When Fed Vice Chair Stanley Fischer’s Hair is on Fire, People Really Should Pay Attention: Rolling Back Financial Protection Rules are “Extremely Dangerous and Extremely Short Sighted”
Some people are prone to exaggeration or overstatement. Fed Vice Chair Stanley Fischer is not one of those people. He is the opposite. He is an urbane master of understatement, speaking in soft, measured tones, sometimes barely audible. He was described by the Financial Times in a lengthy interview over the weekend as “self-effacing,” “courtly, quietly spoken and unobtrusive.” He is, however, a giant voice in finance and financial regulation and he had a huge warning about the deregulatory zeal pervading Washington DC today:
“It took almost 80 years after 1930 to have another financial crash that could have been of that magnitude. And now, after 10 years, everybody wants to go back to the status quo before the great financial crisis. I find that really extremely dangerous and extremely short sighted. …[T]he pressure I fear is coming to ease up on the large banks strikes me as very, very dangerous.”
The FT reported that he “criticized calls to easy up on stress testing, saying pressure to loosen standards on big banks was ‘very, very dangerous.’ He argued that the US had yet to deal with the so-called shadow banking system, which operates outside mainstream lenders, calling this a ‘terrible mistake’”:
“I am worried that the US political system may be taking us in a direction that is very dangerous…. One can understand the political dynamics of this thing, but one cannot understand why grown, intelligent people reach the conclusion that [you should] get rid of all the things that you have put in place in the last 10 years.”
He called this “mindboggling” -- we call it “mindless!” The industry’s self-serving and bonus-driven cries for deregulation are as understandable today as they were in when Upton Sinclair memorably observed that:
“it is difficult to get a man to understand something when his salary depends on his not understanding it.”
That also explains the industry’s many purchased allies in elected office, lobbyists, lawyers, PR spinners, academics and so many others. But all the other “grown, intelligent people” should know better and should stand up to those letting their salaried-interests trump what is best for the country and the American people.
If anyone said we should take down half the protections we put up around New Orleans after Hurricane Katrina in 2005 because ten years have passed and there hasn’t been another catastrophic hurricane, we would all correctly laugh at the idiocy of that notion. Yet, the equivalent of that in financial reform is the prevailing ideology in the Trump White House, administration and much of Washington (egged on by Wall Street and its minions).
We haven’t always agreed with the Vice Chair on policy, but he’s dead right here and, if the Trump administration, his regulators and the Republicans in Congress do just half of what they say they are thinking of doing, then history is going to judge them very harshly.
Don't Gut a Key Financial Protection Rule: Banks Should be Banned from Gambling with Taxpayer Money
One of the industry's biggest financial protection rule targets is the Volcker Rule which bans banks from engaging in proprietary trading, which is trading for their own benefit. This rule is detested by the biggest banks because "prop trading" has a very low cost to them, but results in huge bucks for their bonus pool.
But the big, taxpayer-backed and taxpayer bailed-out banks on Wall Street can't say "get rid of the Volcker Rule because we want to gamble because we are addicted to huge bonuses," so they say the rule interferes with "market making" and limits "liquidity" which is bad. Far too many elected officials, regulators and policy makers who should know better have been have been willing to uncritically accept these self-serving claims.
Tellingly, the industry has provided no evidence that their claims are true or have any basis at all. Given they uniquely have the data about trading and have a unique incentive to provide it if it proves their otherwise unsupported claims, it is all the more telling they have not provided the evidence. We have argued for years that if the industry fails to provide such data at a granular level of product, market and context for independent analysis and confirmation, then their claims should be accorded no weight at all.
Importantly, others have looked at these claims and found no evidence to support them. First, the Treasury Department report issued last year found no evidence to support such claims in the Treasury market and, last week, the SEC staff released an exhaustive 300-page report that "includes a comprehensive assessment of a large body of recent research in addition to original analysis performed by [SEC] staff." It demolishes the industry claims that financial protection rules generally or the Volcker Rule in particular have harmed capital formation or liquidity at all. (See the main findings here.)
Sure, one preliminary study did find some evidence that the cost of trading a particular type of bond (distressed corporate bonds) at a particular point in time appear to be higher. But, as Francine McKenna in MarketWatch detailed, Stanley Fischer pointed out why that study was limited and of limited use. Moreover, as Fischer pointed out, "regulatory changes, even those that may have reduced market liquidity, likely have enhanced financial stability on balance. Overall, liquidity is adequate by most measures, in most markets, and most of the time."
None of that is to suggest that the Volcker Rule is perfect. No rule is and it probably could use some tweaking regarding genuine community banks and banks that don't have prop trading operations or capacity. But it would be a huge disservice to the American people to let the biggest taxpayer backed banks back into the gambling business when the banks get the bonuses and the taxpayers get the bills.
Short and to the Point: “Fiduciary Duty Rule Critics Cry Wolf”
Like the complaints about the Volcker Rule, the industry’s complaints about the Department of Labor’s “clients’ best interests first” fiduciary duty rule are baseless and self-interested. In this case, they are no more than attempts to protect a business model based on an indefensible conflict of interest, as exposed by Nir Kaissar in his Bloomberg View column:
“The rule has exposed an intolerable conflict of interest: brokers are paid by the mutual funds they recommend to clients. For many investors, that neatly explains why they’ve been sold high-priced actively managed funds that routinely fail to keep up with the market.”
Mr. Kaissar then takes on the industry’s arguments one-by-one, showing them to be meritless. First, eliminating commissions will cause clients to pay more because fee based accounts cost more! No, because commission based accounts are not prohibited, but they must adhere to the best interest fiduciary standard. And, no, while fees might go up, all investors are going to save likely substantially as the fiduciary duty standard will likely result in the sale of lower cost, better performing products. Moreover, it’s not even clear that fees will go up as businesses compete against each other for clients. Second, retirement savers will have fewer choices! No, not of products that are in their best interests. Sure, maybe they won’t be steered into high priced, poorly performing products so their brokers can pocket commissions and prizes, but is that really a loss of choice for retirement savers that anyone should care about?
Third, the rule is complex and costly! Consumer Federation of America’s star director of investor protection Barbara Roper is quoted killing this argument: “compliance with the fiduciary rule is hard because the conflicts are so pervasive and reining them in is a big job, not because the rule itself is so complex.” In fact, as the conflicts are rooted out, overcome and “reined” in as the rule is implemented and enforced, the modest, unavoidable cost, complexity and burden of the rule will likely diminish substantially.
That’s not too much of a price to pay so that when people hand over their hard-earned money, their advisors must put their clients’ interests first, not their own. That makes the industry mad, but it is going to save tens of millions of retirement savers tens of billions of dollars every year.
SEC Abuses Its Authority When It Allows Lawbreakers Special Privileges by Granting Statutory Disqualifications Waivers
To protect investors, deter misconduct, reduce recidivism, promote market integrity, and remove bad actors from the markets Congress determined that there are certain illegal and fraudulent acts that warrant automatic disqualification from certain regulatory privileges that otherwise would be available to law-abiding market participants. The SEC has discretionary authority to waive these statutory disqualifications, if it can show that it is for good cause and in the public interest. However, in recent years the SEC has abused this discretionary authority, and has permitted egregious law-breaking firms to continue enjoying certain regulatory privileges, despite their rap sheet. The time has come for the SEC to respect Congress's will and disqualify and bar felons and other bad-actors, so investors are better protected and market integrity is strengthened. For more, including ways Congress and the SEC can fix this problem, see the latest in Better Markets blog.