Ten Years Since the 2008 Crash, Watch the Lively Politico Debate on Where the Next Financial Crisis Lurks
On the 10-year anniversary of the 2008 financial crash, Politico Pro held a very lively discussion at its annualSummit last week. The panelists, featuring Better Markets president and CEO Dennis Kelleher, along with Representative Gwen Moore (D-WI), Harvard Professor of Economics Kenneth Rogoff, and Jeremy Newell, executive vice president at the newly created Bank Policy Institute, discussed the state of financial reform and where the next financial crisis might lurk.
With the recent Congressional passage of the bank deregulation bill being added to regulatory and judicial deregulation, this was an especially timely topic. “We are safer,” observed Professor Rogoff. But, of course, “we are safer” given the law and rules passed to rein in Wall Street as well as the public and private deleveraging and reduced economic activity due to the Great Recession. The real question is “are we safe enough?” and, if so, how long with that last. As Professor Rogoff observed, “people are [already] nervous” because they should be:
“[It] usually it takes many decades before everybody says, ‘Hey, things are going great. Why do we have all these regulations? Let’s pull them back.’ That’s a very typical dynamic. We’ve kind of had that faster this time so maybe we could get in more trouble quickly.”
Quick, significant deregulation as we have seen is different this time, as Professor Rogoff is uniquely qualified to observe. Representative Moore agreed, stating that it was clear “some of my colleagues didn’t learn their lessons…” from the crash just ten years ago.
With Wall Street’s Congressional allies and deregulatory cheerleaders refusing to attend and defend their positions publicly, Mr. Newell is to be applauded for attending and defending deregulation. He stated, among other things, that banks are safer today than in the past and therefore deserved relief from rigorous capital requirements. In fact, he went so far as to say that “One of the things that’s underappreciated is just how much more capital there is in the system today.” But, of course, there’s more capital today because at the time of the 2008 crash the banks were leverage 40-50 to 1 and had virtually no capital to absorb losses before taxpayers were put on the hook to bail them out.
The real questions are how much safer are we today and are we safe enough? The question isn’t whether the banks have more capital. The question is do the banks have enough real capital to absorb their own losses without crashing the financial system and causing a second Great Depression without having to be bailed out again by taxpayers? Let’s just say, we have a disagreement with Wall Street about that!
Mr. Newell also insisted that bank profits should not be used as a metric to measure the impact that the Dodd-Frank Act was having on the banking industry. Better Markets’ Mr. Kelleher pointed out that the banks vociferously argued against Dodd Frank by claiming that they were going to kill bank revenue, profits and lending, all of which have proved to be objectively false. Moreover, banks can’t have it both ways: they can’t wail and moan that Dodd-Frank will hurt bank profits and, when bank profits break records, insist that they shouldn’t be judged on their profitability.
Mr. Kelleher also urged the audience to take a much broader view of deregulation rather than just focusing on Congressional actions. He discussed the wide-ranging deregulation at the financial regulatory agencies as well as in the courts:
“You have a massive shift to deregulation, which right now is not critical. But it is slowly corroding and undermining the pillars of financial reform that are protecting taxpayers and American families and our economy.”
International Deregulation and the Race to the Regulatory Bottom – Again
Wall Street’s biggest banks are not satisfied with just getting deregulation in the U.S. They are also fighting for deregulation in other countries, which is exactly what happened in the years before the last crash.
The biggest U. S. banks are again encouraging other countries to lower their regulation of finance by offering to locate or keep their businesses in those countries that do so, creating jobs and tax revenue. London was notorious for doing this in the years leading up to the 2008 crash and even bragged about their “light touch” regulation of finance. That’s one reason why the crash was so horrific in the UK, with a number of gigantic banks being nationalized, the ultimate taxpayer bailout that continues to bleed public money away from other priorities and programs. The suffering of the British people from those reckless actions continue to this day.
But even as the people of the UK continue to pay for and suffer from the last crash, the global banks are again urging the UK to cut regulations, threatening to leave and take their jobs and revenue with them if they don’t. As the Financial Times reported:
“US banks are calling on the British government to cut taxes and red tape that they say could lead to financial assets and jobs pouring out of the UK after Brexit.”
That so-called “red tape” are the rules put in place to protect the people and taxpayers of the UK from another financial crash. The biggest US banks are also openly and shamelessly playing one country off another:
“Senior Wall Street executives have warned the UK government ministers that the City of London is losing its competitive edge against New York, especially since US president Donald Trump slashed corporate tax and pushed for looser regulations.”
Remember that the US banks and corporations said that US taxes had to be cut so they could be competitive with other counties. But, now that the US cuts taxes and regulations, they are arguing in those other countries that they better cut taxes to stay competitive with the US.
