One, an unfriendly messaging solution from a proprietary behemoth, the other an undocumented mess from the open source world. Can the two be made to play together?
I’m betting my miniscule amount of free time that it can be done. Stay tuned for project specs and a play-by-play of how the mess unfolds…
It’s quarter end at Goldman today, and while the results look excellent ($8 profit per share! Compensation down to 35% of total costs!) you get the feeling that this morning’s earnings call was the last of its kind. There’s an odd sense of gloomy nostalgia around the water coolers: never again, the conversation usually starts, will the profits be quite so meaty. Never again, the speaker really means, will the bonuses be quite so fatty.
The reason for the wistful comments is, of course, Obama’s new banking reform proposals. Reading through the press release, the regulations seem to have two laudable aims:
Two cheers for Obama! He’s taking the banks to the cleaners and setting America’s financial house in order. Except…he isn’t.
Limiting the scope of deposit taking institutions’ activities is pretty much a non-starter. Yes, banks have internal hedge funds, but they are for the most part segregated from the bank proper by law. Goldman Sachs, for example, has its GSAM ”asset management” operation (read: hedge fund), but banking personnel rarely come into contact with their fundie counterparts as the two branches have completely seperate trading desks and backend systems. GSAM can be spun off with little trouble if the new government rules demand it, reducing Goldman’s balance sheet risk, but doing nothing to reduce systemic risk in the financial sector. While the implosion of one of the resultant entities may have a less devastating effect on the economy than GS collapsing in its current form, there is still nothing in the proposed regulations to prevent either of them from levering up to an outrageous extent, collapsing and nuking the economy.
As far as outlawing proprietary trading by firms that have clients, I am not sure how the government intends to do this. In Felix Salmon’s words, banks do not have desks with shiny red lights with “Proprietary Trading” written above them. Investment banks make markets, and this sometimes involves investing their own money on their clients’ behalf in order to close transactions. By the government’s narrow definition, this simple activity — the bread and butter of any bank worth the name – will be outlawed, hastening the same messy end this legislation seeks to forestall.
All this, of course, is moot. US legislation applies to US firms, and there is currently nothing in the proposed laws to prevent foreign banks from creating the systemically dangerous imbalances that resulted in the current economic mess. Goldman and the Morgan Stanley, heavily regulated and unable to outgrow their foreign competitors, will cede business and talent to the Deutches and CSFBs of the world, who will in turn remain just as risky and just as huge as they are right now.
Which brings us to the seemingly easy task of capping bank size. Banks regularly publish statistics on total assets under management, and by levying punitive fees in exponential proportion to the size of these assets, the government hopes to effectively deter banks from growing beyond what it considers to be a desirable size.
Who gets to define what a desirable size for a bank is? In an ideal world, it would be a (more or less) neutral Fed. If, however, the Presidents’ fighting words are to be believed, there is currently an army of financial lobbyists descending on Washington DC, which means that the fine folks in Congress will be telling us what Too Big To Fail actually means. Net effect: banks will remain the same size they are right now, and an already ill-informed public will think that action has taken to prevent another Great Recession when nothing of the sort has in fact been done.
The more things change, the more, it seems, they stay the same.