Page 28 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

BANKING
“Being given notice by the Fed is akin to being sent to the principal’s o ce, whilst failing is akin to being suspended.”
between a doubling and a tripling of the shareholders’ portion of the capital bu er. is goes a long way to explaining the very bearish price earnings multiples we have seen in global banks over the past nine years.
Even more onerous, however, are further provisions within the stress testing rules. Recall that two banks failed and one was given notice, Morgan Stanley. Being given notice by the Fed is akin to being sent to the principal’s o ce, whilst failing is akin to being suspended. Morgan Stanley passed the stress test itself, yet failed to demonstrate that their systems and processes are su ciently robust. What is implied here, but never explicitly stated, is that Morgan Stanley may have fudged its results. eir systems are too messy to tell – at least that is the accusation. Fix them or else.
Let us consider this from the perspective of Morgan Stanley shareholders. Surely, they might argue, these provisions limit shareholder payout and impinge on their rights. is is a very warped version of free-market capitalism, they cry. e managers of the bank, recall, are unable to prove that they haven’t cheated the tests – tests based on hypothetical scenarios made up by quantitative analysts who work within a global bureaucracy based in Switzerland. My hypothetical investor is a US citizen based in Kentucky, or a pension fund based in California. e Fed now reserves the right to withhold the payment of dividends should the managers not manage to prove their innocence.
At the height of the 2007 Financial Crisis there were commentators who predicted the failure of the entire nancial system. A complete overhaul was needed. ere was a very clear option available to the lawmakers in 2008. ey could simply reinstate the Glass-Steagall Act of 1933. is law was very simple. It said that you can’t be an investment bank and a deposit-taking institution at the same time. In this world, the pensioner from California could not be held liable for the risks taken by a proprietary trader in Manhattan. is was how Morgan Stanley was created in the rst place. It was the investment banking spin-o when JP Morgan was split into a deposit-taking bank and an investment bank. Bill Clinton, under pressure from Wall Street, abandoned the principles of Glass-Steagall and eight years later the Financial Crisis hit. One wonders whether the outcome now is better than it would have been if Glass- Steagall had simply been recalled. In the new world order, under the weight of thousands of pages of new banking legislation, banks are micro-
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