SIFMA, The Securities Industry Financial Markets Association, held its annual conference in New York this week and heard industry leaders and regulators warn that many of the challenges discussed at last year's meeting are still with us, and that we can expect at least one more round of severe headcount reductions.
As for why such issues as poor risk management and over-leveraging are leading to situations like MF Global and the recent UBS rogue trader scandal, Deputy Treasury Secretary Neil S. Wolin said the "biggest risk is that system changes in financial markets are simply too hard for us [the regulators] to keep track of."
Citigroup CEO Vikram Pandit kicked off the conference saying we are still seeing some of the problems that led to the financial collapse of 2008 still today even though he believes issues facing the markets are fundamentally different. He noted however that when "you go back and think about what brought all of this on, it was leverage, and we're still living through the impact of leverage."
Pandit also said the collapse of MF Global reinforces the need for greater transparency and disclosure of so-called "shadow banks" such as MF Global that currently operate outside the regulatory oversight of more traditional banks. Pandit also recommended putting derivatives on clearing houses and exchanges as a way of bringing clarity to a market that is complex, murky and often misunderstood by average investors, and also said that "capital is finding its way towards shadow banking faster than towards a formalized banking system right now."
Cost of Regulation Still Too Difficult to Estimate
Guy Moszkowski, Managing Director, U.S. Equity Research Bank of America/Merrill Lynch, said there is still "way too much risk and way too much leverage in our financial markets." He adds that risk and leverage along with not knowing how to determine the cost of Dodd-Frank or Basel III, has caused "a tremendous amount of uncertainty over what kind of return on equity can be earned."
Moszkowski points out that "we are in the middle of a cyclical downturn" and we should expect that both "headcount and compensation will probably be ratcheted down."
This led to a conversation about how some banks that changed their charter to take advantage of government money in the past may now be looking for ways to change back to a model that would allow them to operate outside many of the impending regulations generating so much concern.
Hotel California Provision of Dodd-Frank
That was when Moszkowski mentioned the so-called "Hotel California" provision in the Dodd-Frank act that says if a big bank gave up its bank status, it automatically remains what it termed a "systemically important non-bank" and be subject to the same regulation applied to all "too big to fail" banks. For all you non-Eagles fans, the "Hotel California" provision refers to a lyric in the song that says "you can checkout any time you like, but you can never leave!" Or as Moszkowski said it, "you can't put the genie back in the bottle."
Toos Daruvala, Director, Banking and Securities, McKinsey & Company, Inc., noted that there are 29 global banks now considered too big to fail, even though many would prefer to not be tagged because of the regulatory constraints that come along with it.
All of this will continue to have a negative impact on job creation, even among the smaller financial firms where most of the growth has been lately.