If ever there had been any question as to who runs the United States, it has been answered. Wall Street has once again run roughshod over Washington and Main Street by pulling the teeth out of the financial regulation bill, one by one.
The pressure from banks, hedge funds, lobbyists, CNBC, talk show hosts, and - it seems - the markets (which tend to puke conveniently whenever 'finreg' looms) wore Washington down. Although the bill made it through the House, the Senate now wants to sit on it and percolate (i.e. find a way to squirm out of more stuff) for a few extra days.
Standing up to Wall Street takes real guts. So it makes sense that the bill did not touch upon one of the biggest culprits in the financial crisis - bankers' compensation. That is a hornet's nest that even the bravest reformers dared not tackle. And it will be a miracle if the Volcker Rule makes it through unscathed.
The latest victory for the bulge bracket was to strong-arm Congress and the House to remove the $150bn bank levy, as well as the $19bn tax on large banks and hedge funds. The deciding voter, Massachusetts Senator Scott Brown, crumbled under pressure from his Republican leaders (presumably also from the not-insubstantial financial services constituency in Boston) causing him to flip-flop like a pro.
I am not saying that the levy or the tax, intended to help fund the next crisis, were great ideas. They were more of a sop to shut up protesters who didn't want another taxpayer-funded bailout. But these same protesters don't want banks to have to hold higher capital reserves to help cover their own losses, claiming this will stop them from lending to "Main Street".
Had anyone on Capitol Hill been reading the business press, they would have known ages ago that capital requirements are poised to become more stringent anyway due to Basel III. Capital reserves will be raised regardless of Wall Street's weeping and wailing and gnashing of teeth. (The Swiss are not known for bowing under pressure, especially from nosy Americans which want them to reveal their banking secrets.)
The time that passed since the crux of the crisis and the drafting of the bill dulled the urgency needed to propel the stiffer rules forward. The only fly in that ointment was the flash crash on May 6th, which threatened to derail the banks' anti-regulation rally. The violent moves brought Wall Street and high frequency trading back into the headlines and questions again arose about reckless trading practices.
Luckily for the banks the flash crash is now nearly forgotten by almost everyone except the SEC and CFTC, who are still scratching their heads as to how to do the forensics. The panacea of circuit breakers seems to have satisfied politicians enough that they can once again canoodle with their Wall Street lobbyists.
That circuit breakers were not mandated market-wide across ECNs and exchanges from the onset of Reg NMS is the mystery. Many blame the regulators for being asleep at the wheel, with the excuse that they have no money hence cannot hire the necessary expertise.
One contact at an exchange calls the new market structure "a monster created by Wall Street and Washington", who did not realize - or ignored - the repercussions. He believes that the regulators have no money and no teeth by design - to benefit a very influential constituency, i.e. Wall Street. Banks were behind the formulation of many ECNs, after all. And they pushed the exchanges to embrace automated trading and decimalization, so that their algorithms could do their work - making money and obfuscating regulators.
As Michael Lewis said in his column for Bloomberg: "The oath of the Financial Crisis Inquiry Commission, is: 'We pledge to find out, by the year 2050, what exactly happened on Wall Street in the early part of this century. We pledge to reform Wall Street. Or, failing that, to be taken seriously. Or, at a bare minimum, to attract a bit of media'."
Media attention it got. Results, not so much.
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