The Wall Street Journal has a long page 1 article, "Life on Wall Street Gets Less Risky" describing what it's like at Morgan Stanley under the new regulatory regime. Two bits caught my eye
Your No. 1 client is the government," John J. Mack, Morgan Stanley's chairman and chief executive from 2005 to 2009, told current CEO James Gorman in a recent phone call. Mr. Gorman, who was visiting Washington that day, agreedThis is a useful anecdote to remind people what "regulation" means. I get asked all the time, "doesn't the financial crisis mean we need more regulation?" They seem to think "regulation" is something you pour in like gas in the tank. Or maybe they envision "regulation" as a simple set of impartial rules. You know, there is a 50 mph speed limit, which everyone routinely violates, a huge crash, so we enact a 30 mph speed limit and put a lot of cops on the road.
....regulators prowl the office floor looking for land mines, and Mr. Gorman phones Washington before making major decisions...
About 50 full-time government regulators are now stationed at Morgan Stanley. There were none before 2008, when it was regulated as a brokerage firm instead of a bank.
No, we put 50 cops in your car. And how long can this possibly go on before the cops start asking where you're going and why? How long can 50 regulators sit in the bank approving every decision, before "you know, you haven't made any green energy loans in a long time" starts coming up? But contrariwise, how long before those 50 regulators come to the view that Morgan Stanley's survival and prosperity is their job? 50 full-time government employees calling the shots on every deal at a supposedly private bank is a good picture to keep in mind of what "regulation" means.
It also means bureacracy and a return to the cozy banking world of the 1950s.
There now are 3,000 different limits that restrict such things as how much capital traders can put at risk, up from 30 before the crisis....
Wall Street culture has long valued grueling hours, lunches at desks and late nights in the office. In 2011 and 2012, Morgan Stanley's fourth-floor capital markets division overlooking Times Square, where several hundred bankers help arrange stock and bond deals, started emptying out earlier in the day, according to two former employees who worked there at the time.....The three-martini lunch, 2-pm tee time and "mad men" suits can't be far behind.
But there is good news in this too.
..go-go trading businesses once hailed as its future are gone or curtailed. In their place, the storied investment bank has embraced the retail-brokerage business—peddling stocks and doling out financial advice to ordinary investorsThis is great! The Volcker rule, which seemed awfully hard to define and implement as regulatoin, seems to be happening in spirit. Trading is moving out of big government-subsidized, too big to fail, commercial banks. Free marketers, cheer. This function is not dying. It is moving to hedge funds, where it belongs. And which everyone knows can fail.
For the high-rolling traders who used to make more than $10 million a year, Mr. Gorman has had a simple message: Take fewer risks or take their act to a hedge fund, where failure doesn't threaten the financial system as much.... Traders and others have left for hedge funds and private-equity firms.
...Michael Reed, who worked at the PDT desk for 16 years before leaving in 2010, laments the decline of the firm's trading culture. "Personally, I find it sad," he says. "They used to be a peer of Goldman Sachs. Now, they're just another retail brokerage."
You know, like LTCM.
Oh wait, maybe this isn't so great. "Systemic" never had any limits. How long until regulators decide the new hedge funds are "systemic?" The "intermediated finance" view gaining more and more popularity at the Fed says that leveraged intermediaries willing to buy are they lynchpin of the financial system. "Fire sales" will break out just as much if they fail...
Well, maybe I worry too much.
The other heartwarming big picture: Banks have figured out that maybe the Modigilani-Miller theorem works after all. You can operate with lower risk, lower beta, lower return on equity. That's what's going on, basically, at Morgan Stanley. And made even clearer in the Financial Times:
Credit Suisse’s chief executive has laid out a vision for a banking industry with lower but more sustainable returns and has vowed to never again make losses.
Brady Dougan... said Credit Suisse’s aim of an average 15 per cent after-tax return on equity was a much more dependable promise over the long term than the sector’s pre-crisis 20 to 30 per cent targets.
Lower risk, lower beta, less chance of failure, lower return on equity. So much for the claim banks had to give shareholders an absolute ROE independent of beta and volatility.
