The questions of how to fix Wall Street–style capitalism—from taxes to regulation—are being intensely argued and will undergird much of the economic debate during this presidential election. And many on Wall Street are still making the argument that the consequences of hobbling Wall Street could be severe. “These are sweeping secular changes taking place that won’t just impact the guys who won’t get their bonuses this year,” Bove told me. “We’ve made a decision as a nation to shrink the growth of the financial system under the theory that it won’t impact the growth of the nation’s economy.”
And yet, the complaining has settled to a low murmur. Even as bonuses have withered, Wall Street as a political issue is gaining force. Bankers are aware that populism has a foothold, even in the Republican Party, and that these forces are liable to accelerate the process already taking place. “There’s a real sense the world is changing,” says a private-equity executive with deep ties to the GOP. “People are becoming aware there’s real anger out there. It’s not just some kids camping out in some park. The Romney attacks caught everyone by surprise. We have prepared for this to come from the Democrats in the fall, but not now. You could run an entire campaign if you’re Barack Obama with ads using nothing but Republicans saying things about finance that you’d never hear two months ago. It’s an amazing thing.” (...)
Wall Street as Wal-Mart? A few years ago, the Masters of the Universe never could have imagined their industry being compared to big-box retailing. And yet, the model that had fueled bank profits has finally broken, as markets sputtered and new regulation kicked in. “Compensation is never really going to come back,” a Wall Street headhunter told me. “That is something entirely new.”
What is even more startling about this reversal is that few thought the much-vilified Dodd-Frank act would have much effect at all. From the moment it was proposed in 2009, the bill was tarred from all sides. Critics from the left, who wanted a return of Glass-Steagall, which had kept investments banks and commercial banks separate until it was repealed during the Clinton years, howled that Dodd-Frank wouldn’t go far enough to break up the too-big-to-fail banks. “Dodd-Frank was an attempt to preserve the status quo,” Harvard economist Ken Rogoff told me. The too-big-to-fail banks, for their part, argued that the 2,300-page bill would create an overly complex morass of overlapping regulators that risked killing their ability to compete against foreign rivals. “We joke that Dodd-Frank was designed to deal with too-big-to-fail but it became too-big-to-read,” said the Citigroup executive.
By the time the bill passed, in July 2010, the legislation hadn’t found many new friends. Banks were especially upset by the inclusion of the Volcker Rule, which banned proprietary trading and virtually all hedge-fund investing by banks. Banks also complained about an amendment that slashed lucrative debit-card fees. They capitulated mainly because the alternative—breaking them up—was worse.
Part of the perception that the financial crisis changed nothing is that, in the immediate wake of the crash, the banks, buoyed by bailout dollars, whipsawed back to profitability. Goldman earned a record profit of $13.4 billion in 2009, as markets roared back from their post-Lehman lows. This dead-cat bounce was central to the formation of Occupy Wall Street and the neopopulist political currents that first erupted when the Treasury Department appointed Ken Feinberg to regulate bonuses for several TARP recipients. “The statute creating my authority was populist retribution,” Feinberg told me recently. “The feeling was, if you’re going to bail everyone out with the taxpayers, it has to come with a price.”
And yet, from the moment Dodd-Frank passed, the banks’ financial results have tended to slide downward, in significant part because of measures taken in anticipation of its future effect. Since July 2010, Bank of America nosed down 42 percent, Morgan Stanley fell 25 percent, Goldman fell 21 percent, and Citigroup fell 16—in a period when the Dow rose 25 percent. Partly, this is a function of the economic headwinds. But the bill’s major provisions—forcing banks to reduce leverage, imposing a ban on proprietary trading, making derivatives markets more transparent, and ending abusive debit-card practices—have taken a pickax to the Wall Street business model even though the act won’t be completely in effect till the Volcker Rule kicks in this July (other aspects of the bill took force in December; capital requirements and many other elements of the bill will be phased in gradually between now and 2016). “If you landed on Earth from Mars and looked at the banks, you’d see that these are institutions that need to build up capital and that they’re becoming lower-margin businesses,” a senior banker told me. “So that means it will be hard, nearly impossible, to sustain their size and compensation structure.” In the past year, the financial industry has laid off some 200,000 workers.
Nobody on either side would say that Dodd-Frank perfectly accomplished its aims. But while critics lament that no bank executives have gone to jail and have argued for a law that would have effectively blown up the banking system, Dodd-Frank is imposing a painful form of punishment. “Since 2008, what the financial community has done is kick the can down the road,” the senior banker added. “ ‘Let’s just buy us one more quarter and hope it gets better.’ Well, we’re now seeing cracks in that ability to continue operating with the structures that had been built up.”
by Gabriel Sherman, New York | Read more:
Photo: Howard Schatz
