Wall Street's Grand Bargain

Three developments in finance cropped up in the last days that must be read as a single story.

First, Blankfein, Dimon, and the rest of the Wall Street bigwigs visited the White House to meet with the president and his team. That team consisted of Denis McDonough (Chief of Staff); Valerie Jarrett (Senior Adviser); Cecilia Munoz (Domestic Policy Adviser); Gene Sperling (National Economic Council Director); and Alan Krueger, (Chairman, Council of Economic Advisers). The meeting was secret, but we can deduce much from its attendance.

The White House appears to want Wall Street support in the policy/politics battles to come. This is not far fetched, especially coming on the heels of steak dinners served to Republican Senators earlier this week and the Obama budget that grabbed the “third rail” issue of Social Security.

But every conversation has two sides. What did the power brokers of Wall Street want in return? High on the list is a roll back of financial reform. Industry representatives have made it very clear that they want to limit the ability of U.S. regulators to reach the overseas operations of the big banks, clearly opening a loophole that exposes the U.S. economy to the risks of London Whale-like shenanigans in London, Singapore, and beyond. They also would relish final regulations under the Volcker Rule that fill it full of holes to exploit. There are plenty other items on the wish list, of course.

Could this be the Grand Bargain that actually gets done? It just might be. 

The second story was the JP Morgan Chase earnings report. One could almost see the confetti floating through the air as first quarter profits soared 33% to record levels. But wait, look deeper. One third of the earnings came from reduction in reserves for litigation costs. This is in the teeth of the scathing report from the Senate Permanent Subcommittee on Investigations of the London Whale scandal that, by all rights, should prompt a full-fledged investigation by the SEC at a minimum. JP Morgan Chase must feel confident that there is nothing to fear from the Justice Department and the SEC. Who needs lawyers if the bank is too-big-to jail? And who at the SEC will pursue JP Morgan Chase now that the agency is run by Mary Jo White, who was formally a lawyer for the bank? She does not need to issue a hands-off order; her very presence will do the trick.

Finally, with odd fanfare, the SEC announced an enforcement action against a KPMG Los Angeles partner who provided his golfing partner inside information over a three year period that the partner traded on, about $1 million of trades in exchange for a $25,000 payment to the accountant. If this is true, punishment was deserved. But this was hardly a threat to the well-being of the republic, certainly not as significant as the behavior of Wall Street in the last year. Money laundering for drug cartels and rogue states, manipulation of LIBOR, and London Whale cover ups can earn a bank a fine, but nothing really to worry about. But an accountant passing out insider tips on the golf course deserves a real allocation of enforcement resources.

These events are bad omens. The Obama administration’s DNA includes a compulsion to strike a compromise deal when it comes to the interests of the powerful. “No Drama Obama” can be useful in managing a crisis, but that character trait easily becomes a propensity to make a deal regardless of cost. We can expect the White House meeting to lead to a major accommodation of Wall Street, both on regulation and oversight.

And it's not like the banks have been struggling. They continue to receive the gift of the millennium, access to money almost free of charge from which they can enjoy risk-free profits so long as they refrain from self-inflicted wounds from insane trading ideas.

The forecast for the future: Wall Street praises the balanced approach of the Obama administration, financial reform regulation is peppered with loopholes so that its consequences are largely eliminated, and the cops on the beat turn a blind eye to the biggest offenders in the financial markets.

If this forecast is accurate, business as usual will prevail.

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