President Barack Obama and his colleagues in the House and Senate have grown used to talking tough to the nation's biggest banks. Now they want to add some bite to that bark.
The President, standing alongside former Federal Reserve Chairman Paul Volcker, proposed a set of rules that would bring back into law what's been called a quasi-Glass-Steagall, which separated retail banks from investment practices that were risky yet extremely profitable over the past decade.
The gist of the proposal is that you’re either a retail bank or you’re an investment firm, but you can’t be both. Additionally, President Obama also asked for greater expansion of the deposit-cap rule, a law from 1994 that stated that no institution could have more than 10 percent of national deposits. That law was circumvented during the financial crisis of the past few years.
One of the biggest concerns facing individual traders and technologists is if President Obama’s proposal goes through, what will that do to the job market? Wall Street has taken a beating these past couple years and this proposal won’t likely help the situation.
Even Mayor Michael Bloomberg is upset, to say the least, about the new rules.
A concern that I’ve repeatedly heard is that if the “Volcker Rule”, as it’s being called, goes into effect, prop traders and tech firms geared toward them will be reduced in size. Even if you’re of the thinking that these changes are necessary, is now the time to impose them?
There’s also no telling how large the ripple effect will be if the largest financial institutions in the United States are told to shed valuable business lines and deposits.
The counter, obviously, is—if not now, when? Also, Barney Frank, chairman of the House Financial Services Committee, says that these changes won’t happen immediately, it will take three to five years.
Another interesting component is how hard the administration will fight banks on this. Consider Exhibit A: Wall Street has a way of getting its way, and Exhibit B: this week the Supreme Court ruled to block a ban on corporate political spending.
Democrats are already skittish after losing Ted Kennedy’s senate seat to an out-of-nowhere Republican. If the banking industry says that it’s going to flood money into the coffers of those who support the banking industry, that hard talk is likely to subside very quickly.
It also seems that the arguments in favor of this proposal invariably revolve around getting back at Wall Street for causing the financial crisis. Populist rage runneth over once bonuses come into the discussion.
But it’s worrisome when you hear politicians attacking proprietary trading as the reason for the collapse. There were many dominoes at play in this game, many of which were placed there by the politicians and regulators themselves, and American homeowners, as well.
Rules geared toward greater transparency can only help the industry and investors to do business better. But having the government reach into boardrooms to change business practices can be dangerous at best, catastrophic at worst.
I think that JPMorgan Chase & Co.’s chairman and CEO Jamie Dimon has the best plan. He believes, rightly, that too-big-to-fail institutions are inherently dangerous to the system and to tax-payers.
In an opinion piece from November for The Washington Post, Dimon writes that “too big to fail” should be done away with. That means, to paraphrase Ivan Drago from “Rocky IV”, if the bank dies, it dies. But that doesn’t mean that regulators should impose fairly arbitrary restrictions on growth and business activities.
Dimon writes: “But ending the era of ‘too big to fail’ does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole.
“Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk. Creating the structures to allow for the orderly failure of a large financial institution starts with giving regulators the authority to facilitate failures when they occur.”
Similarly, yesterday Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association (SIFMA), wrote of the proposal that “our industry agrees with President Obama on the need for responsible reforms that end ‘too big to fail’ and protect against systemic risk.
“Like the President proposed last year, we continue to believe the best way of achieving those goals is to establish a tough, competent and accountable systemic risk regulator. We believe providing for strengthened regulatory oversight and flexibility like that originally proposed by the Administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk and ending ‘too big to fail’.”
While both Dimon and Ryan clearly have a dog in this fight, their arguments appear more level headed than what we’re hearing from the President. Expect a good tussle over the months ahead.
—Anthony Malakian