Saturday, February 11, 2012

"The End of Wall Street as They Knew It": lament or celebration?

A lot of people quote Shakespeare characters as if "Shakespeare" is speaking ("the first thing we do, let's killl all the lawyers"). The white-rage set is doing the same to Gabriel Sherman for giving voice to bankers' laments in his opus in New York, The End of Wall Street as They Knew It

Sherman argues that Dodd-Frank is beginning to crimp -- and will increasingly crimp -- the engines of turbo-charged Wall Street profits:

The implosion of the credit bubble destroyed Wall Street’s business model. Now regulations are kicking in that will sap its ability to create the next bubble. Over the past year and a half, the banks have dramatically deconstructed their proprietary-trading desks to comply with the new rules of the game. Among ­Volcker’s provisions is a rule that mandates that banks can invest just 3 percent of their core capital in hedge funds and private equity, meaning that, in addition to being banned from trading for their own accounts, they can’t take risks in outside funds either. “There’s less money to go around because the revenue business model is changing, and it has to change,” a former Lehman trader says. “You can’t print the cheap money anymore.” And nowhere is this rule more devastating than at Goldman Sachs, where proprietary trading accounts for an astonishing 10 percent of the firm’s revenue.

As the banks jettison their trading arms, they’re being restrained by rules that force them to retain more capital. In December 2011, the Fed announced it would compel banks over the next few years to effectively double the amount of capital they hold on their books, a move that would curb leverage and, ultimately, profits. At the boom’s peak, banks like Lehman and Bear Stearns levered up 30, even 40, to 1. Under the new rules, banks would only be able to borrow $12 for every dollar they spend. In Europe, the rules are even stricter: British regulators have indicated that banks may have to hold as much as 20 percent on their books. “Everything that happened over the past 30 years comes back to the leveraging of the global economy,” a former Bear Stearns executive said, “and now that’s reversing.”

Along the way, he quotes various traders, executives and analysts who are not exactly standing up and cheering:
With all the major banks unable to wager their own funds on big bets, there’s a growing sense that the money that was being made during the Bush boom won’t be back. “The government has strangled the financial system,” banking analyst Dick Bove told me recently. “We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.”
Sherman adds:
Of course, described a little less colorfully, reducing the risk in the system at a cost of a certain amount of the banks’ profits was precisely what the government was striving for.

Matt Taibbi, however, assumes that Sherman shares the lament -- that he is mournful bankers' poet:
The article argues that Barack Obama killed everything that was joyful about the banking industry through his suffocating Dodd-Frank reform bill, which forced banks to strip themselves of "the pistons that powered their profits: leverage and proprietary trading."

He’s written a sort of investment-banking version of Jimmy Carter’s "malaise" speech, complaining about a lost era of easy money
Chris Lehmann takes the same tack:
...To your crying towels, bankers! Correspondent Sherman is on the scene, and no howling distortion of recent financial history you care to offer is too outlandish for him to faithfully record! After duly huddling with a couple of dozen financial titans, our reporter has arrived at a chilling verdict: “what emerged is a picture of an industry afflicted by a crisis it would not be flip to call existential.”
Taibbi and Lehmann have similar substantive critiques of Sherman's piece: that what's really crimped bank profits in the last two years has been shocks to the global economy, particularly the European crisis this year -- not the  "largely toothless measure lousy with loopholes and lobbying dosh" that Lehmann deems Dodd-Frank to be. That the European debt crisis is the main proximate cause of this year's poor bank profits and bonuses is true, and it's also true that Gabriel gives it short shrift.  But the question remains whether Dodd-Frank's still-in-flux ban on proprietary trading, the still-unformed derivatives trading exchanges and rules, the recently bulked-up capital requirements, the limits on merchant credit card fees, and other restraints on pre-crash practices will significantly change the banks' business model, permanently shrink their profits and push them toward more productive forms of lending.  Neither really address Sherman's claim that the change in model and reduced profit margins are real, long-term changes (he doesn't really address whether these changes will make banks more productive).

Taibbi and Lehmann are so enraged by the laments of some Wall Streeters quoted in the piece, they don't notice that not only Sherman but many of the people he cites acknowledge that the banking bonanza of the last 30 years proved unsustainable and unproductive. Those acknowledging a need for change include Jamie Dimon and Bill Gross:
Questions about how the banking industry—and the New York economy itself—will reconstitute are being widely debated amid a grudging new consensus among financial types that the past decades represented a distorted type of capitalism. Partly, they acknowledge, the profits of past years were a function of highly specific policies—the repeal of Glass-Steagall, Alan Greenspan’s expansionist monetary policy, the government’s headlong push to encourage home ownership—that allowed Wall Street compensation to explode.

Like an addict, Wall Street is now taking its first step toward recovery by accepting its failings. “TARP led to a lot of this anger,” said Jamie Dimon. “People said, ‘Well, you got bailed out and you would have failed.’ It’s not true in our case, but I can understand why people are upset about that.”

And Dimon acknowledges the issue highlighted by Occupy Wall Street. “I do think we’ve become a less equitable society,” he told me. “So I’d ask the question—let’s say we agree it’s become less equitable—what would you do about it?”

This brand of self-criticism is clearly smart politics. But it also appears to be somewhat sincere. In recent months, a parade of financiers have jockeyed to get on the side of the Occupiers. At a public forum at UCLA’s Anderson School of Management this past November, Bill Gross, the co-head of the massive bond giant PIMCO, told the audience that he shares “sympathy for labor as opposed to capital.” Gross, a registered Republican, articulated the view that finance, and Wall Street compensation, had become disconnected from the real economy. “It’s been several decades when money and finance have dominated at the expense of labor and Main Street. How can one not sympathize with their predicament?”
As for Sherman's own attitude, he give the final word to John Bogle, who asserts that the curbed profits are necessary and right:
But for now, the strictures that are holding the banks back now are tighter than any since the thirties. And those laws kept banking reliably risk-free and dull until the deregulation mania of the eighties and nineties unleashed finance. The system is being designed so that Wall Street grows only as fast as Main Street. “The bubble can’t happen again,” Jack Bogle told me. “The underlying reason is, corporations make money. We do things that make society better. But they grow, and this won’t surprise anyone, at rate of GDP.” On Wall Street, recent history was the exception. “Reversion to the mean is the rule of the financial market.”
Taibbi and Lehmann are driven so batty by some of the more lachrymose and tone-deaf complainers that they miss the point of the piece.

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