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A funny thing happened on the way to the Ball

The Demise of Wall Street’s elite firms could reshape Regulation.

The sudden and shocking demise of the Wall Street elite has left an industry in shambles and the American investor in jitters. The collapse of the largest names on Wall Street is being felt all across the world and has caused the Political landscape to suddenly pay more attention to the Economy and less attention to Governor Palin’s “my space page”. President Bush cancelled his fund raising campaign drive and Barrack Obama is already running commercials blaming the Republicans, while lost in all this is John McCain’s suggestion that “Chairman Cox should be fired for betraying the public trust and falling asleep at the wheel”

While there is a lot of positioning by politicians and pundits alike, there is a huge black hole being created that may reshape regulation as we know it. FINRA was formed by the hasty and controversial merger of NASD and NYSE Regulation in 2007. Large payments were made in anticipation of the ‘cost savings’ the merger would create and more importantly, small firm’s rights were reduced and Large Elite firms were given a seat front and center at the Board level. The Streamlined regulation of NASD and NYSE was supposed to provide more efficient regulation that would also provide better public protection to investors. The SEC endorsed this consolidated regulation overwhelmingly and even made mention that if the members of NASD did not approve the merger that they may have to take action separately. Be careful what you wish for!

The single largest meltdown in Wall Street history is happening right before our eyes and where are the leaders of our regulatory bodies? That’s a question everyone, including John McCain, is asking right now. The warning signs are everywhere that the current regulatory system is going to end. Quite frankly it doesn’t seem to work, unless of course you are guilty of OATS violations or Failure to implement something into your WSP’s!

Bear Stearns was one of the largest firms on the Street and cleared for almost 1000 Broker dealers across the country. They were bailed out in a deal over a weekend that involved Treasury Secretary Paulson, JP Morgan and other federal entities…Like everyone else, Christopher Cox, the Head of the Securities and Exchange Commission learned about the deal on the following Monday while watching CNBC. The message from the Government to the SEC Was clear: You don’t matter anymore, this is bigger then you!

Lehman Brothers collapsed this past week while Merrill Lynch, the largest Brokerage firm in the world made a fire sale deal with Bank America to bail itself out before things got worse. Once again, the Fed and Treasury was involved and gave assurances regarding Merrill’s debt…however one has to wonder: Where is FINRA? Where is the SEC? They have become an afterthought.

There have been rumblings that the Treasury Department may take over the SEC and that Congress is going to demand big changes in the coming months. However there is one undeniable factor that is taking place: The shape and face of the FINRA board is changing. There will be no more Lehman and Merrill’s…and by the end of this week possibly no more Morgan Stanley or Goldman. The large outsider banks may very well become the ultimate power brokers and quite frankly, as evidenced by the Bear sterns and Merrill Lynch bailouts, they have no use for FINRA or the SEC. They deal directly with the Fed chairman and the Treasury. Bank America could shape how or more to the point if FINRA continues. Bank America was forced out of the Clearing business by SEC and FINRA regulators in 2003 for Mutual Fund market timing. Even though Bear Sterns was guilty of the same, only Bank America was forced out and many believe this was the result of Merrill, Goldman and Bear whispering in the ears of regulators to get rid of their institutional competitor.

JP Morgan is in a similar boat in that they do not rely on nor need FINRA or the SEC to get things done. They deal directly with treasury secretary Paulson and most recently have been helping Paulson by putting up money for AIG and other firms and were prodded by Paulson to buy Washington Mutual or Lehman in the last week. Do you really think the heads of Bank America and JP Morgan are going to sit down with a strait face at a table full of FINRA board members and take orders?

 These two firms have been bailing out Wall Street and I would be surprised if they would want anything to do with the current regulatory system. In a matter of days we now have a Board that is no longer representative of the make up of the Member firms. Current Board members from Merrill and Lehman no longer represent the largest firms on the Street. Board members from Goldman as well as Citigroup may also soon cease to b a relative facto in the board make up.

So the important question is whether its time to just do away with the whole Board concept and start over again? Clearly, single self regulation isn’t working and Bank American and JP Morgan have put up way too much money to just suddenly share power with small Broker dealers around the country. It’s hard to imagine either of those entities agreeing to any rule or regulation that restricts any of its business or takes and competitive edge.

Quite frankly Treasury Secretary Paulson is relying on Bank America and Jp Morgan to continue to buy out and help finance the remaining struggling financial giants like Morgan Stanley. With the many BILLIONS and BILLIONS these companies just put up to bail out the Street and America, it is extremely hard to believe that they will want the current Regulatory system and in our opinion, A deal has already been cut with the Treasury and The Fed to have these large companies governed by them Directly. Once that happens, is there really a need for a FINRA board anymore?

Quite frankly, given the lack of regulation that has occurred, one has to wonder whether FINRA will still be in existence a year from now. Perhaps too much time was spent trying to consolidate and control power on the Board and not enough time was spent regulating the elite firms on the Board? The first major test for the single regulator has been a colossal failure of epic proportions and Congress will be making whole sale cages with the Treasury Secretary now the most powerful man in our industry.

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Date
September 22nd, 2008

Author
jbusacca




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