This week the U.S. House of Representatives took up a bill to revise the Dodd-Frank Wall Street Reform and Consumer Protection Act that was passed after the global financial crisis of 2008. It will never become law. Even if the House passes it, the Senate probably won't — and if both do President Obama has vowed to veto it. Good. It's dumb legislation.
I won't go into all the reasons why it is foolish to scrap the Volcker rule that puts up some barriers to permitting banks to borrow at near-zero interest rates from the Fed and use that money to speculate, or why it's not smart to end the authority of the Financial Stability Oversight Council to designate financial firms as "too big to fail," or any of the other many reasons why politicians are on the wrong side of this one.
You would have thought that last week's announcement that Wells Fargo had agreed to pay $185 million in penalties over claims employees had opened unauthorized customer accounts would be enough to remind policymakers that we need regulations. And I'm a banker.
The politicians supporting this legislative weakening of restrictions are supported and even pushed by a number of pundits as well as many of my brethren on Wall Street who seek to weaken major parts of Dodd-Frank and resist any return to the days of Glass-Steagall — the Depression-era law that prevented banks from taking excessive risk and that was repealed during the Clinton administration.
These politicians, pundits and bankers insist that the separation of banking from risk-taking is unnecessary and puts the U.S. at a disadvantage compared to our European and Asian counterparts. As evidence, some assert multiple reasons why neither Dodd-Frank nor the evisceration of Glass-Steagall would have prevented Wells Fargo's fraud or the 2008 financial Crisis. Not so fast.
I have no argument that thin capital standards, easy Fed policies and politicians contributed mightily to the 2008 housing crisis, the tech crisis in 2000, the savings and loan crisis of the late 1980s and a score of smaller catastrophes. But there can also be no doubt that the risk-taking culture of many banks contributed to these as well as to the recent Wells Fargo fiasco. And there can be no argument that this culture must change. As a start, we need to strengthen, not weaken, all the relevant legislation. And then we need to work on changing culture.
I get the argument that rules and enforcement actions won't fix everything. The $185 million that Wells Fargo paid was a pittance compared to the bank's balance sheet. And I agree that there are too many regulatory agencies. We all would be better off if banks were regulated by one or two groups, not a dozen — as it is now. But loosening the rules is not a smart way to change behavior. And in too many cases behavior needs changing. To assert otherwise is akin to the cigarette industry denying that smoking causes cancer. Sure, there are other causes too. But smoking causes cancer. Besides, the extent to which Dodd-Frank would have prevented the bursting of the housing bubble or the extent to which the gutting of Glass-Steagall contributed to that financial crisis or any other malfeasance misses a larger point. We need strong regulations and strong regulatory bodies in order to rebuild trust in Wall Street by the general public. Without that trust, the pitchforks will come out.
The recent cycle of malfeasance by banks combined with economic catastrophes has left too many Americans with reduced savings, lost retirement benefits, fewer jobs, foreclosed homes and a growing sense of a rigged game. As a result, too many view Wall Street as a place that attracts people who don't deserve the money they make but are willing to break the law to get more of it. It's an exaggeration. But there are too many real examples to ignore. It's not just Elizabeth Warren who believes there is a problem. In 2013, Federal Reserve Bank of New York President William Dudley said, "There is evidence of deep-seated cultural and ethical failures at many large financial institutions."
To ignore the contributory role that gutting our regulatory framework would have in harming our industry is to put your head in the sand.
Ken Marlin is founder and managing partner of Marlin & Associates Securities LLC and the author of the book "The Marine Corps Way to Win on Wall Street — 11 Key Principles from the Battlefield to the Boardroom."