May 25, 2010 -- With some restrictive financial-reform measures looming, several Wall Street investment banks are making contingency plans to move some of their trading operations to offshore locales such as Switzerland or Bermuda, several industry analysts said.
"Absolutely, banks are exploring moving their derivatives trading businesses offshore – they will have to, if this bill passes," said Dick Bove, a banking sector analyst at Rochdale Securities. "It's not just a possibility, it's a certainty."
The mere possibility that banks would even consider uprooting jobs and tax revenue away from New York City is viewed by financial analysts as a compelling reason why the most drastic trading provisions will, in the end, fall by the wayside.
"This is not just posturing," insisted Kevin McPartland, a senior analyst with the TABB Group, a New York City based financial markets research firm. "We have had conversations to show there is real concern in the banking community. The laws are extreme enough that banks would have little choice but to move some, if not all, of their derivatives business offshore."
Financial reform passed in the Senate last week; a companion version of the bill already passed in the House in December. Merging the two bills via a reconciliation process is expected to take at least a few weeks.
Among the most controversial Senate provisions is one that would force Wall Street banks backed by the Federal Reserve, such as Goldman Sachs, JPMorgan Chase and Morgan Stanley, to cordon off certain derivatives, or "swaps," businesses into separate subsidiaries.
Multi-Trillion Business at Stake
Furthermore, the bill contains a measure that would force the multi-trillion-dollar swaps trading business onto public exchanges or regulated swaps execution platforms, as well as subject it to the involvement of third-party clearinghouses.
Swaps contracts are side bets on the directions of things such as interest rates or commodities prices, bets that banks and large investors, such as hedge funds, enter into with one another. Such swaps bets are underwritten by banks, or dealers, and they are done either to hedge risk or speculate for profit. Swaps instruments can replicate, synthetically, a host of transactional outcomes, such as credit defaults.
By some estimates there are more than $600 trillion worth of derivatives securities on global balance sheets, though this is a "notional" figure reflecting the total amount being theoretically being wagered by financial parties, and not the actual market value of all existing swaps contracts.
Banks See Billions on the Line
The shift in swaps trading proposed in the Senate bill would likely cost banks billions in revenues, as activity moves to more transparent venues, such as exchanges and clearinghouses, and away from private, unregulated "over the counter" transactions which the banks currently control. Banks would also be required, under such a scenario, to outlay much more capital as collateral in the event a trade goes sour and massive losses are incurred, such as the losses on credit default swap trades that brought down AIG.
A proposal that would ban banks from engaging in proprietary trading, an idea originally floated by senior Obama adviser and former Federal Reserve Chairman Paul Volcker, is still in the mix, having passed in committee. Volcker, along with current Fed chairman Ben Bernanke, have both voiced opposition to the derivatives trading proposal, which they believe is overly onerous.
Bloomberg Weighs In
Already the possibility of new rules that could roil the financial sector has drawn the concern of New York City Mayor Michael Bloomberg.
"As Mayor Bloomberg has said repeatedly, we need real reform of the financial industry that creates greater transparency in the marketplace and doesn't eliminate jobs for the 500,000 New Yorkers who work in the industry or diminish the economic strength of New York City or the entire nation," a spokesman for Bloomberg told ABCNews.com.
Switzerland, among the most lax European jurisdictions in terms of regulations, and already a global banking hub, would be the most logical destination should Wall Street decide to wave bye-bye, Rochdale's Bove said. Bermuda, Luxembourg and the Cayman Islands are other possible locales.
Spokespeople at the largest investment banks, such as Goldman Sachs and JPMorgan Chase, declined to comment for this story. None denied outright that any such contingency planning was underway. A spokesman for the Securities Industry and Financial Markets Association also declined comment.
'Genie Is Out of the Bottle'
"In an effort to further regulate derivatives and proprietary trading, the U.S. could actually lose oversight," TABB's McPartland said.
"Some might think it would be great to get the risks out of the U.S., however losing those businesses would cost jobs, tax revenue and make it considerably harder for banks to extend credit," he said.
"We heard this sentiment in 2006 when Wall Street argued they needed less regulation," said a Senate staffer who has been involved in the reform negotiations. "No one believes them anymore."
The staffer asked for anonymity, citing a strict policy not to be quoted by name.
"Who wants to be remembered as the politician who knocked the legs out from under the global financial engine?" countered industry member Tanya Beder, CEO of SBCC Group, a trading risk management firm in New York.
Beder, a former trading executive at Citigroup and one of the early pioneers of swaps trading, added: "If the reform is too onerous, banks will either move their trading businesses offshore or invent new ways of circumventing the rules. The genie is out of the bottle."