Is Wall Street 'Castrated' -- Or Just Lying Low?

Gabriel Sherman lends a sympathetic ear to the newly meek Masters of the Universe in his cover story in New York magazine, which appears under the ridiculously over-the-top headline "The Emasculation of Wall Street."  "On Wall Street, the misery index is as high as it’s been since brokers were on window ledges back in 1929, " he writes. And more, unprodded by prosecution or even any serious civil cases, the onetime bad boys of the Street are proving themselves endearingly conscience-stricken: along with the complaints about reduced pay "is something that might be called soul-searching" about Wall Street's many sins and its wildly overcompensated contribution to the U.S. economy, he writes.


OK, there is a lot to what Sherman says. Despite the holes in Dodd-Frank, reduced compensation and increased capital requirements are going to snuff out or marginalize some of the riskier businesses that got us into this mess. And perhaps the most hopeful sign in his article is that Wall Street has become so unexciting that the best minds in the nation may think about going into real engineering--or Silicon Valley--rather than financial engineering. As Liaquat Ahamed, the Pulitzer-winning author of the great "Lords of Finance," put it to me in a conversation today: "Banks and bankers are going to become boring." 

For the moment, yes. But what worries me is not what happens this year or next--but ten and 15 years from now. The fact is, the giant banks are going to remain giants, and there is nothing to fix the too-big-to-fail problem beyond a host of as-yet-unwritten "living wills" that are supposed to tell regulators how to liquidate the banks in a crisis. The largest surviving banks—mainly Citi, JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, and Wells Fargo—are growing bigger and more global relative to the rest of the industry. They have already snapped up weak sisters at fire-sale prices (Bank of America swallowed Merrill Lynch, and JPMorgan gulped down Bear Stearns). They are pushing out smaller banks in key areas, having increased their overall market shares in deposits, mortgages, credit cards, home-equity loans, and small-business loans. 

And they are only getting harder to unwind, no matter what all the new rules say. “In my judgment, as best as I can recount history, not just the last three years but the history of mankind, I can’t think of a single case where we were able execute the orderly wind-down of a systemically important institution—especially one with an international footprint,”  Gerald Corrigan, the widely respected former head of the Federal Reserve Bank of New York, told me for a cover story last May. “There’s a reason why we’ve never been able to do it—and it’s because it’s so damn hard to do it. It’s really that simple." 

Beyond that, at more than $700 trillion (yes, that's trillion), the derivatives trade is already much larger than it was during the 2008 crisis. And meager as it is, Dodd-Frank is in the process of being gutted on Capitol Hill (never mind what might happen if Mitt Romney gets elected president, since he has vowed to repeal it).  Regulators are starved for staff.  With a staff of only 712 (roughly unchanged from the 1990s, when financial products where much less complex), the Commodities Futures Trading Commission must regulate markets seven times the size of the futures market it used to oversee.  “Until we complete this task, the American people remain at risk,” Chairman Gary Gensler warned me and my colleague Stacy Kaper in an interview with National Journal last December. "We are midstream” in rule-writing and in requiring firms to report their trading positions, he admitted. “The only thing that we would have right now is the data that banks and others are voluntarily reporting.” Even after the rules are written, Gensler said, “we won’t necessarily have the cops on the beat to oversee the market.”

As James Kwak writes today in The Baseline Scenario, Sherman's article tends to depend on the sob stories of master Street manipulators like Jamie Dimon and well-known outside critics. "The story’s featured voices are ones that are not on Wall Street and have been critical of it for a long time, such as Paul Volcker and John Bogle," Kwak writes. "There are certainly bankers saying that the business is getting tougher, but that’s a cyclical thing. Profits were lower in 2011 than in 2010 because the economy was weaker in 2011 than in 2010. ... My main worry is that the regulations we have are still fundamentally reactive."

Kwak is right. Washington will never catch up. And depend on it, Wall Street will figure out a way around those regulations, as long as the structure of these giant firms remains intact. Wall Street always does.