Wall Street— Gone Dark?

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.