Demonisation of Clintons Goldman Sachs speaking fees aside, Wall Street isnt in great shape and its influence over country and politics is declining
In the 2016 presidential campaign, Wall Street and the banks have emerged as Public Enemy Number One.
That Hillary Clinton accepted $675,000 from Goldman Sachs for three speeches in 2013 probably did more damage to her battle for the Democratic nomination than any other single issue. Even for Clinton, half of a political couple with an estimated net worth of $110m and 2014 earnings of $28m, that figure was not insignificant. For most Americans, its more money than they can imagine seeing in a single year or even a single decade, absent a lottery win.
Worse still, it came from Wall Street. And not just from Wall Street, but from Goldman Sachs, the infamous giant vampire squid.
Clinton, whose views on Wall Street regulation have been middle of the road and who seems to focus on averting the next crisis rather than revisiting the last one, could be telling us the truth when she says such speaking fees in her past would not affect her willingness to crack down on malfeasance. But a perception of conflict of interest remains.
Theres a bigger question out there, though, and that is whether Wall Street really is as massive a threat to our national wellbeing as it was a decade ago. If it is, is it really for the reason that most of its critics argue: that the banks are too big?
True, the banks are back to being profitable by some measures (eyeing their bottom line in isolation) more profitable than ever. But increasingly those earnings are being achieved only by CEOs cutting costs.
Thats a far cry from seeing growth in profitability amidst growing revenues and expanding businesses: rather, its a sign banks are fearful of headwinds. Certainly, there is little confidence that profits will prove lasting but Ill get back to that in a minute.
Then theres the matter of the all-important return on equity measurement. This tells a banks CEO, his board of directors and investors just how well the bank is doing at generating profits from all the billions of dollars (in the case of the countrys most massive institutions) on the balance sheets. Right now, the answer has to be that they arent doing a very good job.
Historically, banks have earned returns on equity (ROE) somewhere in the low to mid-teens. Recently, that figure has hovered around 9.2%. Many of the biggest banks are faring far worse: Citigroups ROE is only 6%. Goldman Sachs delivered a mere 3%, a far cry from the 33.3% it earned in 2006, when the average bank ROE was 23%.
Right now the banks are less healthy than their profitability would suggest. Consider bankers bonus checks: while lavish by any normal standards, in 2015 the average payout fell 9% to $146,200 and the total bonus pool shrank by 6%. It doesnt make sense that CEOs would suddenly scale back bonus payouts during a blockbuster year for earnings.
Nope, winter is coming.
Goldman Sachs may be feeling the chill. It is one of a handful of banks which has not yet warned investors to expect some bad news when first-quarter results start trickling out next month. Analysts at Credit Suisse, however, kindly undertook to do so on Goldmans behalf, publishing a research note last week predicting that Goldmans investment banking income would fall by nearly a third in the first three months of 2016 and that its trading revenues would slump 17%.
Like many other banks, Goldman is trying to diversify: its asset management business bought an online retirement benefits company, Austin-based Honest Dollar. Its an interesting twist, given that Goldman ended up in the spotlight in 2010 as the poster child for bad behavior on Wall Street, in connection with a particular set of transactions where the bank sold mortgage investments that its own bankers thought (and documented in e-mails) were lousy deals. In a subsequent Senate hearing, Republican Susan Collins of Maine grilled four Goldman Sachs officials as to whether they felt a duty to act in the best interests of their clients. Only one indicated, indirectly, that he did and it wasnt CEO Lloyd Blankfein.
That was, and remains, one of the real problems with Wall Street and with the banks as a whole: the business they undertake and the way they approach that business. The emphasis on trading rather than lending will continue to leave them with volatile earnings and riskier-than-necessary business models. Banks have moved slowly to incorporate the concept of risk appetite the institutions willingness to take on risk and tolerance for losses into actual business decisions.
So, theres a lot of stuff besides just the size of a financial institution to worry about. Breaking up Citigroup into three or four small banks, each of which ends up behaving precisely the same way and having lots of exposure to the money losing energy sector (as many banks have warned they now do), isnt a guarantee that the level of systemic risk will fall, especially if they are all linked together through trading relationships. The problem lies in behavior.
Happily, six years after the Senate hearings exposed the attitude of Goldman Sachs to its clients, were on the verge of seeing a new fiduciary rule. This would require big banks and other financial advisers to put our interests ahead of their own when advising us on our retirement assets, at least. (Though for institutions, its still caveat emptor.) Not surprisingly, banks and brokerages are threatening to stop serving smaller clients, claiming the business will become less profitable.
Wall Street is still far more powerful a force than it should be. Rampant financialization remains a problem for society as a whole. But critiques cant stop demonizing the big banks. This isnt 2006, and while the banks may report big bottom-line profits, those profits are more fragile and they face significantly more constraints both from the markets and the regulators. Dont cry for them, but dont assume they are the only source of risk in the financial system today.
Some of the smartest people with a keen interest in finance are no longer trying to build careers in finance; instead, after spending a few years there, they are heading off to make money in the fintech world, ideally by launching new ventures that will disrupt the banking world and seize a bit of their revenues and profits. They are profiting some lavishly from our distrust of Wall Street. And were not yet thinking about whether there are new risks emerging here, because were happy to applaud the innovation.
Or, if youre looking for dangerous behavior on Wall Street, look no further than the world of hedge funds, where a lack of ability (by both their own investors and regulators) and fast-moving, freewheeling and risky trading strategies can be just as risky as anything a bank can do. (Remember, it was a hedge fund, Long Term Capital Management, that nearly brought the financial system to its knees in the late 1990s.) A new bill, the Brokaw Act, co-sponsored by Senators Elizabeth Warren and Bernie Sanders, aims to make their activities more visible.
Then there are dark pools in trading, whose lack of transparency makes it harder for regulators to understand what is happening with stock prices from one millisecond to the next.
We can wrestle with these tough, complex issues. Or we can take the easy way out, and banish all the bankers to work at Waffle House.
The latter option might be more satisfying, but the first is wiser policy.