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Abu Dhabi, UAEMonday 17 December 2018

Goldman, Morgan Stanley edged out as US banks build new lobby group

The tie-up comes at a time when banks are eager to capitalise on the Trump administration’s business-friendly agenda

A monitor displays Goldman Sachs Group signage on the floor of the New York Stock Exchange (NYSE) in New York. Goldman Sachs along with Credit Suisse and  Morgan Stanley has been excluded from a new banking lobby group in Washington DC. Photographer: Michael Nagle/Bloomberg
A monitor displays Goldman Sachs Group signage on the floor of the New York Stock Exchange (NYSE) in New York. Goldman Sachs along with Credit Suisse and  Morgan Stanley has been excluded from a new banking lobby group in Washington DC. Photographer: Michael Nagle/Bloomberg

An effort by the US' largest banks to boost their lobbying clout in Washington is leaving three industry titans on the sidelines: Goldman Sachs Group, Morgan Stanley and Credit Suisse Group.

Though the three firms were initially slated to be included in a newly merged trade association, they were blocked after some executives argued that adding more mega-banks would highlight the stigma that Wall Street still carries from the 2008 financial crisis. Others said that members should be limited to consumer-oriented lenders.

The decision is part of a sometimes fractious debate playing out as high-profile CEOs, including Bank of America’s Brian Moynihan and JPMorgan Chase & Co’s Jamie Dimon, work to combine the Financial Services Roundtable and the Clearing House Association. The tie-up, which comes at a time when banks are eager to capitalise on the Trump administration’s business-friendly agenda, has dredged up long-standing fissures over how to improve the industry’s image and rebuild its political standing.

While the deal is still expected to go forward, disagreements have bogged down the launch of the new entity, according to people with direct knowledge of the negotiations. The tensions have even prompted some regional banks to discuss dropping out, the people added.

“Such is the nature of mergers,” said Steve Bartlett, a former Texas Republican congressman who ran the roundtable from 1999 to 2012 and vastly increased its membership. “Mergers are hard.”

PNC Financial Services Group chief executive William Demchak, who is helping put the associations together, said in an interview that he was “a bit surprised” to hear about any disputes. “From where I sit, in talking with the CEOs every week, this has gone well,” he said.

Mr Demchak attributed any unhappiness to employees at banks who participate in“sub-groups” at the two organisations and are worried their work might be curtailed. The combination has been slowed, he added, mostly by logistical issues like changing payroll systems and choosing office space. While he confirmed Goldman Sachs, Morgan Stanley and Credit Suisse won’t be part of the new organisation when it opens its doors, he said no final decision has been made to exclude them.

This account is drawn from interviews with more than a dozen people who have been closely involved in the talks and merger planning. They asked for anonymity to discuss more freely the sensitive and high-level discussions.

Much of the deliberations are being handled by the bank CEOs themselves, the people said -- perhaps the main reason that the process has been slow.

Mr Moynihan, the roundtable’s chairman, is leading the effort. He has also brought in a team of Bank of America mergers and acquisitions specialists to help push things along, the people said.

Other key players are SunTrust Banks CEO Bill Rogers, Demchak and Dimon. Rogers is the chairman-elect of the roundtable and Demchak heads the Clearing House board of directors.

Dimon has taken great interest in Washington in recent years and has agitated to apply some of the rigour that is common on Wall Street for evaluating performance and fostering accountability to the numerous bank trade associations, the people said. He also brings some experience with shake-ups, having spent the past 18 months overhauling the Business Roundtable, a trade group for CEOs from many different industries, where he is chairman of the board.

Spokesmen for JPMorgan and SunTrust declined to comment on the private deliberations. Mr Moynihan, in a statement, said: “The CEOs of the member companies agree that we’re creating an organization that will produce high-quality research and be an important advocate for pro-growth policies and a safe, sound banking system.”

On the membership question, Dimon aligned with Rogers in contending that Goldman Sachs, Morgan Stanley and Credit Suisse should be kept out, the people said. Greg Baer, who runs the Clearing House and will head the new association, was amenable to their inclusion and Moynihan was agnostic, according to the people.

Dimon thought the three firms wouldn’t necessarily fit because they are mostly known for underwriting and trading securities, rather than retail banking. He also noted that none had been a member of the roundtable or the Clearing House. The new group should figure out its mission before adding any other companies, he argued.

