The crash four years ago was shocking enough to the financial class. But what is happening on Wall Street now is even more terrifying. No doubt the economy itself—the crisis in Europe, the effects of the tsunami in Japan, America’s sputtering recovery—has played a large part in the financial industry’s struggles. But even the most stubborn economies improve eventually. The bigger issues are structural. The Dodd-Frank financial-reform act, much maligned, has already begun to change the shape of the financial system—even before a number of its major provisions are proposed to go into full effect this coming July. Banks are working hard to interpret Dodd-Frank’s provisions in a way most favorable to them—and repealing Dodd-Frank is a key piece of Mitt Romney’s campaign platform.
To comply with the looming regulations, banks have begun stripping themselves of the pistons that powered their profits: leverage and proprietary trading. In the wake of the crash, Morgan Stanley and Goldman Sachs converted to bank holding companies to tap the “discount window,” the Fed’s pipeline of cheap funds that gave the banks an emergency source of liquidity. That move seemed smart then, but the stricter standards required of banks have now left them boxed in.
With all the major banks unable to wager their own funds on big bets, there’s a growing sense that the money that was being made during the Bush boom won’t be back. “The government has strangled the financial system,” banking analyst Dick Bove told me recently. “We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.”
Of course, described a little less colorfully, reducing the risk in the system at a cost of a certain amount of the banks’ profits was precisely what the government was striving for. All this has meant that Wall Street’s traders have found themselves on the wrong end of the market—a predicament that many of them have never seen before. Before the crash, when compensation slid, the banks risked seeing their top talent run for the doors to rival firms or hedge funds. Now, with a glut of hedge funds and an industrywide belt-tightening, bank chiefs are calling their star traders’ bluffs. “If you’re really unhappy, just leave,” Morgan Stanley CEO James Gorman bluntly told Bloomberg TV a few days after his bank announced its meager bonus numbers.
via Is This the End of Wall Street As They Knew It? — New York Magazine.