Wall St: the latest US industry to move offshore

Dick Bove says the US government has driven our biggest banks to export jobs to cheap and unregulated foreign centers

by Joseph N. DiStefano

Published Jul. 1, 2011, 10:32 a.m. ET

Big Banks Are Bad

The United States has adopted, as part of its core financial policy, the view that big banks are not good for the country, its economy, or its financial system. Simply stated, the United States does not want them. A series of rules have been put in place to assure that these banks are inhibited in both their growth and profit goals: Punitive capital and liquidity rules have been established to limit growth; A myriad set of rules that impact the pricing and flexibility of many bank businesses such as credit and debit cards, overdraft functions (Reg. E), Interest rate flexibility (Reg. Q), FDIC policies, proprietary trading rules, and many more have been established to lower revenues; and New regulatory oversight and reporting functions have been instituted to raise operating costs.

Banking Reaction

The banks are reacting to these new constraints on their activities by shrinking, sending jobs and business functions overseas, and beginning to cut employment in this country and more specifically New York: Bank of America (BAC/$10.99/Buy) is closing branches, selling units, and investing more in expansion overseas through its Merrill Lynch subsidiary. Citigroup (C/$1.80/Buy) has decentralized its operations moving people and functions out of the United States. JPMorgan Chase (JPM/$40.88/Buy) remains committed to growing domestically but even this company is seeking growth abroad. Goldman Sachs (GS/$133.22/Sell) has moved people and functions abroad. Morgan Stanley (MS/$23.01/Buy) has developed significant joint ventures in Japan and China and also restructured its domestic employment force.

Deeper Reactions

In the 1990s a theory of business operation developed that suggested that America had embraced a new operating strategy: America would use its intellectual capital to design and innovate. The new products being developed would be manufactured outside the country. The Americans would sell those products in the United States.

This supposedly meant that the capital intensive activity of building the product would be exported while the high value added services of design and distribution would be maintained domestically. Banking has adopted this strategy.

Thursday, June 30, 2011

Moving the Financial Capital Out of New York

Manufacturing

The manufactured product in banking is the transaction – i.e., the payment service; the trade; the safe keeping of funds; the maintenance of records; and many similar activities. The factory in which this manufactured product is handled is an array of computers. The location of these “factories” can be anywhere and increasingly the location is outside New York and in many cases outside the United States.

Note the actions of multiple companies in this regard: BNY Mellon (BK/$25.58/Buy) constantly moves employment and manufacturing away from New York and away from the United States. Northern Trust (NTRS/$46.12/Neutral) is following this practice. Its last completed acquisition was a foreign business and its biggest acquisition ever was a foreign company. State Street Corporation (STT/$45.01/Buy) has aggressively moved its business and incremental employment offshore.

Intellectual Capital

The sending