by Gwen Moritz
Posted 5/28/2012 12:00 am
Updated 2 years ago
I know a lot of bankers who have been diligently working toward compliance with new federal regulations while hoping and praying - and lobbying - for relief. I wonder if their heads dropped heavily onto their desks when they heard the news out of J.P. Morgan Chase, that even brilliant, risk-averse Jamie Dimon was caught with as much as $3 billion in trading losses.
When the smartest guy in the room (now that the Enron guys are either dead, in prison or on probation) is blindsided by transactions that I couldn't begin to explain, who can credibly make the case for less regulation? Is it possible that the guy who came out of the 2008 meltdown virtually unscathed only looked good by comparison? Maybe what looked like skill was just luck. Maybe, as David Weidner of Marketwatch wrote, "The financial system that Dimon and his Wall Street counterparts built became too big to be controlled, much less understood."
Just days before the J.P. Morgan trading losses - these were not bottom-line losses, but certainly hit the bottom line - were made public, Arkansas' most prominent investor and financier revealed that he had had a change of heart on the subject of bank regulation. In an opinion piece in The Wall Street Journal, Warren Stephens, whose company and family had championed interstate and nationwide banking as a hedge against regional economic declines, proclaimed, "The thesis was wrong."
"In hindsight, eliminating the Glass-Steagall Act, the Depression-era law that separated investment and commercial banks, was a mistake," Stephens wrote, because the too-big-to-fail banks "have exercised undue influence over corporate executives" even in the technically forbidden area of tying commercial lending to investment banking services.
Stephens took a position contrary to that of Dimon and the other big boys: The current regulation that limits any one bank to 10 percent of all bank deposits nationally is not too low, he wrote, but at least twice as high as it should be. He calls for lowering the cap to 5 percent - even for those banks that are already bigger than that. (Five banks, he pointed out, already control 50 percent of U.S. bank deposits.)
"Breaking up the [biggest] banks would in all likelihood be positive for investors," Stephens wrote. "Compare both the price-earnings ratio and tangible book value for the megabanks to those of smaller or regional banks, and you'll see that bigger isn't always better."
In fact, bigger - as Weidner and others have observed - can be much worse by creating a management nightmare. That's something even Jamie Dimon would presumably appreciate. His "London Whale" problem falls into the Jurassic Park category: Just because we can do something - clone dinosaurs or dream up incredibly complex financial transactions - doesn't mean we should. Exotic, by definition, means unfamiliar and unpredictable.
Just as the J.P. Morgan revelation was settling into the investigation phase, Wall Street's attention was distracted by something new and shiny: Facebook. It was supposed to be "The Avengers" of IPOs - a can't-miss winner, an investment opportunity that was too big to fail. It's now looking like "John Carter," and not just because of a technological misfire at Nasdaq.
A professional investor pointed this out to me last week: Facebook did not need public money to grow the business, the traditional reason for tapping public markets. Facebook's IPO was strictly a way to make its founders liquid, and boy, did it. Mark Zuckerberg personally sold more than 30 million shares at $37.58 per share, just under the IPO price of $38.
The folks who bought those shares? Well, their shares aren't worth $37.58 anymore - and who's to say when they will be? That muffled sound you hear is Federal Bureau of Prisons guest No. 62348-054, Gene Cauley, sobbing because he can't get in on the flood of investor lawsuits over allegations that lead underwriter Morgan Stanley had warned major investors, but not the general public, of lower revenue forecasts for Facebook days before the IPO.
Morgan Stanley says it did nothing unusual, which is a good place to make my point: Even in 2012, even four years after taking us to the brink of an economic disaster averted only by government intervention, Wall Street has not earned back the kind of trust required for deregulation and doesn't really seem to be trying. n