[Marxism] "To a surprising degree..." (sic)
marvgandall at videotron.ca
Wed Sep 9 07:31:36 MDT 2009
Finance Overhaul Falters as '08 Shock Fades
By DAVID ENRICH and DAMIAN PALETTA
Wall Street Journal
September 9 2009
Nearly one year after the collapse of Lehman Brothers sent shock waves
across the globe, the world is a different place.
The investment bank's messy death intensified the deepest recession since
the Great Depression. It helped open the way to a bigger role for government
in managing the economy. It cast doubts in the public's mind about the
wisdom of relying on markets to correct themselves.
But to a surprising degree, there are some big things that Lehman's demise
Nearly a year after the collapse of Lehman Brothers helped speed the U.S.
toward a recession, the banking industry is getting back on its feet quicker
than lawmakers can agree on new regulations.
On the regulatory front, Democrats' efforts to rework the rules for finance
have bogged down amid infighting between federal regulators, fury among
bankers and opposition from many lawmakers who believe that further
expanding the government's reach will only create new problems. The
all-consuming debate over health care has damped enthusiasm for tackling
such complex legislation.
Meanwhile, major U.S. banks have regained their footing, and some of their
swagger. Profits are off their lows. Large compensation packages are back.
And so is risky business.
Companies are selling exotic financial products similar to those that felled
markets and the world economy last fall. And banks' appetite for risk has
grown: The nation's top five banks collectively stood to lose more than $1
billion on an average day in the second quarter of 2009 should their trading
bets go sour, a record level.
Now, the federal government is locked in a kind of regulatory limbo. U.S.
officials say they are committed to preventing history from repeating and
have pleaded for fresh powers to do so. But today, they have few new
options -- excepting another bailout -- should financial markets seize up
again or a large institution totter.
"There's no fundamental change in the way the banks are run or regulated,"
said Peter J. Solomon, a former Lehman vice chairman who runs an eponymous
investment bank in New York. "There's just fewer of them."
Washington officials say they are encouraged that financial markets and the
economy appear to be healing after the turmoil. But they also say they feel
an urgent need to establish new rules.
"We are under no illusion that things left to their own devices will evolve
back to a healthy normal," said White House National Economic Council
Director Lawrence Summers in an interview. "The concern...is that a
resumption of confidence, which is a good thing, not become a return to
hubris, which would be a very bad thing."
Wall Street's rebound presents a mixed bag for consumers. These banks'
clients are demonstrating a renewed appetite for risk, a sign that
confidence is returning to markets. But credit remains scarce for all but
the healthiest borrowers and lenders are imposing new fees and higher
interest rates on credit cards and other products. Corporations, too, are
likely to have trouble getting credit if they can't access the capital
markets or have less-than-pristine debt ratings.
The financial world has been on a wild ride since Sept. 14, 2008, the Sunday
that Lehman toppled toward bankruptcy.
The Dow Jones Industrial Average dropped from 11,422 on Sept. 12 to 6,547 on
March 9. More than 100 banks have failed. The federal government has pumped
more than $200 billion in taxpayer money into banks, and the government
temporarily deemed the country's 19 largest as too big to fail in a
Some of Wall Street's most notorious practices are unlikely to reappear.
Banks say they've permanently abandoned housing risky assets in
off-balance-sheet vehicles. Top banks have also stockpiled capital to raise
their reserves to the highest levels in recent memory, providing a bigger
cushion against market downturns.
Last December, at a black-tie gala in New York's Plaza Hotel, Bank of
America Corp. CEO Kenneth Lewis told a crowd of bankers to expect a humbler
industry to emerge from the wreckage. "We play a supporting role in the
economy, not a leading role. Financial services are a means, not an end,"
Mr. Lewis said. "There should be some humility in that." The audience
But the mood has shifted as the Dow strengthened this year. Some of the
government's rescue programs are coming to an end, and big banks are paying
back funds they borrowed under the Troubled Asset Relief Program, releasing
them from Washington's control.
The top five Wall Street firms -- Bank of America, Citigroup Inc., Goldman
Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley -- made $23.3
billion in profits in the first six months of 2009. That compared with a
$6.7 billion loss a year earlier at those banks and the companies they
acquired, but it fell short of the $49.8 billion they earned in the first
half of 2007, the peak of Wall Street's boom.
These banks' biggest profit engines remain their trading arms, which place
short-term wagers -- much of it with the firms' own money -- on stocks,
bonds, commodities, currencies and other financial products and markets.
Losses at these arms in recent years crippled firms such as Merrill Lynch &
Co. and Citigroup. This year, trading has generated windfalls. In the first
half of 2009, the top five firms generated $56 billion in trading revenue,
compared with $22 billion in the first half of 2008 for those banks and the
firms they acquired, and $58 billion at the boom's peak. On 46 separate days
in the second quarter, Goldman's traders pocketed at least $100 million in
revenue, while losing money on two days.
Overall, the top firms are assuming greater trading risks than they were a
year ago, based on a standard measure called value at risk. The $1 billion
that the top five banks stood to lose on an average day in the second
quarter represents an 18% increase from a year earlier and is up 75% from
the $592 million in the first half of 2007, according to regulatory filings.
Wall Street "has been tiptoeing back into the pond," said Robert Glauber,
who ran the National Association of Securities Dealers, Wall Street's
self-regulatory arm, until 2006. "They have short memories."
Despite a continuing outcry over bankers' compensation, large pay packages
are still the norm at some companies as they lure talent and try to keep
competitors from poaching employees.
