Saturday 09 Oct 2021 | 06:00 | SYDNEY
Saturday 09 Oct 2021 | 06:00 | SYDNEY

The bankers still don't get it (part 2)


Stephen Grenville

19 September 2011 12:38

Part 1 of this post looked at the failure of financial reform in Europe and the UK.

In the US, the epicenter of the global financial crisis, the effectiveness of financial reform is obscured by the sheer volume of the 2600-page Dodd-Frank legislation. The financial sector is busy subverting its intention. Attempts to re-impose separation between traditional retail banking and proprietary trading are being undermined by cosmetic restructuring. Attempts to increase capital requirements have provoked threats from industry leaders that the US should cease to be part of the Basel-based international effort to make the financial sector less crisis-prone. 

Restructure of the byzantine US regulatory system left it with more, not fewer, regulatory agencies. The various crisis-driven mergers have made the sector more concentrated and conglomerated, not less.

This is symptomatic of a deeper problem. The financial sector does not yet accept that what went wrong in 2008 reflected fundamental faults. The veterans of 2008 see their survival as vindication and proof of their resilience. They criticise the reforms, one-by-one in isolation, arguing that none of the individual problems can explain all that went wrong.

They ignore the wider reality that if government had not assisted large banks such as Citi and Bank of America, interconnectedness and contagion would have brought others down.

The AIG rescue protected Goldman Sachs. The US Government's guarantee of the short-term money market kept this lifeline of funding open. The rescue of Fannie Mae and Freddie Mac kept the mortgage market alive. It's hard to believe that even the best-placed survivors such as JP Morgan Chase could have withstood the damage without the help the Government gave to the sector as a whole. Instead of accepting this, Wall Street has fought every attempt at reform, through their powerful and well-funded lobbying.

What has been the penalty for Wall Street's failure? Financial sector bonuses took a dip in 2009, but are back up again. Many of the 2008 players are still at their desks, while those who patently failed have gone into honourable and generously-remunerated retirement. Whereas eight hundred people went to jail after the relatively minor Savings-and-Loans crisis in the early 1990s, only peripheral players have suffered that fate this time.

Perhaps symbolic of the failure of reform, high-speed trading (which must be a perfect fit for Adair Turner's category of 'socially useless' financial activity) has come to dominate equity and derivative markets.

With three years now elapsed since Lehmans collapsed, the opportunity for fundamental reform is slipping away.

Photo by Flickr user Nick in excelsio.