Of course, the UK banks (which all had to be bailed out by UK taxpayers) happily join in the mendacious Janus-faced arguments:
“Stephen Jones, chief executive of UK Finance, a lobby group for British lenders, said ‘Competitiveness is a big agenda, and the tax cuts and deregulation in the US have put this firmly on the radar.’”
It’s a vicious circle that just results in a global race to the regulatory bottom and everyone knows where that ends: another catastrophic crash.
Huge Profits Prove Again that Dodd Frank Isn’t Hurting Banks, But Banks’ Push for Deregulation Still Intensifies
While not setting a new mark for the most profitable quarter ever, as the banks did in the first quarter of 2018, posting $56 billion in profits, the second quarter numbers just released by the banks show that the first quarter was no fluke. They continue to post astronomical profits while continuing to push for deregulation.
With the exception of Wells Fargo, which for obvious reasons (continuing fallout over the fraudulent account scandal and the sanctions imposed by the Fed) did not perform as well, all of the big banks showed continued growth in the second quarter in profits and revenues, with Bank of America reporting $6.8 billion in profits for the quarter for a 33% increase. Citigroup reported $4.5 billion in profits (16% increase), JPMorgan Chase $8.3 billion (19% increase), Goldman Sachs had $2.6 billion in profits (37% increase), and Morgan Stanley $2.4 billion in profits (39% increase). As Paul Volcker said, if this shows that the rules are killing the banks, they should be asking for more rules!
As had been reported before the quarter closed, bank loan activity also increased. As Better Markets has discussed in the past, this again shows that Dodd-Frank has not impaired banks’ ability to lend and that banks continue to re-balance their activities away from trading to lending and other activities that support the real economy, which creates jobs and economic growth.
However, as overwhelming proof continues to come out that supports financial regulation, Congress and the federal banking agencies remain all too eager to remove many of the safeguards put in place after the financial crisis. If they are successful, there is little doubt banks will shift their activities back to the riskier behavior we all saw in the lead up to the crisis. A move like that will only benefit Wall Street bankers looking for a bigger bonus, not the Main Street consumer who’s looking for a loan to start a small business or purchase a home.
After Years of Relentless Abuse of Retail Investors, SEC Finally Takes a Very Modest First Step to Regulate Dark Pools (AKA Cesspools) In Spite of One Commissioner Denying Reality and the SEC’s Mission
The SEC has finally adopted new rules of disclosure for Alternative Trading Systems (ATSs), better known as “dark pools.” As years of fines prove, dark pools are often cesspools for investor abuse by some of the biggest players, including Liquidnet, Pipeline, ITG, Credit Suisse, Barclays, GS, UBS and BAML. Notwithstanding that record of abuse, SEC enforcement actions and fines, the SEC has only adopted a disclosure rule and not even one that captures all the ATSs or all of their activities.
To better understand what’s going on here, you need to read the blog of Sal Arnuk and Joe Saluzzi at Themis Trading. They don’t get the attention and praise they deserve, but Joe and Sal are vigilant and fearless watchdogs and advocates for retail investors and fair markets, as detailed on their website and in their fantastic book “Broken Markets.”
Interestingly, this time they don’t only talk about what the SEC did and why it was needed. They also highlight and dissect the related statement issued by SEC Commissioner Hester Peirce, who said, among other things,
“I am particularly pleased about what today’s rulemaking is not. It is not a tool for us to engage in merit regulation of ATSs – the kind of regulation that has the effect of squelching innovation.”
As Joe and Sal point out, this kind of thinking simply ignores the reality of today’s markets, the predators preying on retail investors and how today’s market structure kills innovation:
“One of the giant ‘innovations’ that dark pools have brought us in the last decade has been abuse shrouded in anonymity and complexity….
“Newsflash – markets are extremely complex, with more conflicts of interest than ever…. Markets have figured it out alright – secrecy, complexity, economic clout of a few participants that each trade near 20% of the volume, and abuse.
“This makes it expensive for investors who have to spend substantial resources policing their orders in a market in which the SEC has the power to clean it all up….
“The SEC has a mission to protect investors – to police and referee. They are supposed to ‘merit regulate.’”
“Milton Friedman and Free Markets are admirable. However, we haven’t seen anything close to resembling free markets – with their true innovating power. We have exchange oligopolies catering to outsized participants who prey on real investors.”
This has been going on for way too long and too many investors have lost too much money. The SEC has been derelict in not taking action. Disclosure is better than nothing, but it’s just one step up from nothing. It doesn’t stop the predatory behavior or actors. That’s what the SEC needs to focus on, whether you call it “merits regulation” or just investor protection, which is why the SEC exists.