The seemingly toothless SEC has called a Sunshine Act meeting next Wednesday to get feedback on high frequency trading, dark pools and sponsored access. It is unlikely that the agency wonks have done any homework on these subjects, and will merely ask the 'public' for feedback. Cue reams of 'proof' from JP Morgan, Goldman Sachs, Credit Suisse, etc. that none of these practices are damaging to the general public. Whether you agree with this or not, the fact is that many of these strategies have arisen due to the new market structure. High frequency trading, for example, has really only been prevalent for the past couple of years. (Note to Mary Schapiro: can you ask the banks if HFT works better in an up market than it does in a down market? I'd really like to know.) Dark pools have been around longer, but just recently proliferated into a virtual dark tank farm of pools. The SEC is right and justified in looking into them, if only to be able to recognize where future problems might lie. All of these activities involve layers of risk that have yet to be properly analyzed.
In the meantime, the Bank for International Settlements is growing a bigger pair, and has called some of the largest players together to discuss 'excessive risk taking'. This a deliberate slap on the hand by BIS, who bravely tried to take on the captains of the finance industry before the crisis. Had the banks maintained the BIS-recommended capital reserves, the crisis would surely have been lessened, with less taxpayer money needed. BlackRock, Citi and Wells Fargo have reportedly accepted the invitation, according to the FT. (Not surprisingly, Goldman Sachs and JP Morgan have cried off.)
But for all the posturing by the regulators, little has changed in our world of finance. Moral hazard remains the largest risk of all, and no one seems to be strong enough to address that. Only this morning, again in the FT, did I see that Citi delayed paying severance to some of its top executives last year. The bank claimed that it wanted to wait until the furor over outsized paychecks and bonuses died down. But here is how it looks to me - it looks like Citi kept those millions in its 2008 P&L to boost the bonus pool and keep shareholders sweet. I wonder of BIS or the SEC can ever have the power to stop the greed.