The White whip gets cracking on Wall Street

There's still a lot of work to do on the Dodd-Frank financial reforms, but landmark events this week indicate the US financial watchdog is moving beyond class war rhetoric.

New York – Walking through Zuccotti Park in downtown Manhattan yesterday, you could easily forget it was only two years ago next month that Occupy Wall Street protesters started camping out and demanding rights for ‘the 99 per cent’.

While they were initially dismissed as a ratbag group of anti-capitalists, their message about Wall Street accountability was one that resonated and was supported by far more conservative folks than them across America. Polls showed that the movement enjoyed as much as 43 per cent support across the country last year.

US President Barack Obama used the momentum to adopt a policy of class warfare. The 'us and them' rhetoric was ramped up, Republican nominee Mitt Romney was vilified in countless campaign speeches for being a 'Wall Street millionaire’ and a pledge was made to crack down on rogue bankers through regulation and litigation.

Obama’s speech last month in Galesburg, Illinois, showed that the class warfare approach looks set to carry over from his first term.

"The one thing I care about is how to use every minute of the remaining 1276 days of my term to make this country work for working Americans again," he said. “We need an economy that grows from the middle out.”

He further signalled his intentions when he appointed Mary Jo White as US Securities and Exchange Commission chairman in May.

"You don't mess with Mary Jo," he trumpeted at the time, almost daring someone to try it.

Events this week revealed to the public what Obama meant.

First came the revelation that US authorities are secretly investigating JPMorgan Chase for hiring the children of elite Chinese officials.

Then, White threw out a previously agreed upon settlement with hedge fund honcho Phil Falcone that would have seen him banned from the securities industry for two years. White pushed for five years and also secured the first acknowledgement of wrongdoing from an individual or company ever as part of a settlement.

For a man who duped investors at Harbinger Capital Partners about a $US113 million ($125.13 million) personal loan he took out to pay his own taxes while denying them the right to pull out their own money, it is a far more fitting penalty.

John Coffee, a securities law professor at Columbia University, said the week’s events marked an important turning point for White and the SEC in restoring the public's trust in the watchdog.

“The public wants people to admit their guilt. That is very important,” he said.

"You have to have a system that shows investors that they can't get away with fraud, and that wasn't the case in 2008.

"Not only is she showing Wall Street that she is tough but she is also showing the staff by rejecting their earlier recommendation."

White is also going after the head of another billionaire hedge fund manager, Steven Cohen of SAC Capital Advisers, for failing to supervise two employees accused of insider trading.

It came just a week after the SEC and the Justice Department fired off separate lawsuits against Bank of America in North Carolina for selling investors $US855 million in toxic mortgage-backed securities.

Brad Hintz, former chief financial officer at Lehman Brothers and now a banking analyst for Sanford Bernstein, said attacking elites was a populist political response.

"Let’s face it, Wall Street has never won a popularity contest. From a politician’s point of view it is a perfect target but, popular or not, there is a need for Wall Street and that needs to be understood," he said.

But for all the class warfare chatter, how effective has Obama’s crackdown on Wall Street actually been?

An analysis by law firm Davis Polk of the Dodd-Frank financial reforms that were passed three years ago shows there is a lot of work still to do.

Of the 398 rule changes required under the law, 240 – or 60 per cent – have not yet been implemented. The US Securities and Exchange Commission, the government’s Wall Street watchdog, has only completed a third of the 100-odd regulations that it is required to do under Dodd-Frank.

Former US congressman Barney Frank, the sponsor of the aforementioned legislation, said his bill was merely a starting point.

"The debate in the public ... was about whether people can hide risk or pass risk along. Dodd-Frank changed that,” he told Colombia Business School.

"Is it the answer? Of course not – nothing is ever the answer. I don't think that you will see bloodthirsty regulators seeking to penalise people … These are not galley slaves that are going to get whipped if they miss a stroke.”

Before this week, White had been lambasted for being too soft on Wall Street. Particularly, after she used her first vote as chairman in May to allow the foreign branches of American banks to avoid rules regarding derivatives developed under Dodd-Frank and instead follow rules that prevail in the foreign countries where the deals are done. Foreign rules on derivative trading are often weak or non-existent, which is why many of the derivative failures have happened overseas. Do we need to mention JPMorgan’s ‘London Whale’ debacle?

Blythe Masters, head of global commodities at JPMorgan, makes the most sense when she says the crackdown on Wall Street should not be a polarising, class warfare dialogue.

"Most people on Wall Street will tell you that at least 85 per cent of what was in Dodd-Frank was a massive step forward," she said. "What we need to do in the financial community is to restore public trust and confidence and that is no small order.

"We need to get rid of the jargon and continuously explain that these are the engine parts that drive the good," she said. "But we also need to acknowledge the ugly – the lack of accountability, the extraordinary mistakes that were made, the interconnectedness that created extraordinary fear and to support regulation and better behaviour. It needs to be a team effort."

It is too early in her tenure to really determine how Mary Jo White is going to carry out her role but if this week is any indication then Wall Street had better watch out. 

Mathew Murphy is a Walkley Award winning reporter based in New York.

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