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Out of Lehman's Ashes Wall Street Gets Most of What It Wants
December 30, 2010 4:24 PM

Wall Street ain't doin' too shabby these days, successfully stiff-arming us taxpayers who bailed them out two years ago:

Wall Street's biggest banks, whose missteps caused a global financial crisis and economic slowdown two years ago, were more agile when it came to countering the political and regulatory response.

The U.S. government, promising to make the system safer, buckled under many of the financial industry's protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban any form of derivatives. Higher capital and liquidity requirements agreed to by regulators worldwide have been delayed for years to aid economic recovery.

How have revenues been stacking up down there in Lower Manhattan?

The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America Corp., JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg. Goldman Sachs CEO Lloyd Blankfein, 56, and his top deputies are in line to collect more than $100 million in delayed 2007 bonuses -- six months after paying $550 million to settle a fraud lawsuit related to the firm's behavior that year. Citigroup, the bank that needed more taxpayer support than any other, has a balance sheet 14 percent bigger than it was four years ago.

Was it really too difficult to regulate these firms properly, or did they buy their way out of any significant regulatory hurdles?

"The debate that's necessary on these subjects is a debate that is so unbelievably complicated that the larger financial institutions have always controlled the narrative," said Byron Dorgan, Senator from North Dakota. "Even things that were fairly mild were contested as anti-business and going to injure and ruin the economy."

Even when changes were advocated by people who couldn’t be characterized as radical populists, their ideas were dismissed as unrealistic, misinformed, advancing ulterior motives or damaging to U.S. competitiveness.

Such tactics helped bat back suggestions from billionaire hedge fund manager George Soros and Berkshire Hathaway Inc. Vice Chairman Charles Munger that regulators ban purchases of so-called naked credit-default swaps -- contracts that allow speculators to profit if a debt issuer defaults.

Geithner was an early opponent of any such ban, arguing at a March 2009 House Financial Services Committee hearing that it wasn't necessary and wouldn't help.

"It's too hard to distinguish what's a legitimate hedge that has some economic value from what people might just feel is a speculative bet on some future outcome," he said.

Instead Dodd-Frank gave regulators at the Commodity Futures Trading Commission and the Securities and Exchange Commission the responsibility of writing rules governing the $583 trillion market in over-the-counter derivatives.

Some, like Simon Johnson of M.I.T., claim that the fix was in from the beginning of 2009:

"It was very clear by February 2009 that the banks were going to get a free pass," said Simon Johnson, a former chief economist for the International Monetary Fund who is now a professor at the Massachusetts Institute of Technology's Sloan School of Management. "You could see from the hiring of Tim Geithner and from the messages that he and his team were putting out that this was going to go very badly."

"The resolution authority as drawn up by Dodd-Frank does not apply to the megabanks and doesn’t apply to JPMorgan Chase, nor can it because that authority only applies to U.S. domestic financial entities," said Johnson. "If anything, it's gotten worse because we have fewer big banks. The ones that remain are undoubtedly too big to fail."

Simon goes further:

While the Dodd-Frank Act is the most sweeping financial legislation in decades, creating a consumer-protection office for financial products and a council of regulators charged with monitoring systemic risk, it won't fundamentally change a U.S. banking system dominated by six companies with a combined $9.4 trillion of assets.

Another issue had to do with the idea of a tax surcharge on those companies that received bailouts:

In a Bloomberg News National Poll conducted Dec. 4 through Dec. 7th, 71 percent of Americans said big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, and 17 percent said bonuses above $400,000 should be subject to a one-time 50 percent tax.

In early 2010, Virginia Senator James Webb and California Senator Barbara Boxer, both Democrats, proposed an amendment to a jobs bill that would have imposed a 50 percent tax on any bonuses above $400,000 collected in 2009 by executives at banks that received at least $5 billion in TARP funds.

The U.S. Chamber of Commerce, which opposed the tax, urged senators to reject the idea because it "would likely hamper efforts to resolve the ongoing financial crisis, restore economic growth, spur job creation and is likely unconstitutional." The bill never made it to a vote.

"Neither party wanted to touch that issue," Webb said at the Washington Ideas Forum on Oct. 1. "Quite frankly, the way that money affects the political process sometimes paralyzes us from doing what we should do."

But the big question is this: How effective will the Financial Reform bill turn out?

"It's not my point to say that the legislation enacted is worthless," said Dorgan. "It requires more transparency and disclosure and a series of things that are useful, even though it falls short of what I think should have been done."

The Treasury Department takes a more positive view. The law "fundamentally changes the landscape of our financial regulatory system for the better," said Steven Adamske, a Treasury spokesman, in an e-mailed statement.

Stay tuned...and let's hope that we don't need a second bailout in the future.

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