Bank Lawyer's Blog

A Different Approach To Reforming Wall Street

It's not often you get a life-long political progressive who voted for Bernie Sanders for president in the Democratic primaries in 2016 to bash both Sanders and Elizabeth Warren for bashing Wall Street's Big Banks, so when I read last week that former business writer and Wall Street investment banker William Cohan was doing just that, I was intrigued. In an article in the Saint Louis Post-Dispatch about Cohan's book "Why Wall Street Matters," writer David Nicklaus discusses Cohan's contentions.

“I felt like people needed to be reminded how important Wall Street is to our way of life,” Cohan said last week at a wealth-management conference at Washington University. “There would be no Apple without capital markets.”

 ...Cohan argues against two of Sanders’ and Warren’s favorite ideas: breaking up big banks and reinstating the Glass-Steagall separation between commercial and investment banking. Either change, he says, would make it harder for future Apples to raise money.

Cohan, whose previous books include a history of Goldman Sachs and an account of Bear Stearns’ collapse, even favors scrapping much of the Dodd-Frank Act, the banking law that was a reaction to the excesses of the financial crisis.

“Not only is it a problem for Wall Street, it is creating problems getting capital to the small and medium-sized companies in this country that create most of the innovation and most of the jobs,” he told the St. Louis audience. “They remain starved for capital."

On the other hand, Cohan is not a cheerleader for the Masters of the Universe. He proposes that each of the "top 500 executives" of the large Wall Street firms should put their personal net worth at risk. If the firm fails, the top brass' balance sheets are also wiped out. Cohan notes that for most of the history of Wall Street, investment banks were general partnerships, in which each general partner's net worth was at risk for the partnership's debts. With the relatively recent phenomenon of Wall Street firm's "going public," the captains of Wall Street's Titanics can row away with hundreds of millions safely tucked away. Shareholders and, if the US government steps in as it did after Lehman Brothers tanked in 2008 and bails the bank out so the country's not plunged into a Zombie Apocalypse, the American taxpayer, take all of the downside risk.

Cohan asserts that such a "disincentive" would be more of a deterrent to bad behavior on Wall Street than the remedies proposed by Sanders, Warren, and like-minded folks: "smaller banks and more regulation."

That, Cohan says, is exactly the wrong approach. America benefits from the strongest capital markets in the world, and deliberately weakening them would make all of us poorer.

While many people of various political hues would likely support that proposal, I'm guessing that Jamie Dimon won't be popping frosties with Cohan any time soon. Moreover, given the fact that trying to get even basic bank regulatory relief passed with the current Congress and White House seems as difficult as getting  our fearless leader to refrain from reflexive tweet abuse, I doubt any such corrective measure will be forthcoming within the limits of the rule against perpetuity. In addition, Jeb Hensarling and Maxine Waters would likely engage in a cage death match over whether the top 500 executives should be at risk, or whether the proper number is 499. Finally, the adoption of such an alternative approach would mean Liz Warren would have to admit that she might be wrong about something, which will happen the day after Matthew McConaughey admits that he has made the most annoying automobile commercial of all time (effectively parodied by the brilliant Ellen Degeneres below).

Of course, I could be wrong, as certain readers of this blog seemed compelled by the voices in their heads to tell me, inasmuch as a minority of them seem to lack either gainful employment or adequate impulse control. If so, then I can live with it.

Regulatory Relief: Some Bad News And Some Good News

Odds and ends as I attempt to get back into the mix of banking law after some time off to deal with actual life:

CU Consultant and newsletter publisher Marvin Umholtz recently reminded community banks and small credit unions that when it comes to all the hype (and, thus far, little action) about "regulatory relief," especially regulations being "tailored" for smaller institutions, "relief" won't include AML obligations. From Marvin's most recent newsletter (email marvin.umholtz@comcast.net to subscribe) this tidbit concerning a July 28, 2017 House Committee on Financial Services hearing that featured Treasury Secretary Munichin:

This correspondent’s ears perked up when at 3 hours, 9 minutes, and 20 seconds into the July 28^th hearing, Representative Scott Tipton (R-CO), who represented the western slope of Colorado, remarked that he had heard a lot about BSA/AML and anti-terrorist compliance challenges from community bankers in his district. Specifically, Representative Tipton inquired whether the compliance requirements should be tailored differently for small community banks and internationally-active banks. In response, Treasury Secretary Mnuchin said [insert drumroll here], “Again, I think that the BSA/AML process should be reviewed. I think that it should be the same standards for small banks as big banks. Because when people are money laundering, whether they go through a big bank or a small bank, they should be standard.” It would appear that when it comes to stopping terrorist financing, the U.S. Treasury Department under the Trump administration will be setting high standards. Although the Trump administration, as well as the Treasury Department support tailoring regulations generally as articulated in its comprehensive June 2017 report entitled, “A Financial System That Creates Economic Opportunities: Banks and Credit Unions,“ file:///G:/Documents/U.S.%20Treaury%20Report%20#1%202017%20A%20Financial%20System.pdf, that doesn’t appear to apply to anti-money laundering and anti-terrorist situations.

In other words, if a small financial institution thinks that it needs to reduce regulatory compliance costs, don't include AML compliance. And when it comes to "relief," AML will continue to be a pain. Just sayin'... 

Having recently discussed Missouri's Rep. Blaine Luetkemeyer's ongoing legislative attempts to drive a stake through the heart of the notorious "Operation Choke Point," we were interested to learn (h/t Banking Law Journal Editor Evan Sparks via Twitter) that a few days ago, Bob Goodlatte, Chairman of the House Judiciary Committee, received a letter from US Assistant Attorney General Stephen F. Boyd that assures Rep. Goodlatte and others on the committee that the bad old days of choking banks in order to choke disfavored businesses they banked are over. At least, they're over until a new administration sweeps into the White House and appoints a new Attorney General. Interestingly, the letter admits that the policy to choke the life out of the "unclean" actually existed. Under Eric Holder, the US Justice Department acted as if those who alleged that there was such a policy in effect must be sampling the products of "legal" marijuana dispensaries in Denver. Confessing your sins is the first step to redemption.

Although Mr. Boyd claims that all Choke Point investigations are concluded, all initiatives under the program have ceased, and that none of those initiatives will ever, ever again be revivified, he does not, and cannot, as a representative of the US Attorney General, speak for the federal bank regulatory agencies. While he notes that the FDIC withdrew its "high risk businesses hit list," his office doesn't control the OCC, the FDIC or the Federal Reserve. The letter from Mr. Boyd is encouraging, but does not eliminate the need for Luetkemeyer's legislation to be enacted. We hope that Luetkemeyer and like-minded legislators in both houses continue to push that piece of sausage through the grinder.