Rogers and other regional bankers, who tend to say they represent “Main Street” customers had a different take, the people said. They wanted to keep the number of massive Wall Street firms in the group to a minimum, the people said.

Spokesmen for Goldman Sachs, Morgan Stanley and Credit Suisse declined to comment. Two people familiar with those firms’ thinking said they would continue to participate in other trade groups. Still, they questioned how the new group could claim it speaks for the industry while excluding several prominent banks.

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In the interview, Mr Demchak said he was open to the three becoming members down the road if they were interested in joining an association focused on “traditional banking” issues.

“Introducing new members didn’t make any sense,” he said.

Trade associations almost seem to grow on trees in Washington. Non-profits, they are set up to provide lobbying muscle and to take actions, like filing lawsuits, that individual firms are loath to do. Usually housed in high-priced offices around the K Street corridor, the groups employ their own staffs and are overseen by boards comprised of executives from member companies.

Running one is among the most lucrative jobs inside the Beltway. Former Minnesota Governor Tim Pawlenty, who left the roundtable in March to run for his old seat again, was paid $2.7 million in 2016, according to public tax forms. Baer made $1.3 million that same year leading the Clearing House. (He also earned some compensation that is not disclosed from a payments company affiliated with the association. The two are being severed as part of the merger. )

Large banks tend to belong to multiple associations because they are involved in so many different lines of business. The representation doesn’t come cheap; dues for a trade group can run several hundred thousand dollars annually and often increase based on the size of the lender. The merged entity hasn’t yet set its budget, the people said, but the bank executives are expecting to pay less for the one than they did for the two.

Mr Moynihan, Mr Dimon and the other CEOs see the tie-up as part of a broader re-organisation and winnowing of the trades. Their mantra, the people said, is to make sure the groups become more than the sum of their parts. In the past, the CEOs said, they often worked against each other or couldn’t agree on a lobbying agenda. The roundtable, for example, had about 100 banks, insurers and asset managers as members until late last year when the non-banking firms were excluded.

“They had a big party twice a year,” Mr Demchak said. “And you couldn’t pick anything that was controversial because it would piss off half your group.”

After the Clearing House and roundtable combine, the plan will be for the larger banks to participate in three main trade associations. One, the Financial Services Forum, represents eight of the largest US banks, and another, the American Bankers Association, has lenders of all sizes. In the middle will be a new organisation, catering to firms that have about $50 billion or more in assets.

Putting all the pieces in place, however, is proving difficult.

Regional banks, which often have small Washington offices, want the entity to have a strong presence on Capitol Hill, the people said. That would mean having a political action committee to make donations to lawmakers and a willingness to tackle policy matters large and small. The roundtable operates more in this fashion.

Dimon and some of the other big bank executives, however, prefer the way the Clearing House works. It is more akin to a think tank, conducting its own research and writing detailed comment letters to supervisory agencies like the Federal Reserve. The group is known for making the industry’s case on complex regulatory matters such as capital standards and credit-card swipe fees. Forming a PAC and sending lobbyists to Congress to gin up complaints about regulators could undermine the non-partisan sheen that the Clearing House has long cultivated, the people said.

Some of the bank executives are hoping to forge a compromise by picking a handful of issues for the new association to focus its lobbying on. Whether that is possible, and whether all the regional banks will go along, remains to be seen, the people said.

Demchak, in the interview, said the group is committed to finding the right balance between advocacy and research. “It is one of these things we will have to watch and figure out what we will do,” he said.

The composition of the board of the new entity is also up in the air, the people said. One problem is that representatives from all 25 banks that are Clearing House members get to sit on its board. That will be impossible at the merged group. In addition, there is concern over how the seats will be apportioned among banks of different types and sizes.

Even as the negotiations continue, the new trade is hoping to open its doors soon. It’s preparing a branding campaign and even doing some hiring.

Earlier this week, the Clearing House said it will bring on Shahira Knight, deputy director of the White House’s National Economic Council, to oversee government affairs and communications at the new association. The announcement gave some clues of how Dimon and his fellow executives are trying to bridge their differences, describing the entity as a “research-driven public policy organization led by CEOs of large banks with the mission of advocating for and advancing the interests of large banks.”

And despite the turmoil, there are a few matters that everyone has agreed on, including the need for a fresh name for the new group. The likely choice, the people said, is the Bank Policy Institute.