In the first half of 2009, the top five firms set aside about $61 billion to
cover compensation and benefits for their employees. A year earlier, the
total for those firms, plus the big banks they subsequently acquired, was
about $65 billion; in the first half of 2007, the figure was $77 billion.
Per employee, the payouts may exceed previous years since the firms have
collectively eliminated tens of thousands of jobs.
Congress earlier this year imposed restrictions on bonus payments. So
instead, several companies, including Bank of America and Citigroup, opted
to pay larger salaries. J.P. Morgan is planning a similar move.
The trend has caught the attention of world leaders.
"The abatement of financial tensions has led some financial institutions to
imagine they can return to the same modes of action prevalent before the
crisis," British Prime Minister Gordon Brown, French President Nicolas
Sarkozy and German Chancellor Angela Merkel wrote in a letter to other world
leaders on Sept. 3. The three leaders advocate strict new limits on bonus
Regulators have told banks to avoid excessive risk, but haven't been
specific, executives say. In fact, federal officials are pushing banks to
quickly return to profitability, which Wall Street executives have
interpreted as a blessing of vigorous trading.
Goldman and Morgan Stanley were expected to face tougher oversight after
they converted last fall into bank holding companies overseen by the Federal
Reserve, a move to gain access to government funding and ease concerns about
Both have dialed back their bets with borrowed money. For every dollar of
trading assets on their books, the firms are holding roughly twice as much
capital as they did in prior years, according to Brad Hintz, an analyst at
Sanford C. Bernstein & Co. This deleveraging makes their businesses safer
but less lucrative.
But much remains the same. Both firms were expected to sell power plants and
oil rigs they own in their commodities-trading businesses, because
commercial banks generally aren't allowed to hold such physical assets. But
the banks, after a discussion with the Fed, believe they're allowed to keep
them because of a provision in federal law that allows newly formed bank
holding companies to retain certain long-held assets, according to people
familiar with the matter.
Perhaps the best indicator of Wall Street's revived exuberance is its
continued pursuit of exotic financial engineering. The market for credit
derivatives, widely blamed for helping destabilize markets, remains vast.
As of March 31, the notional value of credit derivatives outstanding in the
U.S. banking system, a widely used measure, stood at $14.6 trillion,
according to the Office of the Comptroller of the Currency. That was down 8%
from three months earlier, but still almost triple the $5.5 trillion level
of three years ago.
Total return swaps -- a type of derivative that lost favor during the
crisis -- are among the instruments regaining popularity, bankers and
investors say. Banks use the swaps to provide hedge funds with low-cost
financing, which the hedge funds in turn use to purchase leveraged loans or
other assets from the bank. The hedge funds pledge the purchased assets as
collateral for the loan. During the crisis, the swaps burned banks that
seized collateral from hedge funds, only to find that the assets' values had
plunged along with the overall markets.
Even collateralized debt obligations, perhaps the biggest money-loser in
Wall Street history, are staging a comeback of sorts. Banks are
disassembling securities produced by bundling home and commercial mortgages
and repackaging them into what market experts describe as mini-CDOs. The
goal is to cobble the mortgage-backed securities, seen as high-risk, into
instruments more palatable to investors.
Wall Street firms defend their use of the complex products. "A structured or
engineered product may be entirely appropriate for the purchaser," said
Citigroup spokesman Alex Samuelson, whose bank is among those marketing new
types of derivatives to investors. "They're not intrinsically bad."
The Obama administration, financial regulators and many lawmakers believe
that more regulation is necessary to protect the U.S. economy from another
crisis and to bolster confidence. Certain elements enjoy broad support, such
as a proposal to empower government officials to take over and break up
large, faltering financial companies whose failure could destabilize the
economy. Many policy makers believe that such powers would have allowed the
government to mitigate the impact of Lehman's collapse.
But many Republicans and some Democrats are skeptical of some elements of
the proposal, such as a proposed consumer-protection agency and a plan to
expand the Federal Reserve's powers to regulate the country's largest
In Washington on March 26, newly minted Treasury Secretary Timothy Geithner
took a rough outline of President Barack Obama's financial rules to Capitol
Hill. Administration officials knew it would take months for these proposals
to work their way through Congress.
But Mr. Geithner argued that the government urgently needed the power to
take over big failing companies. At a congressional hearing, he urged
lawmakers to grant that authority "as quickly as you can."
Political support was lukewarm. Rep. Don Manzullo (R., Ill.) called the idea
"radical." In June, House Financial Services Committee Chairman Barney Frank
(D., Mass.) delayed an immediate vote on the issue, pending a broader review
of financial regulation.
In the meantime, regulators have tried to crack down on dozens of banks,
slapping hundreds with penalties that restrict their growth and direct them
to raise capital. The Fed has centralized more of its supervision of large
banks through top officials in Washington.
In July, FDIC Chairman Sheila Bair told a congressional panel that big banks
were able to essentially "blackmail" the government because some companies
were so large that officials had no way of breaking them apart if they were
Regulators know it would be difficult to break up Citigroup's complex bank
holding company operations, for example, even if they wanted to. Bank of
America, J.P. Morgan and Wells Fargo & Co. each controlled more than 10% of
the nation's deposits -- once a firm regulatory cap -- because of
acquisitions performed during the heat of the financial crisis, sometimes at
the government's urging.
The Obama administration is expected to intensify its push for the new
regulation regime in the coming weeks.
During a weekend summit, the world's top finance ministers agreed to create
higher capital requirements for top global banks once they recover from the
financial turmoil, a move that would force them, in effect, to become more
At the meeting in London, Mr. Geithner implored policy makers to continue
fighting for tougher financial regulations in their own countries. "We can't
let momentum for reform fade as the crisis recedes," he pleaded.
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