Levine on Wall Street: Has The SEC Jailed Enough People For Greed?

The SEC has only sued 138 firms and individuals for financial-crisis misconduct.

The SEC has only sued 138 firms and individuals for financial-crisis misconduct.

You're almost there, SEC: After the five-year anniversary of the financial crisis, surely there'll be a drop-off in the number of articles about how you're not going after the people who caused it aggressively enough. Meanwhile the Wall Street Journal has a big front-pager marshaling all the complaints. This is a good place to read quotes like "What has Wall Street really learned? Very little," and "They've not had the big case that everybody wanted to see ... a major player being held really accountable" and, my favorite, "There's a lot to be said for the SEC's first line of defense, which is that it's not unlawful for people to have unconscionable greed." The Journal also dryly explains that one reason that the SEC hasn't put more people in jail for unconscionable greed is that "The SEC has civil powers only and so can't jail people."

When banks say no, shadow banks say yes.

Reuters's five-year-er-er today is about how "Five years after Lehman, risk moves into the shadows," and leads with Melody Capital Partners, a firm founded by three ex-UBS executives to make loans where "the borrowers are in financial distress and the financing arrangements tend to be unusual in nature." Poor Melody! Lots of people legitimately worry about "shadow banking," in the specific meaning of non-bank-regulated short-term borrowing to finance long-term investment: tri-party repo, asset-backed commercial paper, etc. There's good reason to think that those practices pose systemic risks to the financial system. But lots of people also use the term "shadow banking" to refer to any bank-ish services provided by non-banks, and so firms like Melody or Prospect Capital, which use long-term funding to provide loans that are too risky for banks, get lumped into the same systemically risky category. That seems wrong! Those firms are surely much less risky than the big banks: they're small enough to fail, far better capitalized, and actually lending money to real businesses.

When the UK says no, Europe backs down on financial regulations.

The European Court of Justice seems to be leaning toward "strik[ing] down a law giving the European Securities and Markets Authority the right to ban short selling of financial instruments in emergencies" at the UK's request. This Europe also decided not to move Libor -- the London interbank offered rate -- under continental ESMA regulation, and found out that its planned financial transaction tax may be illegal. So I guess expect more in the way of U.K. (and U.S.) style freewheeling financial markets, and less in the way of continental-style government intervention in markets. Though the bonus cap still seems to be a thing.

JPMorgan's Chief Investment Office could lose $15 billion

That's if interest rates suddenly go up 2 percent, so don't panic. And every other big bank is in a similar situation: As rates go up, giant portfolios of bonds lose money. But you'll notice that the $15 billion is much, much more than the $6 billion that the CIO lost when its London Whale beached himself on some credit derivatives last year. (And JPMorgan already lost $3.3 billion on this portfolio last quarter, which is of near-Whale magnitude.) The Whale was a scandal; the widespread losses on interest rate moves are not, though I guess you'll keep seeing articles about them. It's a good exercise to think about why; I suspect part of the answer is that losing money on interest rates is a more conventional thing for banks to do than losing money on credit derivatives, and that everyone is doing it at the same time and in the same way. Another part of the answer is accounting: when the Whale's positions lost value, that affected JPMorgan's net income; when the giant portfolios of "available for sale" bonds lose value, that doesn't. And if it's not in your income statement it's like it never happened.

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    To contact the author on this story:
    Matthew S Levine at mlevine51@bloomberg.net

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