are going to be we might take with a pinch of salt, but the risk is that we now have a shadow hanging over us. Sentiment will continue to be negative.”

He also said draconian regulation could damage the economy if banks stop lending to households and businesses.

“We want banks to lend to drive the recovery, but if you put enough regulatory clouds over them they will not lend,” said Mr Maughan. “They will say the future is too uncertain to lend.”

Alastair Ryan of UBS said: “There is a lot of uncertainty about how far-reaching potential reforms turn out to be and what they mean for the structural returns of the large banks.”

Daniel Davies of Credit Suisse claimed the proposals were “a long way from becoming law” but should be taken seriously, particularly in the UK given Mr Osborne's support.

How the giants will suffer

Goldman Sachs: Expected to be the worst affected by the measures due to its large proprietary trading operations. Analysts have predicted the hit on its profits could be about $4.67 billion in 2011. Its high gearing on fixed income operations are particularly vulnerable.

Morgan Stanley: Hit to be about half of Goldman's due to the size of its rival's investment banking profits. MS also takes less risk than Goldman in its trading positions, analysts said.

Deutsche Bank: Sizeable Wall Street investment banking operations seen as vulnerable to curbs. Large fixed income profits are a concern. Hit may be $2 billion.

Credit Suisse: Big player in US investment banking, could be hit by $2.3 billion.

RBS: Claims it carries out little prop trading and that the little it does is being phased out under its restructuring. However analysts are concerned its US operations could still be hit by a forced break-up.

Barclays: Also claims its prop trading book is tiny, and that it only trades directly on behalf of customers. But analysts are sceptical, arguing that it does take its own positions in trades placed on behalf of clients.

UBS: Analysts at JPMorgan think it is less vulnerable than the Wall Street giants due to its smaller investment banking operations. Even so, hit could be as much as $1.92 billion in 2011.