After listening to Jamie Dimon’s testimony before Congress the other day I became less enthusiastic about Volcker Rule. No, I didn’t suddenly turn into a laissez faire supply-sider, I simply became more convinced that if such matter is entrusted into the hands of regulators we would have to be dependent on these regulators struggling with definitions, like what a hedge is. That would be too painful to watch.
I have to admit that, perhaps, capital requirements and other Basel III rules can be more effective than outright ban on certain kinds of trades.
My comrades on the left might disagree. But think about it: banning something outright will simply ban it on paper but in reality such ban will not prevent smart and resourceful Street guys from finding ways around it. Even potheads could for years find ways around the drug laws. Moreover, a sweeping ban will make a great excuse for the ever-complacent or complicit regulators to fall asleep again while giving the public the illusion of things being under control. Besides, show me any ban that has prevented people from obtaining/providing the illegal goods or services. What would prevent various exceptions and exemptions from being forced quietly into the legislation that renders the entire brick wall between deposits and trading desks useless?
Jamie Dimon and many others on Wall Street want regulations to be simple and effective. So do I. And so do regulators, I suspect, who are helpless in the face of complexity. Having capital requirements will be hard not to enforce simply because it’s quantifiable. All they have to do is build a spreadsheet where column B is needed capital and column C is actual capital, subtract one from the other and voila, there’s the list of those who meet the criteria and those who don’t. I’m being slightly facetious and simplistic, but you get the idea. Much easier than wrestle over definitions of what is a “directional trade” or a “macro hedge” with those who made a career out of twisting the terminology. Arguing over a definition of a “hedge” is a battle that the regulators, in their current state, can’t win.
It was almost comical to see senators asking Jamie Dimon his opinion on how to regulate the financial system. Here’s Jamie Dimon’s idea of sensible regulations: Proper capital requirements, proper liquidity, proper risk management and risk controls. It does not sound unreasonable at all. I could almost sense the slight disappointment among some (mostly Republican) Senators as they haven’t received anything less of “let the market take care of it”. The whole Senate testimony was worthy of a Monty Python’s skit in its absurdity, as the only voice of reason was coming from a Master of the Universe (Tom Wolfe accurately described this dynamic almost 25 years ago in his Bonfire of the Vanities). I wonder what was going on in Jamie Dimon’s mind at that point, but if I had to speculate I’d say disbelief, amusement mixed with a breathtaking realization that he’s the sole de-facto arbiter of a system that affects millions of people and trillions of dollars.
Meanwhile, capital requirements under current Basel III rules would have prevented Goldman from buying CDS contracts from AIG, for example. Or at least they would require Goldman to post higher capital in these kinds of trades to account for the risk of AIG becoming insolvent. While we can’t be sure such a trade would not have been done, we can be sure it would have been much smaller in size.
If OTC derivatives have been cleared through the exchange, there would be no high-stakes “who has what” poker game going on between the biggest financial institutions, trying to figure out who has what in ‘Assets available for Sale’ section of the balance sheet or other hard to decipher nicknames given to toxic assets. These holdings would have been more transparent. Thus, as Jamie Dimon rightly pointed out in his testimony, JP Morgan would not have been asked to take the bailout package, as everyone would see their minimal exposure to the crappy assets, compared to other firms. Thus, it is quite possible, that the bailout could have been smaller and more targeted (to Citi and BofA) and not sweeping and imposing.
Look, I’d love to have regulators who are smart and capable of doing their job, but the truth is, they will always be at least one step behind, because they don’t have the capacity and the wits to anticipate what is the next product to be invented on the Street. Regulators are a reactive force, not proactive. Lawmakers proved to be no better at understanding the complexities of the current financial system and dealing with the repercussions. Good intentions are a poor excuse. What we care for are the results.
We also would like to offer some advice to Jamie Dimon and other Wall Street alpha dogs – be a mensch, stop being offended at being called names. It’s not Obama’s job to become friends with Wall Street. He plays his game – you play yours. At this point of their careers neither Jamie Dimon, nor Lloyd Blankfein nor many of others on top of the Wall Street hierarchy care about money – they care about their legacy. Right now none of them look like socially conscious tycoons of the 1900s, no strangers to consolidation and market manipulation, sure, but who nonetheless understood the long-term dynamics of the society and came to rescue the system with their own money when the circumstances called for it. And yet, the bar has been set so low, and in part by our own public servants, that even Jamie Dimon, a fox guarding the hen house, looks as having more integrity than the subservient watchdogs. As evidenced by ingratiating senators who are on Wall Street’s payroll, asking Dimon for advice on how to run things, all Wall Street’s powerful men’s grievances about unfair treatment look nothing more than a simple disingenuous posturing. Guys, let me break it to you: You run the freaking game! You don’t have to have a TV show (like Ace Rothstein in the Casino), or bring attention to yourself by verbal sparring with various politicians; you have to have the whole thing to be quiet. Please, no more displays of victimhood and defensive language. And I’d like to conclude by posing a question to Mr. Dimon to ponder: imagine a less sharp and more reckless man inheriting your job one day. Wouldn’t it be a fitting legacy for a man in your position to help build a system that is less dependent on someone having both superhuman qualities and spotless integrity and more dependent on built-in levers of control that work regardless of someone’s pedigree and ambitions?