Irregularity on the Street

Canada has had fairly intense banking and financial regulations throughout its modern history. The currency is solid, their real estate market wasn’t hit particularly hard in recent years, their businesses are prospering, their national healthcare program is coveted by most of their citizens and life is good up there. They also haven’t had a major recession or depression in 150 years… not even the Great Depression of 1929. Ok, it can get a little cold during the winters, and their financial executives don’t exactly draw remotely the pay levels of their American counterparts. The During the same period, United States, on the other hand, has lived through a roller coaster, boom or bust economy that destroys lives along the way… with pretty lax financial regulation.

Down here, our obsession with short-term trading as opposed to longer-term investing and value creation is a disease that makes extreme volatility a good thing for those who make their livings trading and a pretty bad thing for folks who are trying to run their companies to manage growth and revenue generation. Worse for creating the kind of stable environment where employers feel confident enough to hire new workers. And let’s face it, betting in a volatile market is risky… remember the subprime collapse that took down the market in the fall of 2008? Bailouts? Remember?!

America’s six largest banking institutions aggregated a record $23 billion dollars in earnings in the second quarter this year. Financial executives are making money hand over fist. Instability and volatility were really good for business. They make money when the market moves, up or down… they die when it is static. For traders with federal banks inside their corporate umbrella, fat has gotten even chubbier as they borrow fed funds at near zero interest (try that one, Mr. Consumer!!!) so that they can invest on their own accounts.

Wall Street loves this system, even though it continues to erode the buying power of the average American worker (every year, without fail, since 2002) and pushes increasing wealth – they already control 42% of the entire American wealth pot – into the hands of the one percenters even as costs (read: paying folks their salaries and wages) are continually reduced. Bottom line: banks want to have as little equity as possible (which requires them to pay investors a hefty rate of return) while being able to load up on very, very cheap debt from the fed. The government wants a solid equity cushion to protect against that volatility. Many others, even including conservatives like Senator John McCain, would be a lot happier if we go back to the pre-1991 repeal of the ban against commercial banking and trading being in the same entity; they really shouldn’t be under the same roof.

The government is pushing back, while facing a Congress that depends heavily on this Wall Streeters for campaign contributions: “The most pressing concern for banks is a relatively tough new rule that regulators proposed [in mid-July] that could force banks to build up more capital, the financial buffer they maintain to absorb losses [from risky trading in a volatile market]. But the banks did not demonstrate any difficulty in meeting the proposed rules, and the banks now appear to have fewer allies in Washington than at any time since the financial crisis.

“This was highlighted on [July 17^th] when the Treasury secretary, Jacob J. Lew, effectively issued an ultimatum to Wall Street, calling for the swift adoption of rules introduced through the Dodd-Frank financial overhaul law, which Congress passed in 2010. Mr. Lew also said that he might be open to stricter measures if enough had not been done to remove the threat that big banks can pose to the wider economy… ‘If we get to the end of this year, and cannot, with an honest, straight face, say that we’ve ended ‘too big to fail,’ we’re going to have to look at other options because the policy of Dodd-Frank and the policy of the administration is to end ‘too big to fail,’ ’ Mr. Lew said.” New York Times, July 18^th.

There is still so much wrong with our regulatory schema, from returning to a world where traders and commercial banks are never allowed in one company to stopping companies that issue debt from being able to select and pay for the company that will rate that debt… but we have to start somewhere.

I’m Peter Dekom, and sometimes the obvious just isn’t enough to stop foolhardy business practices.