Washington vs. Wall Street

Since the beginning of the year, governments all over the world have worked on new sets of regulations for financial institutions after they spent more than a year bailing out firms like AIG, Northern Rock or Royal Bank of Scotland. In my opinion, the absolutely necessary process of re-regulating the banks is starting to get more traction and political support. The methods that lawmakers have used handling the too-big-to-fail investment banks, have created a moral gap between Wall Street and Main Street. Between 1933 and 1999, the Glass-Steagall Act restricted commercial banks to underwrite stocks and bonds, and investment banks to take in deposits from customers. It turns out that a very plausible cause of the global banking meltdown could be the 1999 repeal of the Glass-Steagall Act, which gave financial giants the power to outplay the regulators.
On January 12, President Barack Obama announced plans to collect $120 billion over 10 years through a fee on financial institutions in order to recoup losses from the Troubled Asset Relief Program (TARP). “Any new tax is always more complicated than the designers anticipated” said Ed Kleinbard – a law professor at the University of Southern California. Kleinbard added that UK is already struggling to make its 50 percent tax on bank employee bonuses of more than 25,000 pounds work. Some UK officials are afraid that higher taxes may drive 9,000 bankers out of the country. However, it seems like the US plan will not include a tax on Wall Street bonuses or financial-services transactions. According to analysts’ estimates, the 10 biggest US banks are expected to earn a net income of $45 billion in 2009. It is obvious for everybody that this plan is a political measure, with significant populism flavor. Banks repaid the US government $165 billion last year, letting the government recoup about two-thirds of its total investment in the banking system. According to the Department of Treasury, TARP received $12.9 billion in fees, dividends and interest, which translates into an 8 percent return on its bank investments.
On January 22, President Barack Obama made public his intentions to curb proprietary trading within the banking sector. Obama proposed to limit the size of banks’ balance sheet and prohibit them from investing in hedge funds and private equity funds. Some European countries, including UK, are pushing firms to cut risk by boosting their capital reserves instead. Obama’s plan is finding mixed political support in Europe. On one side, French Finance Minister Christine Lagarde said “If banks engage in very high-risk activities, they can endanger the money of their depositors”. On the other side, UK Chancellor of the Exchequer Alistair Darling ruled out Bank of England Governor Mervyn King’s suggestion to separate investment banks from operations that take deposits from consumers, claiming that banks conduct proprietary trading for their own benefit, not for that of their clients.
The Financial Stability Board (FSB), which coordinates financial regulators’ response to the global economic crisis, is to adopt a final plan by October 2010. Until then, any unilateral move taken by any government could create substantial differences within the global financial mechanism, such that the investors could get into cross-border regulator arbitrage.