Over the course of the past two years, a lot of tomatoes have been thrown in the direction of Wall Street. Some of it was deserved. Much of it wasn’t. It was uninformed populist anger. It’s really easy to blame a bunch of egotistical rich guys in Brioni suits for problems that were caused elsewhere.
This anger has given rise to dual hyper regulation of both sides of the Atlantic. In Europe, regulators have come down hard on the investment banks. Many politicos have advocated a trading tax. The United States is not any different. Barney Frank and Chris Dodd combined to pass one of the most damaging bills ever to the US financial system. The Financial Regulation Law that President Obama signed last summer is yet to be filled in. The terms are so broad that they have sent a chill up the spine of bankers.
Goldman Sachs traditionally gives most of it’s large sse to the Democrats. Jaime Dimon of JP Morgan says he is a Democrat. But since they all were taken to the woodshed, they have begun donating money to the Republicans.
Correct regulation is good. It levels the playing field. It creates competitive markets. If incentives are written with care and concern for economic growth, the market will respond with enthusiasm. If applied capriciously, we get laws like Sarbanes-Oxley.
For years, investment banks and trading firms have tried to play regulatory arbitrage with different countries financial regulators. Corporations also do this with taxes, recognising revenue in certain countries to lessen tax liability. The regulators have turned their howitzers on the banking industry.
Lloyd Blankfein of Goldman Sachs today said, “Operations can be moved globally and capital can be accessed globally,” he told the panel. “It’s not arbitrage to thwart [regulation]. It’s about a need to compete with rivals.”
The regulators are playing a game of chicken with banks. This is a game the banks will win.
Countries need bank capital to grow. Excessive regulation, excessive limitations on operations limits profitability. Banks must answer to their shareholders and will allocate capital where it does the most for shareholder value. That allocation also happens to do the most for their own pocketbooks! Nationwide GDP increases faster with good banking.
Cities like Chicago, New York, London, Geneva, and Hong Kong have all benefit ted by having an active banking community and a deep deposit of capital housed in city banks. It gives local businesses an advantage.
Where does all this capital go with aggressive regulation?
Asia. Asia has been steadfastly quiet during this whole debate. Ironically, Singapore is not a member of the G-20. It doesn’t need to abide by any G-20 pronouncements. Singapore has excellent banking regulation that makes it the “Switzerland of Asia”. Capital is beginning to flow there. If hedge funds, high frequency traders, and the rest of the marketplace are smart, they will follow that capital over there.
There is a 600 trillion dollar a year OTC market at stake. Most of it makes its home in the US and Europe. It might find a new home in Asia.
US regulators don’t understand the function of places like LaSalle Street in Chicago, and Wall Street in New York. Many in Washington DC see them as simply greedy traders looking to steal the last piece of bread off the plate. The current leaders in control of the levers of power have decided to aggressively target them. Some of the hearings that I have seen at the House Financial Services Committee, and the Senate Banking Committee make it abundantly clear that many of our elected officials don’t understand the world of high finance. The laws that they have passed, the regulations they have enacted over the past years have confirmed that suspicion.
Now the banks will make them pay for their lack of understanding. Capital can leave with the flip of a switch. Blankfein issued a warning shot today. They are getting ready to turn that switch. The markets of Europe and the US will suffer.