Here is Frank Partnoy's prescription for financial reform. Essentially he says that half measures are not sufficient. Wall Street will always find loopholes in weak regulation, and they have plenty of help in this in the halls of power in Washington, and in the think tanks, universities and the media.
Even President Obama seems to be in denial about the effectiveness of his reforms, and the health of the US banking system. Obama: JPM One of the Best Managed Banks His own Treasury pressured regulators and lawmakers to create the loophole that allowed the loss in London, and that his administration has a horrible record in investigating and prosecuting bank fraud.
I do not think the US is ready to insist on serious reform. It will take another crisis. The anti-regulatory slogans are too effectively ingrained in the public psyche. And self-deception is a powerfully addictive state of mind. Especially for those whose expansive lifestyles depend on it.
Financial Times
Rebuild the Pillars of 1930s Wall Street
By Frank Partnoy
May 13, 2012
...JPMorgan’s losses have generated renewed interest in tightening the “Volcker rule”, which would attempt to ban speculative trading by banks. Yet the losses also illustrate why the Volcker rule will not work. The synthetic credit trades were not proprietary bets; they were massive, mismatched hedges. (Well they were prop bets but were masquerading as hedges. But that merely underscores the problem with the Volcker Rule and regulating specific guidelines that can be circumvented by pathological liar as Mr Partnoy indicates in the next paragraph. - Jesse)
The current version of the rule arguably would not have barred these trades (It would have, except for the hedging loophole that JPM had obtained with the assistance of the Fed and the Treasury - Jesse). Moreover, wherever the line between speculating and hedging is drawn, Wall Street will easily find a way to step over it. It would be impossible for regulators to police what is a hedge and what is not.
A better way to stop the cycle of financial fiascos would be to emulate 1930s reforms, when Congress erected twin pillars of financial regulation that supported fair, well-functioning markets for five decades. First was a mandate that banks disclose important financial information. In today’s complex terms, that would mean disclosing not just a value-at-risk number but also worst-case scenarios. The law should require JPMorgan to tell investors what would cause a $2bn loss.
The second pillar was a robust anti-fraud regime that punished officials who did not tell the full truth. Unfortunately, this has been eroded by legislation and judicial decisions that make it more difficult for shareholders to allege fraud. Prosecutors are also reluctant to bring criminal cases, leaving the Securities and Exchange Commission to mount largely toothless civil actions. Instead, the law should punish anyone who defrauds investors by citing one value-at-risk number and then losing 30 times that amount.
By rebuilding these two pillars, regulators could create stronger markets and greater trust. At a minimum, they could wean bank managers, and themselves, off flawed maths. They could stop allowing banks to satisfy disclosure obligations simply by reporting one inevitably inaccurate value-at-risk number. They could give Mr Dimon more than a slap...
Read the entire article from the Financial Times here.
