Wall StreetReform Fail

The Reform That Wasn’t

William D. CohanWilliam D. Cohan on Wall Street and Main Street.

From the outset of the recent financial crisis, the government’s often-haphazard response was motivated by an overarching desire to re-establish the status quo on Wall Street as quickly as possible.
The thinking seemed to be that the sooner the surviving big banks got back on their feet and returned to providing the grease that keeps the wheels of capitalism churning, the sooner the broader economy beyond Manhattan would recover from its serious malaise and businesses would take the steps necessary to hire new workers — reducing a stubborn 10 percent unemployment rate — and to invest capital in new plants and equipment.
Not only did the government’s theory fail in practice — unemployment remains relentlessly and historically high and American businesses seem intent on hoarding, rather than spending, the $2 trillion in cash on their collective balance sheets — but it also lost a once-in-a-century opportunity to change the mores of a momentarily chastened Wall Street, which remains badly in need of substantive reform. This is more than a shame; it is prima facie evidence of how deep Wall Street’s hooks have been — and continue to be — into the powers that be in Washington (and vice versa).
For instance, for all its bluster and heft, the July 2010, 2,200-page Dodd-Frank law, which purports to force Wall Street to change its bad behavior, has of course done nothing even remotely close to that and merely reinforced the longstanding cozy relationships. Rest assured, while you are reading this column, Wall Street’s lobbyists and executives are busy cozying up to regulators at the Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation and others to make sure the regulations still being written in the wake of Dodd-Frank come out just the way they want them. Despite the hype, that law was yet another triumph for powerful forces determined to return the Wall Street/Washington axis to the status quo.

Not surprisingly, the surviving Wall Street firms could not be happier with this outcome. While business may not exactly be booming on Wall Street these days — even Wall Street cannot claim to be immune from continuing unrest in the Middle East and the Japan disasters — it is certainly healthy, albeit less so (thankfully) in some of the more exotic and controversial securities that helped propel the financial crisis.
And because of the demise of firms like Bear Stearns, Lehman Brothers, Wachovia and Washington Mutual, competition among the survivors is much diminished, to their delight. Debt and equity markets have all but recovered from the financial crisis and companies are taking advantage of the artificially low interest rates to issue billions of new debt securities at previously unthinkable long-term rates. The so-called “junk bond” market has rallied to levels not found since the height of the previous bubble in 2005 and 2006, with the usual corresponding deterioration in credit quality and restrictive covenants. The equity valuation of “social networking” companies such as Facebook, Groupon and Zynga have pretty much exceeded the absurd levels reached in during the Internet bubble of a decade ago and none of these companies has even gone public yet!
Then there is the crowing about AT&T’s $39 billion proposed acquisition of Deutsche Telekom’s wireless business — one of the largest acquisitions in years — chock full of hundreds of millions of dollars in fees for the bankers providing the advice and to JPMorganChase for making a $20 billion bridge loan to AT&T — one of the biggest ever. Is this what Washington was hoping would happen when it chose to recapitalize the banks in October 2008 with taxpayer money? That they would be helping the giants arrange even bigger deals, reducing competition and — likely — existing jobs?
Which brings us to the still-absurd level of Wall Street compensation. Bonus payments in 2010 hovered close to $150 billion, more evidence of how completely out of whack Wall Street pay continues to be. There are even reports that the war for talent has resumed, with the return of multi-year, multi-million dollar contracts. And yet, there has not even been a baby step toward holding Wall Street’s top executives fully accountable for their actions — by asking them to once again put their entire net worth on the line as they did in days of yore when Wall Street was a series of private partnerships. Another lost opportunity.
Ironically, the one prominent American still pushing for Wall Street reform — the investor Warren Buffett — benefited handsomely from his well-timed $5 billion investment in Goldman Sachs at the height of the crisis, made during the third week of September 2008, just after the Fed allowed Goldman to become a bank holding company. (No coincidence there.) He is also someone who every banker or trader on Wall Street would love to have as a client.
Even though the likes of Jamie Dimon, the chief executive of JPMorganChase, and Bob Diamond, the chief executive of Barclays, have said the time for banker bashing must come to end, Buffett has blasted the behavior of Wall Street executives before, during and after the crisis. “In the half a dozen financial institutions that needed help the most during the crisis, that were too big too fail … the managers which led them into trouble in all cases went away very, very wealthy,” he said.
You would think what Buffett had to say about Wall Street reform would carry weight. Unfortunately, while the mainstream financial press — including this paper — reported on many aspects of Buffett’s recent trip to India, only the Financial Times, it appears, reported on his comment critical of banker pay. Time to move on, I guess. The bottom line is that there has not been even the slightest inconvenience for Wall Street in the wake of the crisis. Would that were the case for the rest of us.

  Copyright. 2011. The New ork Times Company. All Rights Reserved

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