Wall Street— Gone Dark?

by wjw on February 7, 2012

Just days ago I was mocking the Dodd-Frank financial reforms as overly complex and ineffectual.  But now an article in New York suggests that they have, in fact, had a considerable effect on the banking industry.  And for the good, if you ask me . . .

To comply with the looming regulations, banks have begun stripping themselves of the pistons that powered their profits: leverage and proprietary trading. In the wake of the crash, Morgan Stanley and Goldman Sachs converted to bank holding companies to tap the “discount window,” the Fed’s pipeline of cheap funds that gave the banks an emergency source of liquidity. That move seemed smart then, but the stricter standards required of banks have now left them boxed in.

With all the major banks unable to wager their own funds on big bets, there’s a growing sense that the money that was being made during the Bush boom won’t be back. “The government has strangled the financial system,” banking analyst Dick Bove told me recently. “We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.”

Of course, described a little less colorfully, reducing the risk in the system at a cost of a certain amount of the banks’ profits was precisely what the government was striving for . . .

“If you’re a smart Ph.D. from MIT, you’d never go to Wall Street now,” says a hedge-fund executive. “You’d go to Silicon Valley. There’s at least a prospect for a huge gain. You’d have the potential to be the next Mark Zuckerberg. It looks like he has a lot more fun.”

. . . “Certain products are gone forever,” Dimon told me. “Fancy derivatives are mostly gone. Prop trading is gone. There’s less leverage everywhere. Mortgages are back to old-fashioned conservative mortgages—which is a good thing.”

Gosh.  So now, instead of employing clients’ money to make huge billion-dollar bets with each other, banks now have to invest in businesses, supervise IPOs, make mortgages, and develop bond issues.  They can no longer charge insane fees for things like debit cards.  There are now more hedge funds than there is money to invest in them.

Sounds like a brighter, safer, saner world.  Could it be that Occupy Wall Street showed up a few years too late?

Or has it all just moved underground, somewhere to the dark economy?  If the Big Swinging Dicks can’t play on the Street anymore, maybe they’re making their side bets off in the Deep Web.   Unsupervised, unregulated, at invitation-only sites as charming, and ruthless, as dogfighting pits.

If so, let’s hope that it’s their own money they’re playing with.

DensityDuck February 7, 2012 at 6:33 am

This is exactly what happened in the early Nineties after the Savings and Loan Crisis (remember how that destroyed civilization?)

And the crazy thing about all this is that what happened in 2008 was exactly what happened in 1988. Banks that were once tightly-regulated convinced the government that they didn’t need to be quite so regulated after all, and the government was happy to go along with it because relaxed lending and oversight standards meant that lots more people could get loans, and then the whole thing blew up and everyone cranked down on regulation again. Until the next time.

See, that’s what the “boom and bust is natural” guys don’t understand–that it might be natural for that to happen, but only in a consistent regulatory environment. It’s better to have no regulations at all, than to have super-tight regulations sometimes and then just loosen them bit by bit, bank by bank. If you’re gonna have rules then you gotta make everyone play by them for the whole game.

Ralf The Dog. February 7, 2012 at 6:44 am

The thing about economic force multipliers is, they multiply both directions.

Bruce Cohen (Speaker to Managers) February 7, 2012 at 12:51 pm

“let’s hope that it’s their own money they’re playing with.”

Not going to happen. Not when there’s trillions of dollars of retirement investments and similar piles of Other People’s Money to be scammed.

Ken Houghton February 7, 2012 at 3:39 pm

” banks have begun stripping themselves of the pistons that powered their profits: leverage and proprietary trading.”

If it hadn’t been part of your blog post, I would have stopped reading there, convinced the author was an idiot.

Prop Trading was never a big money maker, and often was a money loser; most of the people I speak to are happy it’s gone. (Or, in some cases, run by an affiliated entity.)

Leverage is lower? Yes, but–even ignoring that some of that is regulatory–leverage in itself doesn’t increase profits: there has to be something to DO with the leverage. Otherwise, it really is gambling. Lower leverage is a result of the lower demand for “riskier” assets as much anything else. (Short version of that sentence: wait for the next bubble.)

It’s articles such as this one that re convincing me it’s time to get more heavily invested in the markets (a feeling that generally lasts until more data is published).

Frank Shannon February 7, 2012 at 7:34 pm

I read that article too, but I just thought the rich had smartened up about their propaganda, and realized articles about how unpopular they are giving them a sad were counter productive.

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