“I believe the future is only the past again, entered through another gate.”
–Sir Arthur Wing Pinero
In his 1939 book, Wall Street Under Oath, Ferdinand Pecora issued a prescient warning: “Under the surface of the governmental regulation, the same forces that produced the riotous speculative excesses of the ‘wild bull market’ of 1929 still give evidences of their existence and influence… It cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity.” That opportunity is again manifest in 2018.
Pecora was chief counsel to the U.S. Senate Banking Committee, from 1932 to 1934, during its investigation into the causes of the 1929 stock market crash that triggered The Great Depression. The “Hellhound of Wall Street,” as the press dubbed him, led what became known as the Pecora Commission. His work exposed the subversive practices and abusive behaviors of arrogant financiers of the time. And he galvanized public opinion.
Those potent hearings set a framework for the substantive reforms that would successfully govern the markets for the next 60 years. The Banking Act of 1933 (popularly known as Glass-Steagall), The Securities Act of 1933, and The Securities Exchange Act of 1934 not only better regulated Wall Street, but also had the effect of subduing the financial industry too. Wall Street became trustworthy again.
That period of relative calm ended in the late 1990s when Glass-Steagall was effectively repealed in 1999. And history repeated itself.
The fusion of greed, technology, and poor regulatory oversight (despite the number of financial regulatory restrictions increasing by 18 percent from 1997-2008) fueled the 2008 meltdown, what became The Great Recession. Shortly thereafter, as a response, the massive Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010. Now more than 22,000 pages long, the legislation has impacted every sector of financial services in every state of the union.
Notwithstanding protestations by the financial industry that Dodd-Frank is flawed and overbearing (which it is), Wall Street is more powerful and influential than ever.
It returned virtually all taxpayer funds, the capital infusion known as TARP, early and with interest; bonuses rose by 17 percent in 2017 (averaging $184,220); after several years of nearly uninterrupted gains, the stock market hit another record high this past January. And, perhaps most importantly, the American economy seems poised to emerge from static (the “New Normal”) to dynamic growth.
But have any lessons been learned since the financial collapse?
Like Pecora surveying the landscape a decade after that era’s crisis, studying events since the recent crisis ended ten years ago reveals a certain return to “pernicious activity.”
Consider two recent developments as evidence.
The first involves Wells Fargo, thought to be among the best managed financial institutions on Wall Street before, during, and after the 2008-2009 turmoil. The bank largely avoided engaging in many of the speculative activities — like complex mortgage securities — that its peer group could not resist. Then-Chairman Richard M. Kovacevich objected to the perceived bailout of his firm and questioned why it should even receive $25 billion in TARP support to stave off disaster. In fact, Wells Fargo was not in peril. Its performance underscored its sterling reputation as other institutions were wilting under hundreds of billions of dollars in toxic loans and risky derivative products.
Today, however, with nearly $2 trillion in assets and 8,500 locations, Wells Fargo resembles a bank besieged, reminiscent of the unscrupulous practices and unsavory characters from the dark days of the crisis. It is a crime wave.
In 2016, it fired 5,300 employees after determining they were complicit in opening what later was confirmed to be 3.5 million unauthorized customer accounts and unauthorized activity in its online bill pay services. A flawed “decentralized structure” and perverse sales culture were blamed for the rampant fraud that occurred mostly between 2009 through 2016. The bank will ultimately pay nearly $342 million in fines and settlement costs.
U.S. regulators are now preparing sanctions against the bank after it was learned in 2017 that it forced 570,000 customers to take out additional auto insurance polices on top of policies for which they already had coverage. This time, the bank blamed the transgressions (dating back as far as 2005) to an unnamed third-party vendor, for which the bank will refund $145 million. Reuters described this recent disclosure as “the latest in a long-running scandal over how the nation’s third-largest lender treated its customers.”
In a rare public rebuke, responding to what it called “widespread consumer abuses and compliance breakdowns,” the Federal Reserve in February announced that it is punishing the company. As the bank’s principal supervisor, the Fed is restricting Wells’ growth until it “sufficiently improves its governance and controls.” The bank must also make immediate changes to its board of directors.
Fed Chair Janet Yellen said, “We cannot tolerate pervasive and persistent misconduct at any bank and the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that the abuses do not occur again.” That was an extraordinary public declaration by the Fed to call-out an individual firm.
Nevertheless, perhaps unsurprisingly, more trouble emerged last month. Wells Fargo Advisors, the firm’s wealth management business, is now the subject of federal and state inquiries assessing whether its advisers acted inappropriately in the treatment of wealth and investment management clients, including 401(k) plan participants. Among the states opening its own investigation is Massachusetts. The office of the Secretary of the Commonwealth, released a sternly worded statement on March 8. Secretary William F. Galvin said, “I need to be assured that Massachusetts residents haven’t been burned by corporate greed.”
The second development also feeds the narrative that little has been learned.
One can be forgiven for believing that the industry would have done all it could to restore its damaged reputation after the financial-induced recession. But such efforts at best proved lackluster. Americans are still angry at Wall Street.
In 2016, seven years removed from the crisis, a Harris Group poll revealed that only 37 percent of Americans thought the financial services industry had a “good reputation,” up from a crisis low of 11 percent. In the late 1970s, roughly 60 percent of Americans expressed confidence in the banking industry. So, it is curious that Wall Street did not support a regulatory measure that would have, at a minimum, bolstered its public image and instilled more confidence in its practices.
Last month, the 5th U.S. Circuit Court of Appeals struck down what is known as the Department of Labor’s “fiduciary rule.” With its origins dating back to the Employee Retirement Income Security Act of 1974, the rule was a remnant of the Obama era. It automatically elevated all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary. This meant that such market participants would be required legally and ethically to act in the best interests of their clients. The rule was to go into effect in early 2017 but delayed upon further review by the Trump administration.
As Investopedia.com explains, “Fiduciary is a much higher level of accountability than the suitability standard previously required of financial salespersons, such as brokers, planners and insurance agents, who work with retirement plans and accounts.” The new rule would have also eliminated many commission structures within the industry. Many feared that billions of dollars in revenue and profit were at stake had the rule been allowed to stand. Greed is still good on the street.
Among those supporting the rule’s removal: U.S. Chamber of Commerce, Financial Services Institute, Financial Services Roundtable, Insured Retirement Institute, Securities Industry and Financial Markets Association.
Remarkably, the Chamber said the Court’s decision “represents a victory for American businesses and consumers in the battle to address regulatory overreach by Federal agencies.” Overreach?
Actually, it’s not overreach.
In actuality, rather, it is an ominous sign when a large segment of the financial services industry opposed a rule that would have brought a sensible standard of care in how it interacts with customers and their money. Much of the crisis owed itself to an industry that largely acted against the best interests of its supposed “valued customers.” The stain of such malfeasance was a compelling argument for implementing a rule intended to protect tens of millions of Americans and trillions of dollars of their wealth.
Big banks today are still motivated by avarice and algorithms (complicated code-directing computers to effect financial transactions by the millisecond), not altruism. Lending is secondary to speculating. Complexity has replaced familiarity. Vaults hold more data than gold. And traders can destroy banks faster than boards of directors. On any given business day, no executive or regulator can be certain of the health of these institutions. Arguably, they are too big to manage, let alone too big to fail.
These new realities are even beyond what Pecora feared nearly eighty years ago.