Donald Trump, the 45th president of the United States, will be great for banks. Won't he? After all, there's no shortage of former (Goldman Sachs) bankers on his team, and the volatility surrounding Trump's election along with rate hikes and the expectation of a fiscal stimulus have been credited with delivering the best fixed income trading conditions for years.
While President Trump will almost certainly be good for the U.S. banking industry and might even offer some respite to the interminable cost and job cuts, Wall Street CEOs also sounded some notes of caution during the calls accompanying their fourth quarter results this week and last. To a degree, this was inevitable - it's incumbent on CEOs to mention downside risks while extolling all the upsides, but it also illustrated why the Trump presidency might not necessarily be plain sailing.
M&A bankers are broadly expected to have a good 2017. Trump's corporate tax cuts should encourage businesses flush with cash to start thinking about acquisitions. The danger, however, is that in a climate of uncertainty they'll think about deals, but won't execute them.
Goldman CFO Harvey Schwartz said as much during this week's call. "Dialogue in boardrooms remains quite high for us," said Schwartz, before cautioning that dialogue and deals are not the same thing. The arrival of a new administration with new policies can, "have an impact on timing of transactions," he added. Reading between the lines, this means 2017 could be a year of talking rather than doing. "The environment is pretty robust in terms of dialog," said Schwartz. It's just a shame that dialogue doesn't earn fees.
The real risk from Trump is geopolitics. If not Russia, then Iran or China. Morgan Stanley CEO James Gorman elucidated this danger during Morgan Stanley's call on Tuesday. The bear case for 2017 includes the risk of, "a geopolitical or political event which creates enough confusion in the minds of potential issuers that the underwriting calendar doesn’t come back," said Gorman. Like Schwartz, he added that the failure of the M&A pipeline to "crystallize" because of political changes is also a risk.
Schwartz said that in light of the "body of work" created by regulators over the past eight years, it now makes sense to "step back" and evaluate it. Regulatory weakening could be a boon for U.S. banks - especially if European banks remain bound by tight constrictions, and the anticipation of looser constraints has contributed to the 25% and 28% respective increases in the share prices of Morgan Stanley and Goldman since Trump was elected.
There's no guarantee that regulation will be weakened under Trump, however - or, at least, that it will be weakened in the way banks would like. During yesterday's grilling by the Senate Finance Committee, Trump's Treasury Secretary nominee Steve Mnuchin said he doesn't plan to eliminate the Volcker Rule and allow banks to resume proprietary trading because, “the concept of proprietary trading does not belong” in banks guaranteed by the government. Instead, Mnuchin said the rule needs to be clarified so, "banks can understand what they can do and what they can’t do."
Lastly, and this wasn't articulated by Schwartz (or indeed anyone at Goldman), but 'the firm' is also exposed to reputational damage under the Trump administration. Ex-Goldmanites are peppered throughout the Trump team and the bank is already attracting flack for its association with the new president. If Trump falters, or is perceived as damaging living standards for U.S. voters, Goldman stands to be implicated too. The firm's share price may not stay this high forever.
Photo credit: Donald Trump by Gage Skidmore is licensed under CC BY 2.0.