How can we restore confidence in Wall St?
Many in Washington and on Main Street seem to have lost trust in Wall Street, and as legislation moves slowly, many questions remain unanswered. Matthew Bishop, US Business Editor of The Economist moderated a panel of financial figures, including Robert Wolf, CEO of UBS America. The panelists discussed what changes can be made to restore trust in the economic system, what regulations are productive and how institutions should react.
Bishop launched the session by asking panelists what should be done to restore now-dwindled confidence in the financial sector.
“We need drastic change,” said Amar Bhide, a visiting scholar at Harvard Kennedy School. “Over the last 30 years, not just the past four or five, credit decisions have been made by three credit rating agencies and four or five banks. There should be lending offices making specific judgments about credit.”
Today’s credit rating process is dangerous, he said. If you have 100 lending offices, mistakes could be more permissible. But when there are three rating agencies, problems become much more volatile.
Bishop asked Wolf, half jokingly, ‘Should we just break up the banks?’
“I’ve been in the industry since 1984 so I’ve seen a few crises. The recent environment was one of extreme leverage. Everyone took advantage of easy credit. Our industry moved away from its normal cycle, away from asking, ‘How do we serve the client?’” he said. “We went from being a moving business to a storage business.”
And because banking institutions were stuck, everyone ran away at the same time, he said. They were desperate, and began to sell liquid products, and that’s when the problems started to arise.
Deven Sharma, president of Standard & Poors had a systematic approach to fixing the broken industry. He believes three things need to come together: regulation, transparency and market discipline. Regulation, he said, brings more confidence to investors and market participants.
“But it must be smart regulation because there is a lot of inconsistency globally which opens the doors to arbitrage and also brings more friction to the capital floor,” he said. “You want minimum friction but also to maintain integrity.”
The market is being looked at entity by entity, he said, but this fragmented view is unrealistic. The market works more cohesively, and smart regulation brings consistency across the globe. He also encourages transparency, which is an “overused word” but regardless, helps people understand details of an offering and risks involved. Lastly, market discipline, he believes, will provide stability and also innovation.
Deborah Bailey, director of Governance, Regulatory and Risk Strategies at Deloitte & Touche, focused on how to manage large financial institutions.
“We need to learn how to put a fragmented regulatory system under one umbrella in the US. I think there is a lot of hope for that. We have the same number of players as we did in the beginning of the crisis. When you have that many bodies you spend a lot of time coordinating who does what,” she said. “We need to stop making criticisms, and take what we know, and put it in the system now to strengthen resiliency and go forward as an economy and a country.”
Bishop discussed how it seems Wall Street is happier now, and as a journalist, that may mean things that should be sorted out have not been.
Wolf responded that a lot of legislative change has been pushed forward, even if it may not seem so.
“We’ve had a year and a half to see regulation go from an 85-page blueprint to a 2,000 page legislation with a lot of views, hundreds of amendments.”
He pointed out that a year ago, 750,000 jobs were being lost every month, and now jobs are growing in the private sector. At the end of the day, the focus is how to grow the economy, and to do that, he said, capitalism is critical.
“We’re all geniuses in hindsight here, but what did we learn from our mistakes that help us move forward?”
And Wolf, who became much more vocal as the panel proceeded, pointed out the importance of finding a balance between Wall Street and Washington. When Bishop pointed out Wolf’s close relationship with Obama, Wolf responded: “It’s a new president. He’s been there for a year and half and everyone’s trying to figure out how to work with this administration in the best way.”
Bhide pointed out the importance of distinguishing what should be securitized and rated. Rating agencies, he said, need to have actual conversations and do due diligence and analysis of the projects. It used to be that only big projects like railroads and powerplants were securitized, and now houses and credit card loans are securitized with rating agencies’ math models, which are often faulty.
Bailey discussed why there is a need for financial literacy early on in our educational process with an anecdote close to home.
“I have a very smart daughter, but it took her a while to realize you have to put some money in the ATM before you can take it out.”
