Even as Republicans push for smaller and smaller government, those policymakers and regulators with a special interest in or oversight of financial markets appear to be in a decidedly re-regulatory frame of mind. Certainly, some of the latest proposals aimed at making Wall Street less risky and the financial system more stable are venturing in that direction, to a surprising degree.
Over the summer, we witnessed a bipartisan attempt to restore some version of the Glass-Steagall Act, reinstating the barriers that once barred commercial banks (that accepted consumer deposits) from dabbling in the riskier array of businesses from which investment banks made their money. By the time it was repealed in 1999, the Depression-era legislation was being honored as much in the breach as the observance, having been nibbled away at over the decades that led up to the 2008 financial crisis.
Since the repeal, Senator John McCain argued, “a culture of dangerous greed and excessive risk-taking has taken root in the banking world,” necessitating a return to the spirit of Glass-Steagall. The push to reinstate the separation of the two kinds of banks is being spearheaded by Sen. Elizabeth Warren (D-MA); in an ironic twist, McCain voted in favor of the Gramm-Leach-Bliley Act, which was responsible for the demise of Glass-Steagall.
The financial crisis continues to fuel the debate over how much regulation is enough when it comes to Wall Street. As of this month, just 40.5 percent of the rules required under the Dodd-Frank regulatory reform have been finalized, according to law firm Davis Polk. Even so, each new controversy over the last few year – the “flash crash”; the London Whale trading losses; the scandal over the rigging of Libor; the debate over the ownership of metals warehouses and power generation plants by banks – seems to have tipped the balance further in favor of those arguing for greater oversight over the financial system.
In the eyes of these critics, it’s not enough simply to ensure that systemically important banks – those deemed “too big to fail” – are well capitalized and less likely to require bailouts in the event of another crisis. Further steps need to be taken to reduce the odds that any chain of events that might result in such a crisis developing in the first place.
JPMorgan Chase is rapidly emerging as the poster child for this new kind of “tough love.” The cost of protecting the bank and its shareholders from litigation of various kinds – and of paying fines to settle some allegations – has become so substantial that JPMorgan Chase last week reported a loss of $380 million for the third quarter of 2013, the first quarterly loss ever booked under the leadership of CEO Jamie Dimon. It’s a mark of how much attitudes have shifted since the crisis, when Dimon was awarded a status somewhere between éminence grise and superhero for steering his own institution through the wreckage with remarkably little damage and for his leadership within the industry more broadly.
These days, JPMorgan Chase is more likely to serve as a cautionary tale. Clearly, the bank’s risk management and oversight policies were inadequate, as the $6 billion London Whale losses reflected. Until this new, harsher approach to regulatory oversight took hold in Washington, however, it would have been both more difficult legally and practically for Commodity Futures Trading Commission (CFTC) enforcement officials to pursue the bank as aggressively as they have been in the London Whale case. Rather than simply sign off on a pro-forma deal, CFTC officials are said to be uninterested in any settlement that doesn’t include an admission by the bank that its employees deliberately manipulated financial markets.
While Dodd-Frank gives CFTC the power to do so (requiring them to show simply reckless conduct rather than a deliberate intent to manipulate), aggressively pursuing such an admission from JPMorgan Chase – rather than, say, Goldman Sachs or some other firm whose reputation was more tarnished during the crisis – remains a novel phenomenon.
The Securities and Exchange Commission, under its new chair, Mary Jo White, shows every sign of becoming equally aggressive in devising new rules of the road for Wall Street. Most recently, White publicly questioned whether securities exchanges should still be allowed to regulate themselves. If she and SEC colleagues follow through with concrete proposals to pull some of the self-regulatory responsibilities away from the likes of the New York Stock Exchange and Nasdaq, that would mark an even more dramatic change in Washington’s attitude to regulation. While Congress and the CFTC are demonstrating a greater willingness to act in areas that have always been their domain, the SEC would be creating new precedents.
But then, as White pointed out, the environment in which exchanges work these days, the structure of the markets and the nature of the exchanges themselves have all changed dramatically over the last decade or so. Now that U.S. exchanges are for-profit, publicly traded corporations (rather than member-owned entities), will they be as focused on writing appropriate market rules if there is a risk that those rules will make it more difficult for people to trade or for the exchanges to make money?
The case of the bungled Facebook IPO is a case in point: In trying to protect itself from investor lawsuits, Nasdaq claimed that it was acting as a regulator when it launched the IPO and thus is immune from claims by investors who incurred losses in the chaotic trading that followed the offering.
The market has been waiting for the SEC to undertake some kind of action with respect to what are known as “dark pools,” privately owned and operated trading venues that have seen their market share soar even as they are subject to less regulatory oversight. But for the SEC to not only tighten regulation on these competitors to exchanges, but to remove from the exchanges themselves the right to govern themselves, would be a step further than anyone has been expected.
Clearly, the financial crisis wasn’t “the crisis to end all market crises,” as the debacles that we have witnessed since have demonstrated all too clearly. The first wave of post-crisis regulation focused on making critical institutions more able to survive another such tsunami. Now, the signals sent from Washington in recent months suggest we may be on the verge of a second flurry of activity aimed at trying to guard against such problems becoming a tsunami in the first place.
That’s a utopian goal, and regulators and policymakers looking to dabble in these waters should probably pause to consider the unintended consequences of their actions. But it’s a reassuring sign that, five years after the last serious systemic challenge, complacency hasn’t seized hold of those regulators whose job it is to ensure our financial markets function as smoothly as possible.