Just when leveraged funds thought they could catch a break as U.S. regulators targeted prime institutional funds, along came Archegos. As we noted in our analysis earlier this week, this case will not go unnoticed – indeed, Secretary Yellen Wednesday said it is an early warning blip on her systemic-risk radar. I’ve seen a lot of scandals come and go without substantive regulatory change – think JPMorgan’s “London Whale” and Goldman Sach’s aluminum-can accident. Despite a lot of huffing and puffing across Washington and costly enforcement actions, the business of big banking went on much as before. This time, it’s going to be different.
The reason we expect substantive regulatory change that goes beyond SEC standards for leveraged funds isn’t that Archegos poses larger costs to the banking sector than past near-miss scandals. Quite the contrary. At least so far, direct losses may well be lower. What’s different now is that tempers about financial scandals are higher than they were even in the aftermath of the 2008 crisis – which is saying something.
When prior big-ticket scandals broke, regulators were up to their necks in Dodd-Frank and other post-crisis rulemakings and had little appetite or capacity for anything else. And, for all the hearings held on these cases, Congress also had little appetite for new bank-regulatory legislation. Dodd-Frank used up a whole lot of bank-related oxygen and what little was left dissipated after Republicans took control of the House in 2010.
The second reason banks were spared structural violence after prior scandals was that regulators were not only way busy, but also convinced that the sum total of all the big-bank rules they were busily writing would suffice to prevent large-scale misbehavior. FSOC in the Obama Administration thus turned to nonbanks, using up most of its oxygen designating four nonbanks and trying to persuade the SEC to do the Fed’s bidding on MMF reform. By the time of the election in 2016, FSOC seemed downright worn out. Its last report spoke movingly about an array of hedge-fund and leverage risk it had studied since 2010, but proposed nothing concrete on which the Trump Administration might have acted even were it so inclined.
The third reason for high-probability, high-impact regulatory change is that FSOC now is anything but quiescent and the SEC is more than willing. Further, Democrats now control both the House and Senate and thus can put up much more than just a set of high-profile hearings to call bankers to account and demand FSOC, SEC, and bank regulatory action.
Enacting statutory change of course isn’t easy given Democrats’ slim Senate margin, but it often doesn’t take new law to lead to new rules, especially if regulators are already inclined to issue them. Pressed by progressives, frightened of renewed systemic risk, and chastened by the March 2020 crisis, the Ides of April are propitious for those seeking vengeance in Archegos’ aftermath.