Robert Reich: How Wall Street protects its ability to gamble

In an interesting column, Robert Reich looks at how Wall Street uses lobbying and threats to preserve its ability to gamble.

Regular readers know that the only way to end gambling by Wall Street firms (aka, the Too Big to Fail) is to require them to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

This disclosure allows the market to see if Wall Street gambles and increase the cost of Wall Street's access to funds to reflect the risk if it does.  A higher cost of funds is the markets way of restraining Wall Street's risk taking.

The Commodity Futures Trading Commission, the main regular of derivatives (bets on bets), wants to extend Dodd-Frank regulations to the foreign branches and subsidiaries of Wall Street banks. 

Horror of horrors, say the banks. 

“If JPMorgan overseas operates under different rules than our foreign competitors,” warned Jamie Dimon, chair and CEO of JP Morgan, Wall Street would lose financial business to the banks of nations with fewer regulations, allowing “Deutsche Bank to make the better deal.”...

I wouldn't want the banks to perceive that they were operating at a competitive disadvantage so I would propose that ultra transparency be adopted globally.

After all, it would be grossly unfair to adopt ultra transparency in the US and not the EU or UK.

With ultra transparency, market discipline would reduce the risks US banks carry.  Financial theory tells us that this reduction in risk would be rewarded with a lower cost of funds and a higher stock price.  As a result, if only the US requires ultra transparency, then banks from every other country would be operating at a competitive disadvantage.

One advantage of being a huge Wall Street bank is you get bailed out by the federal government when you make dumb bets. Another is you can choose where around the world to make the dumb bets... 

Wall Street would like to keep it that way. 

For two years now, squadrons of Wall Street lawyers and lobbyists have been pressing the Treasury, Comptroller of the Currency, Commodity Futures Trading Commission, SEC, and the Fed to go easier on the Street for fear that if regulations are too tight, the big banks will be less competitive internationally. 

Translated: They’ll move more of their business to London and Frankfurt, where regulations are looser. 

Meanwhile, the Street has been warning Europeans that if their financial regulations are too tight, the big banks will move more of their business to the US, where regulations will (they hope) be looser. 

After the Basel Committee on Banking Supervision (a global financial regulatory oversight body) came up with a new set of rules to toughen bank capital and liquidity requirements, European officials threatened to get even tougher. They approved a new system of European regulatory bodies with added powers to ban certain financial products or activities in times of market stress. 

This prompted Lloyd Blankfein, CEO of Goldman Sachs, to issue — in the words of the Financial Times — “a clear warning that the bank could shift its operations around the world if the regulatory crackdown becomes too tough.” 

Blankfein told a European financial conference that while Europe remains of vital importance to Goldman, with less than half of the bank’s business now generated in the U.S., the introduction of “mismatched regulation” across different regions (that is, tougher regulations in Europe than in the U.S.) would tempt banks to search out the cheapest and least intrusive jurisdiction in which to operate. 

“Operations can be moved globally and capital can be accessed globally,” he warned.

Which is why ultra transparency needs to apply to all of a bank's exposure details globally.