One thing that has caught my attention recently is how both political parties in the race for the 2016 presidency have amped up the vitriol again on how they are going to “get tough on Wall Street”[1]. I wrote about this a while ago in my piece on Elizabeth Warren. (Who by the way was recently mentioned as a potential running mate for Bernie Sanders. Just so you know I will be doing an Alec Baldwin and leaving the country.) How can they say something like this with a straight face after Dodd Frank and Basel III? Either they’re being dishonest or aren’t very bright. Based on past performance I would lean towards the former with a decent dose of the latter.
Take democratic hopeful Bernie Sander who says he will break up the big banks in his first year in office. (Here’s hoping he’s focused on other more pressing priorities.) Sanders also goes on to say how he will stop these banks from gambling with depositors’ money. What kind of “gambling” is never specified. Isn’t that what banks do? Borrow money (from depositors) and lend it out (mortgages, business loans, etc.). I think Bernie is referring to prop trading that I believe has been regulated away by the Volker Rule. Time for Bernie to read his economic briefing papers a little more closely.
Which brings me to one of my points: Politicians will say anything to get elected even when they know it is not true. It is interesting how the press and the politicians talk about bankers as though they were separate from the rest of American society – like they don’t pay taxes or lose their jobs like everyone else. It’s an abstraction that the press and politicians like to perpetuate to continue fanning the flames of populist discontent. Whipping up popular fervor against Wall Street and the big banks continues to play well in most of the country.
It’s like the quote from the movie “The American President”: Politicians have no interest in solving your problems they “just want to make you afraid of it and tell you who’s to blame for it. That’s how you win elections in this country”. I guarantee that whoever wins this presidential race to the bottom will quickly temper their anti-Wall Street rhetoric.
2016 will mark the eight anniversary of the most severe financial crisis since the Great Depression. To commemorate the occasion I went to see “The Big Short”. I had read the book when it first came out and was eager to see the film[2]. Here are my takeaways:
- Like any great investigative feat that most of society misses, the investigators, who catch on earlier than everyone else, are ridiculed (think Watergate). It was the same for these guys in 2005. Ryan Gosling’s character, Jared Vennett (modeled after the Deutsche Bank bond salesman in the book) is called “bubble boy” and Chicken Little by his colleagues.
- The life of big hedge fund managers isn’t as glamorous as the press would have you believe. Michael Burry and Front Point’s Mark Baum (Steve Eisman in the book) are miserable as they slowly peel away the onion of the housing meltdown.[3]
- The big banks didn’t cause the crisis but they were the accelerant that made it so devastating. This ultimately led to the real crisis that was the threat to the banking system that despite what the politicians say, is essential to the survival of the economy and the country. This is why the bailouts were critical. Bernanke and Paulson weren’t bailing out the fat cats they were saving the country.
- When a crisis gets bad enough the banks will protect themselves at the expense of their clients. In the movie the banks weren’t marking down the ABX swaps because they held so many of the underlying bonds. As soon as they unloaded the inventory the ABX dropped off a cliff. Remember this point.
So where am I going with all this? I remember a passage from the Michael Crichton book called “Rising Sun”. One of the characters, a Japanese businessman tells his American counterpart that the difference between America and Japan is that in America you fix the blame and in Japan we fix the problem. We need to stop blaming and shaming the banking industry for 2008. It’s time to move on. Much of the regulation has worked to make the global banking system safer particularly restrictions on prop trading and leverage. However, as others have pointed out there are parts of Dodd Frank and Basel III that are not working and in some ways may be making the system weaker for next system crisis.
The current political environment does not allow for constructive debate on this issue. The slightest suggestion of amending or rolling back even the smallest piece of Dodd Frank brings howls of protest from the politicians that regulators are being soft on Wall Street. Meanwhile potentially toxic regulations are allowed to remain like ticking bombs ready to go off in the next big financial crisis. The short list of things that are not working includes the liquidity impact of the Volker Rule and central derivatives clearing, the Orderly Liquidation Authority (OLA) and overreaching capital rules (e.g., capital surcharges and TLAC).
The banking industry may not as strong as the regulators think it is. But the answer isn’t more regulation. We need to examine and refine the regulations we already have to make them better. That might mean some regulations have to go away or be scaled back. Hopefully the new president can be pragmatic and strong enough to work with congress and the regulators on this. If not we may be having the debate after the next crisis about why all those regulations that were enacted didn’t work like we thought they would. Let the dialogue begin.
[1] See “Republicans and Democrats Agree: We Hate Wall Street” WSJ 1/13/16.
[2] The other great book on the housing short trade is “The Greatest Trade Ever” by Gregory Zuckerman about John Paulson.
[3] I love the scene in the movies where Burry says he’s not wrong just early and is told it’s the same thing.