JP Morgan analyst Kian Abouhossein has issued a research note, and it isn't pleasant reading, particularly if you work at a US investment bank, in the US.
According to Kian, the US banking legislation currently being juggled between the House and the Senate has the potential to bring about the following outcomes:
1) Global returns on equity at US brokers halve, from 20% to 10%
2) Tier II and tier III investment banks review their businesses and either close them altogether or spin them off
3) Derivatives trading at US investment banks (in the US) becomes incredibly expensive, prompting clients and employees to favour European investment banks, or US investment banks in Europe.
4) Banking jobs move from the US to Europe
5) Bankers move from US investment banks to European investment banks
Don't mention Section 176
The catalyst for this chaos is section 176 of the Senate Reform Bill, which 'proposes "prohibition against Federal Government bailouts of swaps entities."
If this becomes law, Abouhossein points out that banks will be required to hold a lot more capital in order to retain the single A credit rating required for participation in derivatives trades. This increase in capital will make writing derivatives punitively expensive.
He assumes that a) European countries won't impose similar legislation, and that b) US banks operating in Europe won't be affected by it.
As a result, he predicts European banks such as Barclays, UBS, Credit Suisse and Deutsche Bank would be the big beneficiaries. Counterparties will trade derivatives through them instead, and large numbers of derivatives trading jobs currently based in the US could move to Europe.
Ultimately, Abouhossein predicts that banks will split out their entire sales and trading operations to avoid Section 176. Cash and derivatives businesses are too closely linked to separate derivatives operations alone.
You will also be paid a lot less
This is the same Kian Abouhossein who has produced an entire series of depressing research notes warning of the nasty effects of banking legislation on jobs and pay, so his latest missive is not entirely out of the blue.
It's also worth bearing in mind that Abouhossein works for JP Morgan, which will clearly suffer from 176, so there may be an element of propaganda in his efforts.
Section 176 aside, Abouhossein is also very definite on one other thing: compensation ratios are going to have to come down - significantly.
Following the introduction of Basel II and the new transparency rules surrounding OTC trades, he's predicting that ROE across the industry (European banks included) will plummet. Reducing the compensation ratio to 35% will be the only way of providing shareholders with a decent return. Compensation per head is predicted to fall by an average of 22% as a result.
If 176 is implemented on top of this, it could be particularly nasty for anyone working at a US broker in the US. "If US brokers have to comply with section 716, the IB comp adjustment would be much more significant," intones Abouhossein - ominously.