When I got back to New York, I ran into Pandit again, and he told me the Basel liquidity requirements for banks called for $3- to $5 trillion in liquidity. “Where do you think that three- to five trillion will come from?” he asked rhetorically. “The lending pool.”
One of the biggest questions regarding financial reform was whether the new regulatory superagency would have the wherewithal to be more effective than the current agencies. A former chairman of the SEC told me that the agency didn’t have the resources to properly regulate the industry. “How will the SEC manage the extensive new obligations it will have when regulatory reform passes?” he wondered. Under reform, the agency that missed Madoff and the financial crisis would have responsibility for ten thousand hedge funds previously unregulated, among other things.
When I spoke with Schapiro in June, I asked her point-blank if the SEC was capable of keeping up with the job. She acknowledged that there were only thirty-seven hundred people to handle thirty-five thousand regulated entities. “We do need more people,” she agreed. “I think we’re covering the waterfront right now—and we could do it more comprehensively, and that’s our goal. And I will say Congress has been generous in the last two years to give us significant budget increases. But make no mistake about it, we are just now in 2010 getting back to the staffing levels that we enjoyed in 2005. And if you think about what’s happened in our markets from 2005 to 2010, and to know this agency didn’t grow at all during that period is pretty frightening.” I had been hearing from others that the SEC couldn’t keep up, due to staffing levels and pay levels and experience levels, and Schapiro seemed to agree that there was a steep hill to climb. But she suggested to me that the SEC has been able to tap into a new sense of patriotism that was bringing new blood into the public realm. She put a confident face on it, even knowing the huge challenges ahead.
In July 2010, I hosted an important panel discussion at the Aspen Ideas Festival. For more than ninety minutes before a packed auditorium, Alan Greenspan, David Rubenstein of the Carlyle Group, and the economist David Hale offered a clear and brutally honest analysis of where the economy was headed. There was agreement that a key priority was getting the business community spending again, but Greenspan and Rubenstein believed that the financial reform bill would probably accomplish just the opposite. Why? “The regulatory bill has an extraordinary amount of items that empower the regulators to implement and promulgate rules,” Greenspan said. “I can tell you how it’s going to play out, having been there.” In effect, Greenspan said, the uncertainty created by a slew of unclear rules would discourage spending and lending. Rubenstein agreed. “The business community is in hibernation, sitting on cash. They don’t know what the tax rates are going to be, what the regulation is going to be.” He called upon the administration to end the demonization of the business community. “Often in Washington, they love employees but they hate employers,” he observed.
Rubenstein, who I recalled felt so bullish back in 2007, was sober as he described a world where the economic momentum was shifting away from the United States. “We’ve been the biggest economy in the world since 1870,” he said. “We will lose that title to China roughly around 2035.” Ultimately, he suggested that the United States might be number three among world economies. “There’s nothing the president or the Congress can do,” he declared—not because they didn’t have a role to play, but because the political will has been lacking when it comes to addressing real issues. “Congress is dysfunctional,” he said, highlighting the overemphasis on vague regulations and the underemphasis on making hard choices. He concluded sadly, “Tough decisions don’t get made in Congress.” Indeed, many of the people I interviewed complained that the financial bill was a “political solution” whose value was more about the administration’s scoring a win than about true reform.
In some respects, the public narrative was just as important as the regulatory environment—maybe even more so. Regulations fail; we’ve seen it time and again. The truth is, it’s not possible to legislate perfection, even when the strictest regulations are in place. The health of the system is in the hands of the men and women who ply their trade in the halls of finance. I have spoken at length with hundreds of them—from top executives and heads of state to global investors and brokers and traders—and they all emphasize their willingness to rethink practices. Complicating their task is the rapidity of growth and change in a global marketplace where there are billions of players—long, short, buyers, and sellers. And that in itself is a form of checks and balances.
September is a cruel month for America. The attacks of September 11, 2001, took away the lives of thousands of people, many of whom worked on Wall Street. The events of September 12–14, 2008, destroyed the financial lives of countless others. In no way is a lost nest egg comparable to a lost life, and in no way can a comparison be drawn between the horrors of the terrorist flights and a financial setback, however painful and widespread. Still,
