A Badge of Honor for FDIC Vice Chairman Tom Hoenig: “Wall Street’s Least Favorite Regulator is Calling It Quits.”
As we have said, FDIC Vice Chairman Tom Hoenig has been a fearless, distinguished public servant. Yesterday was his last day at the FDIC, inexplicably not reappointed there or appointed to some other prominent position. “Inexplicable” unless this Bloomberg story explains why he was needlessly ousted from the FDIC: “Wall Street’s Least Favorite Regulator is Calling It Quits“:
“The ranks of regulators Wall Street loves to hate will lose one of its last and most prominent voices …when Thomas Hoenig steps down as vice chairman of the FDIC.”
He consistently made the compelling, data driven case for the biggest banks to have sufficient capital cushions and limit their highest risk activities because, as he said most recently in a speech everyone should read, “Finding the Right Balance“:
“Weakening these standards will undermine the long-term resilience of not only the banking system, but the broader economy as well.”
It is undeniable that well-capitalized banks lend through the business cycle and support the economy in good times and bad, rather than under-capitalized banks boosting bonuses (and stock buybacks and dividends) in good times and cutting lending to rebuild capital in bad if not coming with their hands out to taxpayers for bailouts as they did in 2008. He may have been “sometimes a lone voice” standing up to the power, influence and access of those gigantic global financial institutions, but we have no doubt that history will judge him highly favorably as courageous and prescient.
Chipping Away at the Most Successful Pillars of Financial Reform, Key Regulators Discuss More Banking Deregulation is On the Way
Fed Vice Chairman for Supervision Randy Quarles in testimony before the House Financial Services Committee and the Senate Banking Committee made it clear that the pace of deregulation will be increasing at the key financial regulatory agencies. The previous week, the Fed had released proposals on the Supplementary Leverage Ratio (SLR) and the Comprehensive Capital Analysis and Review (CCAR).
In addition, Mr. Quarles testified that he wants to consider opening up the stress tests scenarios to public comment. This is something that banking lobbyists had long, though unsuccessfully, sought during the Obama administration as such a change could potentially give banks more influence over the parameters of the exams. Such a move could give the banks a roadmap to passing the stress tests, rendering them much less useful.
It is undeniable that stress tests are one of the most important and successful elements of post-crash reforms that were incorporated into the Dodd-Frank law. No less an authority than Gary Cohn — when he was President of Goldman Sachs — sang the praises of stress testing, which was a critical tool used to restore confidence in the U.S. financial system at its most perilous time and since then. The Fed has built up an enormous amount of credibility worldwide with the effectiveness of its stress tests and it should not put that at risk to satisfy what will be a passing, but very dangerous deregulatory zeal.
At those same hearings, Mr. Quarles also described the Volcker Rule as “detrimental” to capital markets and said the Fed is working with four other Federal agencies to revise it. He also said that it was “unarguable” that the Volcker Rule has negatively impacted market liquidity. We, however, are unaware of any independent, robust data supporting that view. Indeed, of the many studies that have been done, including by the SEC, Treasury and the Fed, no evidence has been found that the Volcker Rule has damaged liquidity.
Better Markets echoes what others, including FDIC Vice Chair Thomas Hoenig, have said recently that carving up the Volcker Rule is a mistake. This sentiment was captured quite well during the hearing when Rep. Stephen Lynch (D-MA) commented that he was worried about streamlining the Volcker Rule,
“No is no. There is no streamlining. We wanted it [high risk, dangerous, capital depleting propriety trading by taxpayer backed banks] to stop, and it has stopped.”
That’s the success of the Volcker Rule. While some say proprietary trading had nothing to do with the financial crash, they need look no further than Morgan Stanley, which, in December of 2007, had to write off a $9 billion proprietary bet loss at the same time that it had to take massive write downs due to its subprime lending and derivatives activities. Just nine months later and just five days after Lehman Brothers failed, Morgan Stanley had burnt through all its capital and informed the Fed that it was going to fail unless it was rescued by the government, which then bailed out Morgan Stanley and Goldman Sachs.
Banks love to “prop trade” because it’s like going to Vegas with someone else’s credit card: using other people’s money, it costs little to do; it allows them to pocket gigantic bonuses; and, best of all, shift their losses to someone else like taxpayers. That’s why, as Congressman Lynch said, “we wanted it to stop” and why it should remain stopped.
Senator Menendez Shines Critical Spotlight on Failure to Address Exec Comp Rule
During Randy Quarles’s appearance before the Senate Banking Committee mentioned above, Senator Robert Menendez (D-NJ) used his time while questioning Vice Chair Quarles to shine a bright spotlight on the ongoing indefensible failure to enact the incentive-based compensation rules contained in the Dodd-Frank Act.
As Vice Chair Quarles admitted, pre-crash compensation schemes contributed significantly to the 2008 financial crash. Such unimaginable, immediate riches are simply irresistible and incentivized reckless, illegal and even criminal conduct. Too little has changed, as evidenced by the ever-expanding Wells Fargo and other scandals prove, and the absence of robust incentive-based compensation rules continue to put the American economy and consumers at risk. It is simply unacceptable that, as Senator Menendez pointed out, regulators have all the time, energy and focus to deregulate the financial industry, but little if any time to protect Main Street consumers, investors and taxpayers and promulgate a rule required by law.
The current proposal, released almost two years ago, is sitting stagnant even though regulators have ostensibly been working on the rule since 2011. It is clear that regulators have time to finalize the rule given the extensive number of completed rules that they have “revisited” and the number of new or revised proposed rules to deregulate. Yet, as Vice Chairman Quarles stated in the hearing, he has no timeframe to finish the process for the incentive compensation rules at the Federal Reserve.
The same lack of follow through to this Congressionally mandated rule can be found at the Securities and Exchange Commission, where Chair Clayton removed any mention of the rule from the regulatory agenda he released in July 2017. In the meantime, Wall Street profits and executive pay has ballooned to record levels not seen since the run-up to the 2008 financial crash. If regulators are allowed to ignore statutory requirements, not only will there be increased danger to the economy and consumers, but the strength of Congressional authority and oversight will weaken.
We commend Sen. Menendez’s focus and tenacity in maintaining a spotlight on this essential yet overlooked issue and echo his vow to keep up the pressure on regulators until they fulfill this long overdue Congressional mandate.
