Saying Sayonara to Regulations

The recent battle over the Federal government’s 2015 budget ended pretty much as expected—a messy, protracted debate with bad feelings on both sides, punctuated with fears over another shutdown, ultimately averted by last-minute passage. The entire episode was shrouded in opposition from both extremes and unhappiness with the final outcome.

In this kind of scenario it can be hard to find any clear winners. But in this case there actually is one, and it just happens to be. . .Wall Street.

Sure, the 1,600-page, $1.1 trillion spending bill isn’t a fun read for anyone. But look through it and you’ll find a provision that, even for industry observers, can seem a little arcane. Of course, that hasn’t stopped supporters and critics alike from flooding the airwaves and social media channels with their opinions.

The change in regulation as laid out in the spending bill for 2015 has to do with the area loosely described as loan swaps. Even those not well-versed in trading can remember that these risky instruments were at the epicenter of the financial services industry meltdown in 2008. Back then, most initiatives made by banks were protected by the Federal Deposit Insurance Corporation or the Federal Reserve itself. And just to keep these organizations—and the economy at large—going when the loans collapsed, the government provided hundreds of billions in bailout funds.

That’s what prompted the ‘push-out regulation,’ which removed FDIC and Federal Reserve backing for the riskiest investments. It was a measure specifically designed to minimize the need for future taxpayer help.  Now, that measure is gone.

Acknowledging the ambiguity, even some Democrats felt that the regulation, embedded in the sweeping Dodd-Frank reforms, may have gone too far. However, critics now maintain that the removal of the provision gives Wall Street conglomerates carte blanche to go back to their reckless ways.

And those critics have a fierce advocate in Sen. Elizabeth Warren (D-MA). In impassioned speeches that will play well to her base if she ever runs for president, Sen. Warren lashed out at industry giants for have too much sway over the government. She saved some particular venom for Citigroup, for example offering a laundry list of former and current company executive with key roles in government agencies. She also cited the million spent on lobbying, funds diverted to think tanks and other ways in which Citi tries to “influence the political process in ways that are far more subtle—and hidden from public view.”

Sen. Warren stressed that even with the many recipients of government bailouts, Citigroup stands out. During the financial crisis, the megabank received nearly half a trillion dollars in bailouts—close to $140 billion more than the next biggest beneficiary. Citi also successfully blocked an attempt to break it up, along with other too-big-to-fail institutions, and it’s now larger even than it was then. And finally, Citi had a hand in helping dictate the new regulation.

But that’s one corporation and one piece of regulation—is there a bigger picture here that needs our attention?

There surely is, and it has to do with the fact that our industry cannot, and should not, have to ask for more government assistance, even if it’s permitted under the law. We’re in the business of handling other people’s money, and the constant battering we get for failing to manage our own helps no one.

To be sure, we’re in the business of enabling the economy, and that inevitably means making some loans that recipients don’t pay back. But the line from there to bailouts is not a thin one. We should be able to see it very clearly, and many corporations knew they were crossing it long before government agencies could see it too.

In the larger sense, the disaster of 2008 is still fresh in our minds. And that’s more of a deterrent than any single piece of regulation that guides our business practices.


Written by Jack Dougal