Wall Street’s Semi-Secret Stasis

Downtown New York was empty over the long Independence Day weekend. There were no bankers around to breathe the heavy

Downtown New York was empty over the long Independence Day weekend. There were no bankers around to breathe the heavy air. Manhattan was warm pudding. Late one afternoon, off with his family, a former senior Lehman Brothers executive was on the phone, musing about his old firm and the lay of the land. High finance, the executive said, is just like football, and the financial crisis killed off a few athletes. “You’d get tighter rules. You’d get better helmets. You’d get better this, you’d get better that,” the Lehman chief said. But it’s the same football game. “How else would it be?”

We’re nearly two years past the climax of the crisis, when Lehman, Washington Mutual and A.I.G. imploded. That September, and in the months that followed, there was a national feeling of collapse, opportunity and rebirth: It was a new day with new rules and a new paradigm for power and money. The era of the investment bank was gone, along with the $68 million bonus.

Today, one of the great secrets in finance is that nothing at all has changed on Wall Street, where the same people at the same firms are mostly doing the same things in the same way. Some executives who are proud of their firms’ recent alterations, or annoyed by them, would disagree, and others, like the Lehman man, would say that the fact that it’s the same game is so obvious that it defies mention.

‘If the judgment is it’s too big to fail, you have to just hold your nose and help them,’ one former Lehman executive said.

Once the Senate passed its version of the financial reform bill this May, the industry breathed a half-muffled sigh of relief that their worlds hadn’t changed all that much. “You could really make an argument that financial regulation amounts to merely a little dust splashed on some of them,” an executive at a New York private-equity firm said this week. As it now stands, for example, the landmark Volcker Rule that bans proprietary trading at banks won’t go fully into effect until 2022.

But the potential splashes were the good news. By the beginning of this month, Senator Robert Byrd had died, and other colleagues’ support for the bill was wavering openly. It isn’t entirely clear how final financial reform legislation will pass, or what it will look like when it does. “The Democrats have incentive to say they’ve made changes, and the Republicans have incentive to say the Democrats have made mistakes, and Wall Street has incentive to say they’ve been damaged,” said MIT’s Simon Johnson, the former chief economist of the I.M.F. “But it’s tweaks.”

THE GREAT LESSON two years ago was that the country’s banks had gotten so appallingly enormous and strangely interconnected that they had to be bailed out of their deathbeds in order to save the entire financial system. Their natural deaths would have been too devastating, so taxpayers rescued them-but not Lehman, whose failure was crippling.

Technically, the problem of too big to fail is supposed to be gone: The House and Senate financial reform bills both allow the government to wind down companies without having to use trillions of taxpayer dollars. But not only is there disagreement over how to do it, there is serious uncertainty that the government could really allow a giant to die. Like in a monster movie, a recent report from Moody’s said the proposed government wind-down authority doesn’t “eliminate the risk of contagion.”

Meanwhile, banks are not getting any smaller. “The big are going to get bigger,” Citi chairman Dick Parsons said in South Africa last month. Regulation, he said, would not put up “material impediments” in the way of his bank’s growth plans.

On Wall Street, it’s been in vogue all year for bankers to be proud of their size. “Some have suggested that size alone, or the combination of investment banking and commercial banking, contributed to the crisis,” JPMorgan’s Jamie Dimon told the Financial Crisis Inquiry Commission in January. “We disagree.”


The former senior Lehman executive conceded that the too-big-to-fail issue hasn’t been solved. “What’s wrong with that, in a way?” he said. “You’re always going to have big firms, and if the judgment is it’s too big to fail, you have to just hold your nose and help them.” The former executive spoke very calmly. “The fact is, for most of the TARP money, they’re getting it back. So it’s kind of a question of: If you get the taxpayer money back, how bad was it really?”

He’s not alone in asking something like that aloud. In April, when Treasury officials said the bailout would cost $89 billion instead of $250 billion, columnists at both The Times and The Journal said the bailouts were “starting to look far less expensive.” (Between them, there were one and a half sentences on the trillion or so dollars that the Federal Reserve has loaned to Wall Street with essentially no interest.)

Wall Street is still big, still proud, and it turns out to still be paying itself in the same way. Two months after those April columns, news leaked of the Federal Reserve’s ongoing review of the pay practices at the 28 biggest American financial firms. Little has changed, the study is showing. Risk managers. for example, are still reporting to chiefs who control their bonuses-“and whose own pay,” Eric Dash reported, “might be constricted by curbing risk.”

Rules about risk haven’t changed, either. A guideline for capital, liquidity and leverage requirements will come later this year with an international banking agreement called Basel III. The fight over Basel is already said to have been won by the industry, which doesn’t want be forced to store away billions for the next emergency. “Banks win battle for limits,” a Financial Times headline said late last month.

On Monday, July 5, if vacationing executives happened to open their copies of that paper, they found an article that so perfectly sums up Wall Street’s amount of change since September 2008 that it almost sounded made up. It was called “JPMorgan brushes aside bill concerns.” After spending $1.6 billion to buy an enormous energy and metals trading outfit, the head of commodities at the bank, Blythe Masters, said she wasn’t panicked about the Senate’s financial reform bill, which bars banks from derivatives trading. JPMorgan was already trading through affiliates, she said: “It’s fine-tuning more than a material impact.” Ms. Masters knows what she’s talking about: She helped invent credit default swaps when she was in her 30s.


Wall Street’s Semi-Secret Stasis