Why money never learns on Wall Street
US banks might not be lending as recklessly as before, but Wall Street bonuses are still massive, and there’s much to be done to prevent a repeat of the mistakes of 2007-8
Morning commuters walk on Wall Street in New York’s financial district
I f the size of Wall Street bonuses is a gauge of how much has changed since the banking crisis five years ago, then the financial sector has learned little from the calamitous mistakes that led to the crisis.
Even though 2008 was a disastrous year for Wall Street, executives still shared $18 billion in bonuses, the sixth largest annual bonus bonanza, although this figure was down from a staggering $32.9 billion in 2007.
Last year the figure stood at $20 billion, an average increase of 9 per cent on the previous year, according to the reports of the New York state comptroller who tracks the industry. So bonuses have started to rise again despite a massive reduction in the number of US financial jobs which were lost over the five-year crisis. The comptroller puts total job losses at 28,000, while just 8,500 new jobs have been created.
US lawmakers responded to the paralysing financial crisis caused by the failure of Lehman Brothers, the country’s fourth largest investment bank, in September 2008 by introducing the Dodd-Frank act, legislation that ran to 2,300 pages overhauling the financial system to put manners on Wall Street.
Passed three years ago, the act puts the onus on the various US regulatory agencies to come up with ways to adopt the new rules. They are still far from being fully implemented, and Wall Street firms spend hundreds of million of dollars a year lobbying to water down the regulations.
“We are three years down the road here with Dodd-Frank and we are only a third of the way through with many of the hardest rules yet to be implemented,” Daniel Gallagher, a Republican commissioner at the Securities and Exchange Commission, the US markets regulator, told The Irish Times in May.
The act’s co-author, Barney Frank, a former congressman, regrets how slowly the regulations are being introduced, but says their onset is still a deterrent. The “single biggest cause” of the crisis – the sale of mortgages to people who could never have repaid them – has ended, he says.
“While the financial community is fighting against accepting full responsibility for what they did, and trying to blame others and resisting some of the changes, they were sufficiently chastened so people on the whole are not engaging in the kind of activities that they did before.”
Congress could not force prescriptive rules on regulators, Frank said, but had to give broad authority to financial supervisors because it would restrict the ability to regulate in the future.
“The more specifically you regulate something, the easier it is for clever people to evade that regulation by minor changes so you don’t give the regulators the power to progress,” he said.
He acknowledges that conservatives’ control of the court system in the District of Columbia where regulations are being challenged has made the court “a terrible opponent of regulation” but this was “a delaying factor, not a killing factor”.
Setback for regulations
The Republicans regaining the House of Representatives also caused a setback for the new regulations, he said, because they have starved funding to the Commodity Futures Trading Commission, which monitors the secretive and highly lucrative $600 trillion derivatives market for complex financial instruments that helped cause the worst financial crisis since the 1930s. Derivatives are contracts between two parties and have no intrinsic value; instead their value derives from the value of an underlying entity, such as an asset or interest rate.