The Wall Street That Cried Wolf

Huge profits show, again, that Wall Street’s griping about regulation is unfounded.

By SHARE
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The headlines have been nothing short of dazzling: " Bank of America profits soar"; " Citigroup's profits surge";  " Bank boom continues: Goldman Sachs profit doubles." In fact, the six biggest Wall Street banks – Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Wells Fargo and Morgan Stanley  – all beat their profit expectations in the most recent quarter, according to results announced over the last week. JP Morgan Chase is even on pace to make $25 billion (yes, billion with a b) this year.

If you're thinking that these numbers don't at all square with the ominous warnings of bank executives and lobbyists, who have been saying non-stop that new regulations meant to safeguard the financial system and prevent a repeat of the 2008 financial crisis are going to irreparably harm their ability to do business, you're right. But that hasn't stopped the banks' griping.

The latest iteration of this argument played out after regulators recently announced new rules regarding bank capital – the financial cushion banks must keep on hand to guard against a downturn. Failed presidential candidate turned bank lobbyist Tim Pawlenty, for instance, said that the new rules "will make it harder for banks to lend and keep the economic recovery going." JP Morgan Chase CEO Jamie Dimon, who has been scaremongering for years about various regulations, warned that the new rules would put U.S. banks at a competitive disadvantage with foreign lenders.

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But this same dynamic has been playing out since the Dodd-Frank financial reform law was signed by President Obama in 2010. Banks and their allies complain about onerous new regulations, while at the same time reaping record profits.

And as the New Yorker's John Cassidy explained, those profits are due to many of the same practices that helped cause the 2008 debacle in the first place: "an emphasis on trading rather than lending, a high degree of leverage, and implicit subsidies from the taxpayer." That would seem to make the case that new regulations, rather than going too far, have not gone far enough.

Perhaps that's why banks haven't been crowing about their new avalanche of profits, and Dimon is even warning about an upcoming profit squeeze. As the Financial Times' U.S. banking editor Tom Braithwaite explains:

In the next 12 months the Fed will hit the banks with a new flurry of measures. … Those are coming, they are serious and the banks fear them. There is an outside chance that lawmakers will go even further, such as by restoring the split between investment banking and commercial banking known as Glass-Steagall. There is still plenty to play for in deciding how painful the next round of regulations will be.

But, with every earnings season, warnings of calamity look more and more hollow.

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One of the major knocks against Dodd-Frank – beyond the obvious one that it left the biggest banks even bigger than they were before the financial crisis – is that it left too much discretion to regulators to write new rules. Corporations and trade organizations familiar with how the agency rule-writing process works are almost inevitably going to have the upper hand in such a system.  And there are still so many rules left to be written – some 60 percent, according to the law firm Davis Polk – that Wall Street will have ample opportunity to water the law down to meaninglessness.

But it's hard to keep saying with a straight face that new regulations will spell doom for the industry when the new rules that are in place so far, which were accompanied by similarly dire warnings, have done nothing to even dent Wall Street's bottom line. In fact, the huge pile of profits may be the best thing that could have happened for those trying to bring a modicum of sanity back to Wall Street regulation.