What are the consequences of regulators leaving government work to join the financial services industry, and vice versa? Nomi Prins, a Senior Fellow at Dēmos, chronicles the problems of the revolving door between Washington and Wall Street in her latest book "All the Presidents' Bankers."
“The difference is that now people know each other less in their personal lives before they make those transitions," she says. "Now it's a little more like 'I know you from the industry of Wall Street and Washington' as opposed to 'We hung out and our dads smoked cigars together.'”
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Prins notes that there was more personal accountability in the relationships between Wall Street and Washington during the mid-20th century. She points out that before the crash of 1929, the Morgan bank (predecessor of J.P. Morgan - JPM) had strong connections with Presidents Coolidge and Hoover. Yet, a shift in the relationships occurred during the Great Depression.
"There was this accountability moment where the bankers that ascended to run these banks, to run Chase, to run Citibank (C)…they wanted economic stability throughout the country," she says. "They actually thought [stability] was important for confidence in the banking system…people would actually keep their money there and trust that they had a future with this bank, so the relationships with individuals and corporations and countries all mattered."
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Prins says that the modern-day deterioration of the bank-customer relationship is a direct result of the growing size and risk profiles of bank behemoths.
"The banks are so big right now [and] they have access to so much of a percentage of the deposits of individuals,” she says. “The leverage is so much higher on the back of those deposits, the bailouts that have happened for numerous reasons in the past 25 years have all been an indication that is okay to take more reckless bets."
And while the idea of banks being "too big to fail" caused widespread Main Street anger towards Wall Street, Prins believes the policy of government bailouts will continue post-Financial Crisis as banking has become more concentrated. She noted that the big six banks (J.P. Morgan, Citi, Bank of America - BAC, Goldman Sachs - GS, Morgan Stanley - MS, Wells Fargo - WFC) in this country control 97% of all trading assets in the U.S. and 93% of all derivatives.
Prins also added that the anti-banking rhetoric of many U.S. Presidents (remember President Obama's Wall Street "fat cats"?) has a long history, but one that is at odds with actual policy. It goes all the way back to Woodrow Wilson and the creation of the Federal Reserve, she said.
"In practice Woodrow Wilson was behind the creation of the Fed, which we know now has substantiated a lot of Wall Street losses, has a $4.5 trillion book. It's the largest hedge fund in the world right now...But [Dodd Frank] hasn't fundamentally changed the concentration of power. The revolving door...influences the risk inherent to what's going on on Wall Street. It hasn't made the economy more stable with respect to the banking industry, which is an industry that infiltrates every aspect of our individual and political lives.”
We should also note that the Federal Reserve has its own door to Wall Street. Former Chairman Paul Volcker worked at Chase early in his career. Alan Greenspan spent time at Brown Brothers Harriman (now BBH). Former Fed Governor Jeremy Stein recently joined the $20 billion dollar hedge fund BlueMountain Capital Management as a consultant. Current Fed Chair Janet Yellen, and her predecesor Ben Bernanke, do not have such Wall Street ties.
