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Why Talk of Re-Regulating Wall Street is Just Talk

Politics / Market Regulation Feb 19, 2010 - 02:42 PM GMT

By: Sy_Harding


Best Financial Markets Analysis ArticleCongress continues to promise tough regulation of the financial industry. Another version of a reform bill is expected to reach the Senate for debate next week.

It’s all window-dressing! More months will pass, during which investors and consumers will hear assurances that tough reforms will take place. But nothing meaningful will be forthcoming.

It’s been the same after every financial implosion and Wall Street scandal in recent decades.

Only after the shock of the 1929-32 crash, when the stock market lost 90% of its value and pushed the country into the devastating Great Depression did Congress take meaningful action.

In the 1930’s, after similar investigations revealed similar problems to those of today, Congress passed the Truth in Securities Act, which required corporations to provide more honest information about their operations, sales, and earnings; the Securities Exchange Act, which was aimed at ending fraudulent trading, by regulating stock exchanges, banks, and brokerage firms; and the Glass-Steagall Act that prevented commercial banks from being involved in stock brokerage and trading activities. Congress also created the Securities & Exchange Commission to police the newly regulated securities industry.  Among the SEC’s quick actions, it imposed the ‘uptick rule’ that prevented firms from driving a stock, or the entire market down with relentless short-selling (they had to wait for ‘upticks’ before they could execute a short-sale).

Congressman Sam Rayburn said at the time that the president of the New York Stock Exchange mounted “the most powerful lobbying effort ever organized against a piece of legislation.”
Wall Street did manage to get the bills watered down, but even with that the reforms were meaningful, and did take place.

Most investors are probably unaware, or forgetful of the many scandals that have taken place in recent decades, in which criminal charges by the SEC and Justice Department have periodically accused major financial firms of fraud and scams of public investors. In almost every case the evidence was overwhelming enough that the firms settled out of court, agreed to pay sometimes $billions in fines and restitution, but were allowed to sign settlements in which they “neither admit nor deny guilt”.

The public was usually too happy that a bull market was underway to be bothered by such details. So with no pressure on Congress there were no regulatory changes to halt such activities.

There was not even any public outcry when many of the previous regulations, including the Glass-Steagall Act, the ‘Uptick Rule’, and the curbs on ‘program-trading’ were repealed.

But here we are, after the bursting of two serious bubbles, in stocks and in real estate, and two severe bear markets, the combination of which has resulted in investors and homeowners losing $trillions in the value of their assets.

As in the 1930’s, now the public is mad and demanding that financial firms, particularly the major banks, be punished and reformed.

Congress has responded to the anger of its constituents with investigations, in which it has, as in the 1930’s, identified the big financial firms as the major players that created the bubbles and their aftermath, and is again promising reforms that will prevent another recurrence.

(They don’t acknowledge that they aided and abetted by repealing the previous regulations for their friends on Wall Street).

Politicians will respond to their constituents. So as long as people remain mad and demanding reform, that’s what Congress will promise.

However, as usual the financial industry has begun to fight back, working to convince the public that reforms are not needed and would actually do more harm than good.

When they have convinced the public of that, and the furor for reform dies down, Congress will also back down, leaving it pretty much business as usual for Wall Street.

How can the public become convinced that reforms would do more harm than good? By clever propaganda.

For instance, a number of bailed-out banks have formed a group they call the Coalition for Business Finance Reform. Sure sounds like a group whose public statements will provide unbiased information on reforms. But its purpose is to educate against reform of ‘over the counter derivatives”, the customized contracts the big firms trade in private arrangements away from the public exchanges.

In a similar education of the people effort, JP Morgan released a research paper last week, which The Financial Times headlined as “Doomsday Regulation Scenario Laid Out”. The JP Morgan paper predicts that proposed reforms would result in banks having to raise $221 billion, which they would have to pass along to the public in much higher prices for bank services.

Meanwhile, financial firm executives and their lobbyists are out in full force with interviews and articles explaining that proprietary trading, derivatives risk, etc., did not really contribute to the collapse of the financial system, and need not be regulated.

Congress has incentives of its own for arriving at the same conclusion.

During the 2008 elections Wall Street provided candidates with $155 million in campaign funds, roughly $88 million to Democrats, and $67 million to Republicans. In the year after the election Wall Street firms and executives handed out $42 million to lawmakers, most of it to the members of House and Senate banking committees, and House and Senate leaders.

This is the mid-term election year when their re-election looms larger than any other consideration. So expect Congress to continue to talk the tough talk that voters want to hear, but by stalling until the anger dies down, to eventually be able to walk the walk the financial industry is paying for, meaningless but noble-sounding regulatory changes.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website, and the free daily market blog,

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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