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Regulating banks                                                                                    

Posted at: May/05/2010 : Posted by: mel

Related Category: Economics,

There has been a lot of news about financial regulation coming from congress in the wake of the deepest recession in nearly seventy years. There is no doubt in my mind that the short-sighted motive for profit over financial responsibility led these banks to make irresponsible choices. For most of us, if we do something wrong and get caught there is normally a punishment and a change in the rules to prevent us from that same choice in the future. The legislation that congress is debating is exactly that. For obvious reasons the banking industry is lobbying very hard to prevent any new rules or oversight on their activities.

At the center of this debate is financial-regulation reform for derivatives—the complex financial instruments behind many of the recent debacles—to be traded on centralized exchanges, where data and activity could more readily be seen by investors. As no surprise to anyone, Wall Street opposes calls for change. JPMorgan Chase CEO Jamie Dimon told analysts that such proposals could cost his bank from "$700 million to a couple billion dollars," and industry players warn that investors would suffer if trading becomes more transparent. But like with our children, history has shown that banks often don't know what's good for them.

In the 1930s, banks opposed the creation of the SEC and FDIC. The SEC provided oversight to the trading of stocks in a “fair and transparent manner”. The FDIC has protected the savings of millions of individuals from the greed and poor decisions of a few. Creation of the SEC and FDIC is credited with laying the groundwork and confidence associated with the financial industry's remarkable growth over the next 80 years. In 1975, over the protests of Wall Street firms, the SEC did away with fixed commissions. Yes, profits from executing trades were pinched, but the discounters that sprang up as a result brought in millions of new investors. New investors provided much of the capital for the innovation boom of the next 25 years. In 2000 and 2001, the SEC ordered exchanges to switch from the archaic method of pricing stocks in eighths, to decimalization, or prices in pennies. Market makers objected, but customers got better treatment and equity trading boomed. More recently, the SEC forced firms to post corporate bond-market trades on a central clearinghouse. The result: Wall Street wails, a better trading environment for investors, and higher volume. Meanwhile, whether it was the erosion of the Glass-Steagall Act or getting license to increase leverage, the few times that Wall Street has gotten its way, catastrophe has followed.

What history has really shown us is that the financial services sector hates change with a passion. But history has also shown us that creativity thrives with change. It is time for the lobbyist to shut up and take their medicine. Business as usual is no longer good enough, but don’t worry, they will still find a way to make a profit.

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