Wednesday, July 24, 2013

Wall Street wins its bet on loss of political will for serious financial reform

The Wall Street Journal reports that U.S. financial regulators are considering relaxing, if not eliminating, the need for skin in the game by firms that originate and distribute mortgage-backed securities.

This is a clear sign that Wall Street has won its bet that 6 years after the beginning of the financial crisis there would be a loss of political will for serious financial reform.

Wall Street won its bet because it understood how to manage the legislation and subsequent writing of regulations so as to minimize the chances for any substantive financial reform.

From your humble blogger's perspective, Wall Street's winning was completely predictable.  I predicted it and cited the Dodd-Frank Act as being an impediment to reform.

The Dodd-Frank Act, with the exception of the Consumer Financial Protection Bureau and the Volcker Rule, was quite literally written by the bank lobbyists for the benefit of the banks.  It was designed to use the regulatory rule making process as a blunt instrument to kill the political will for serious financial reform.

No surprise, it succeeded.

But its very success in killing the political will for serious financial reform is also its achilles heel.  It didn't end the "lynch mob" desire to get the bankers.  The bankers made sure this desire was frequently flamed as each instance of their bad behavior behind the veil of opacity has come out.

We have seen the bankers manipulate global benchmark interest rates (Libor, Euribor,...) for personal benefit.  We have seen bankers sell interest rate swaps to unsophisticated borrowers.  We have seen bankers engage in swaps to hide the indebtedness of entire countries so they could gain admission to the EU.  We have seen bankers in the UK sell loan payment insurance products that quite literally could not be collected on.

The list goes on and on and on and with the latest being the revelations about how bankers are currently manipulating the commodity markets for aluminum, electricity, oil and ....

So if there is no political will for serious financial reform and the lynch mob desire is growing with each new report of bankers engaging in conduct that was detrimental to society for their own benefit, how is this going to play out.

What I think you are likely to see is the pressure will be put on the regulators to actually do their jobs.

You can see this with the discussion of banks being required to maintain a higher level of capital against their exposures.

You will see this as pressure is applied to the SEC to do its job and restore transparency to all the opaque corners of the financial system.

In the case of structured finance securities, the pressure will result in observable event based reporting where any activity like a payment or delinquency involving the underlying collateral is reported to all market participants before the beginning of the next business day.

In the case of banks, the pressure will result in ultra transparency where banks are required to disclose on an on-going basis their current global asset, liability and off-balance sheet exposure details.


Benign said...

Why should things get better? No rationale given. If will is exhausted, the SEC and bank regulators remain as captive as ever and we just wait for the next crisis.

Richard Field said...

The driver for improvement is the lynch mob anger.

Ultimately, neither regulators or politicians want the anger turned on them (please note that a majority in the US would vote everyone out of office in a recent survey).

As a result, they will enforce the regulations already on the books.

For the SEC, which was ground zero for the financial crisis as it wouldn't have occurred without its failure to ensure transparency throughout the financial system, the clock has already run out on prosecuting Wall Street. So the only way it can escape the lynch mob glare is to enforce transparency.