Reforming Global Finance

Beyond LIBOR: Whiners on Wall Street

Are financial industry complaints about the alleged costs of regulation justified? Or does history prove they are without merit?

Credit: Marcio Jose Bastos Silva/


  • When faced with new regulations, the regulated industry routinely argues that the costs and burdens are too heavy — but then they invariably adapt and thrive.
  • Business owners consistently say that their reluctance to hire arises from uncertainty about consumer demand, not concern over regulation.
  • Even as essential regulations are being adopted, corporate America is actually faring well. Regulation is clearly not interfering with corporate profits.
  • In the years leading up to the crisis, huge sectors of our financial markets were completely unregulated, while other sectors were poorly regulated.
  • The slow pace of the economic recovery is not attributable to regulation but instead to rampant unemployment and lack of consumer demand.

Ever since the emergence of financial market regulation in the early 1900s, the financial services industry has argued that new regulatory requirements will have a devastating impact by imposing unbearable compliance costs. Yet Wall Street has always absorbed the cost of those new regulations and has consistently remained one of the most profitable sectors in the U.S. economy.

For example, a century ago, when securities regulation first emerged at the state level, Wall Street railed against it as an “unwarranted” and “revolutionary” attack upon legitimate business that would cause nothing but harm. However, in the years following this early appearance of financial regulation, banks and their profits grew handsomely.

Subsequently, when the federal securities laws were adopted in the midst of the Great Depression, Wall Street staunchly opposed them, claiming that they would slow economic recovery by impeding the capital formation process and discouraging the issuance of new securities — virtually identical arguments that industry is making today.

However, in the years after the enactment of the federal securities laws, U.S. securities markets flourished and became what has often been described as the envy of the world. The same pattern has been repeated with each new effort to strengthen financial regulation, including deposit insurance, the Glass-Steagall Act, mutual fund reform and the national market initiatives of the mid-1970s.

The lesson to be learned from this history is that, when faced with new regulations, members of the regulated industry routinely argue that the costs and burdens are too heavy — but then they invariably adapt and thrive. Opponents of reform under the Dodd-Frank law are following this familiar pattern, and their attempts to minimize regulation by invoking the costs and burdens must be similarly discounted.

Equally unfounded is the often-heard claim by opponents of regulatory reform that regulation is stifling overall economic growth and preventing a robust recovery from the financial crisis. This claim is unsupported, often just repeated as a self-evident proposition.

In fact, the slow pace of the economic recovery is not attributable to regulation but instead to rampant unemployment and lack of consumer demand following the worst financial crisis since the Great Depression. We need more financial regulation, not less, to ensure that the economy recovers and that we never again experience such a profound and long-lasting financial disaster.

The Bureau of Labor Statistics continuously surveys the private sector to understand the reasons for layoffs. Data for 2010 shows that only 0.3% of the people who lost their jobs in layoffs were let go because of government regulation. By comparison, 25% were let go because of a drop in business demand.

In survey after survey, business owners consistently say that their reluctance to hire employees and expand production arises from uncertainty about consumer demand for products and services, not concern over regulation.

Even as additional and essential regulations are being adopted, corporate America is actually faring well. Regulation is clearly not interfering with corporate profits, cash reserves or executive compensation.

Corporate profits are at record levels, representing over 10% of GDP after tax. And executive compensation has nearly regained its pre-recession levels, with a reported remarkable 27% increase in median pay in 2010. That level of compensation remained steady and even increased somewhat in 2011, with the top 100 CEOs receiving a total of $2.1 billion in compensation.

The stagnant consumer demand holding back economic growth was a direct result of the financial collapse and economic crisis which, in turn, were a direct result of too little regulation. In the years leading up to the crisis, huge sectors of our financial markets (such as swaps) were completely unregulated, and other sectors (such as mortgage-backed securities) were poorly regulated.

Moreover, industry’s claims that financial reform will reduce market liquidity, capital formation and credit availability, and thereby hamper economic growth and job creation, simply disregard the fact that the financial crisis did more damage to those concerns than any rule or reform possibly could.

In September 2008, at the height of the Wall Street-created crisis, there was no market liquidity, capital formation or credit availability and, since then, there has been little economic growth and even less job creation. The financial reform and Wall Street re-regulation law was passed with the intent to prevent that from ever happening again.

Passed, but not fully implemented

Having failed to prevent the passage of a comprehensive financial reform law, the financial industry is now redoubling its efforts to make sure the law is never implemented as intended. What that means is that they are trying to prevent the protection of the American people, taxpayer, Treasury and economy from suffering again as a result of their unregulated conduct.

Their latest weapon to kill or weaken financial reform is to claim that every rule and regulation passed to implement the law must be subjected to exhaustive “cost-benefit analysis.” That is a seductively innocent sounding phrase. Indeed, it is an activity that on its face seems sensible and appealing.

However, in the context of regulation generally and financial regulation in particular, that thinking is simply wrong and it will likely kill financial reform, as Wall Street has intended all along.

Moreover, it is a ridiculous argument. The very industry that caused the financial collapse, economic crisis and trillions of dollars in costs — many that continue to this day — now claims that it cannot be re-regulated to prevent it from causing yet another crisis if the costs it must bear are too great.

Succumbing to those arguments would be irrational. The American people, taxpayers, Treasury and economy have to be protected from Wall Street. Wall Street doesn’t have to be protected from regulation.

Nonetheless, the industry is making this argument in the regulatory process and in lawsuits filed to prevent Wall Street from being re-regulated.

For example, the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association have sued the Commodity Futures Trading Commission (CFTC), the federal agency that regulates futures and options markets, over what is referred to as its “position limits” rule. They claim, among other things, that the CFTC did not conduct a proper cost-benefit analysis.

More recently, the Chamber of Commerce and the Investment Company Institute have sued the CFTC for the same reasons over re-establishing a registration requirement for investment companies that act as commodity pool operators.

Tellingly, the financial industry only ever talks about costs to it, but never talks about the benefits of financial reform or regulation. So, in truth, when the industry calls for “cost-benefit analysis,” what it really means is “industry cost analysis.” That is as incomplete as it is wrong and will leave taxpayers and the Treasury on the hook again for their recklessness.

Adding insult to injury, the financial industry and its allies are waging a battle in Congress to cut the regulatory budgets of the agencies that are supposed to police Wall Street. That the CFTC, one of the agencies at the center of cleaning up the Barclays-LIBOR scandal, faces Congressional defunding shows the extent of decay that has gripped today’s Washington.

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About Dennis Kelleher

Dennis M. Kelleher is the president and CEO of Better Markets, Inc., a nonprofit organization that promotes the public interest in the U.S. and global financial markets.

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