As Obama signs the most sweeping financial reform law since the Great Depression, Randall Lane finds a lot of Wall Streeters privately admitting their biggest complaint about the bill: it doesn’t punish them enough.
While President Obama signed the health care reform bill that Congress sent him with the haste of a Las Vegas wedding chaplain, financial reform has been allowed a relatively leisurely six-day engagement. This purgatory between the Senate’s vote last week and Obama’s autograph today has allowed Wall Street to gradually digest its immediate future.
Upon passage, the standard response was to publicly grumble but privately rejoice about a bill that could have been far more punitive. But as I asked around over the past few days, there’s been a shift: many on Wall Street now view financial reform as a wasted opportunity—to make the rules that govern them even tighter.
They won’t say this officially. They might not even say it to their peers, in the same way they won’t tell others on the desk they really dig Glee. But privately, one-on-one, the most deliberative Wall Street hitters I know recognise that they need a system that saves them both from themselves, as well as potentially capricious regulators. This new law, while well-intentioned and likely better than nothing, effectively accomplishes neither.
To understand why, it’s integral to grasp the Wall Street mindset: a place where more is always good, where manners don’t count for much, and where trouble is only defined by whether you get caught. The financial industry, in other words, is basically populated by a few hundred thousand five-year-olds.
And like petulant preschoolers, Wall Street craves—and needs—rules, and the discipline to enforce them consistently. If left to its own self-interest, Wall Street couldn’t function. Whereas a group of engineers on a desert island would surely built a little civilisation, financial professionals would act out Lord of the Flies, a bunch of kids eating candy all day. Money can be made from markets in almost any global condition—war, famine, euphoria, it doesn’t much matter, as long as liquidity is required. What the markets really hate is uncertainty.
Yet that’s what today’s watered-down law introduces. Take the Volcker Rule, which in its original form would have banned bank “prop trading”—the practice of banks’ taking government-insured deposits and gambling with them for their own profit. An elegant way to protect Wall Street from itself. Even the outlaws were rooting for the sheriff on this one. “Objectively, it’s a good idea,” one trader, who until recently ran a large prop operation for one of the top banks tells me. “It (the Volcker Rule) was clean. It made sense.”
But the muddled-down law—firms can continue to prop trade with up to three per cent of their assets—comes riddled with loopholes. Want to get around the three per cent rule? Prop trade from your foreign offices. Or renounce your status as a bank holding company, as Goldman Sachs seems primed to do. Or, when one of your clients is selling something you want to buy, put it in your pocket, rather than act as a true middleman. The Volcker Rule offered some consistency; the three per cent rule merely kicks off a race to see who can be most creative circumventing it.
Such murkiness appears throughout the new law. Wall Street would be thrilled to impose strict rules dealing with the ratings agencies, who blessed so many of the junky contracts that Wall Street sold to unknowing dupes. “People would have loved that,” another heavy tells me. “They would have taken the blame out of Wall Street.” Instead, other than increasing their liability, we get a two-year study on how to fix them problem—one of a dozen areas, whether a “council of regulators” declearing if a bank has grown too big to fail or “guidelines” for pay packages that encourage risk, that casts regulators in the role of parents.
That’s dangerous. With so much in the law left grey, and so many regulators and commissions established to judge those fuzzy areas, we run the risk of politicizing financial regulation, turning it into another EPA or OSHA, where the Democrats score points expanding the rules when they’re in power, while Republicans ignore them when they have control.
Kids hate it when parents fight; so does Wall Street. The latter, like the five-year-old, gladly would have accepted tighter shackles for the knowledge that it could grow, safely and securely.
Randall Lane is editor at large at The Daily Beast. This post originally appeared at the Daily Beast and is republished here with permission.