MARK KARLIN, EDITOR OF BUZZFLASH AT TRUTHOUT
After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust. There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.
The top New York Federal Reserve Bank official, William Dudley, made this rare allegation among Wall Street insiders and government officials late on in his remarks delivered on November 8 at the Global Economic Policy Forum in NYC.
His speech was entitled, "Ending Too Big to Fail," but although he offered suggestions for increasing overall market stability, Dudley is not an advocate of breaking up "banks too big to fail":
One alternative strategy for dealing with too big to fail is to reduce the size of large banks by imposing size limits. While I understand the motivation, it is important to recognize that imposing size limitations might not be a very efficient means of making the financial system more stable. First, it could sacrifice some socially beneficial economies of scale and scope, especially to the global clients of large financial institutions, depending on how the size limits were implemented. Second, the resulting benefits in terms of reducing systemic risk might be quite small. As demonstrated by the thrift crisis, if many firms are all vulnerable to the same shock, ensuring that these firms are small and numerous won’t necessarily reduce the systemic risk they collectively pose to the financial system. Third, the costs incurred in breaking up such firms also need to be considered.
Others have argued in favor of separating commercial and investment banking activities of the large banks. In my opinion, there are shortcomings to re-imposing Glass-Steagall-type activity restrictions. It is not obvious to me that the pairing of securities and banking businesses was an important causal element behind the financial crisis. In fact, independent investment banks were much more vulnerable during 2008 than the universal banking firms which conducted both banking and securities activities. More important is to address the well-known sources of instability in wholesale funding markets and to give careful consideration to whether there should be a more robust lender of last resort regime for securities activities.
Given that the reinstatement of Glass-Steagall is a litmus test of whether or not one is serious about reining in the giant banks, Dudley clearly sides with making incremental adjustments that will allow banks too big to fail to continue to exist. He promotes more accountability, more technical adjustments in structure, and a touch more regulation. But he is opposed, in general, to limiting the size of financial institutions.
So his passing reference to a culture of lawlessness on Wall Street appeared all the more insightful, because he appeared to gloss over it without due regard for its impact. In fact, Dudley believes that fines and a little more regulation will result in an environment where asset size of the institution is not the issue, because the market will be "robust" enough to absorb a bank collapsing without government assistance.
Part of the "framing" challenge here is that we are not really speaking of banks. We are speaking of "white whale" financial institutions that are so large and diverse that only a part of their economic activity is what is thought of as retail banking. They are involved in virtually every part of the financial sector, of which size is a reflection but doesn't fully account for how their tentacles reach into every sector of the global economy.
Dudley speaks in the arcane terminology of banking activities and regulations -- and appears to regard lawlessness as playing a minor role in financial disruptions if one judges by his passing reference.
He concludes with a pablum solution to what a few solid indictments and jailings could go a long way toward resolving:
A holistic approach is needed that both provides a credible resolution process for large, complex and interconnected banks, uses enhanced prudential standards and initiatives to further reduce the probability of default and the social losses associated with a default, and that incents management to intervene early to address incipient problems before they threaten the viability of the firm.
It was groundbreaking for Dudley to even refer to illegalities, but clearly observing the law is still not a major part of the solution to the Wall Street oligarchs.