Thursday, May 24, 2012

Another gunfight at the Wall Street corral

Many many years ago, when I was a corporate finance reporter, I developed a deep cynicism about government's ability (or perhaps its willingness) to stop bankers from doing anything they wanted to do. This was in the waning days of Glass-Steagall, the US law that forced banks to keep their banking activity (bank accounts etc) separate from their brokerage activity (selling stocks, managing portfolios etc).

Over and over, I watched the banks find ways to breach the so-called Chinese wall that in theory separated the two activities. Over and over, I watched the regulators chase furiously behind, trying to plug the leaks one by one as they discovered them. They'd write a new regulation, and the banks would swiftly find a way around it. The regulators would try to stop that trick, and the banks would invent another. In this war, the regulators were hopelessly outgunned; however smart and hardworking they might be (and they were), their skimpy budgets were no match for the banks' armies of smarter, harder-working and much better paid lawyers of their own.

Fast forward to this recent piece in the Financial Times by Sallie Krawcheck, now apparently a full-time mother, but formerly deep in the trenches as head of Merrill Lynch and Smith Barney She describes how regulators are now trying to stop banks from trading in derivatives (the complex securities that started out as a way to manage risk and rapidly became instead the main vehicles banks use to take on more and more of it) for their own profit - the so-called Volcker rule. The theory is that if the banks can't use derivatives to make money for themselves, they will be good boys and use them only to manage real risks.

Fat chance, Krawcheck says - and she's absolutely right. Once again, the regulators are trying to - as she puts it - regulate by topic: stop an exact scenario that has caused trouble in the past from repeating itself. Trust me, faced with the Volcker rule, the banks will immediately find hundreds of ways to confuse the issue so thoroughly that nobody will have a clue whether a given deal is covered or not - just as they found hundreds of ways to evade Glass-Steagall even as they claimed strict adherence.

The banks, of course, are fighting the Volcker rule, as they fight any effort to control how they do business - but I wouldn't be surprised if secretly, their top executives were sniggering. Once again, the regulators are trying to outgun the banks, and even more than last time (as budget-cutting and deregulatory fervor have taken over governments around the world) they haven't got a chance in hell of succeeding.

So just stop, Krawcheck says to the regulators. Stop letting the bankers lead you by the nose through thickets of their own creating. Don't regulate the structures. Regulate the risk itself. Figure out how much risk the banks are taking and then insist that they have enough money on hand to cope with those risks - all of them.

And if you don't know how much risk the banks are taking in some areas (and not only do the banks to do their level best to keep that a dark secret, but often they don't even know themselves), then don't let the banks operate in those areas. Period.

Krawcheck's time in the trenches has given her a hard-nosed common sense. Would that government regulators - not to mention our bought-by-the-banks legislators - had as much.


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