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Rick, not Katy

30 July 2015 By Rob Cox

Rick Perry looks to be running for the wrong job. The former governor of Texas is one of the 17 candidates duking it out to be the American presidential nominee for the Republican Party. Judging by a speech he gave to the elite minds of global finance this week in New York, he might be better suited as a banking regulator.

It’s easy to see the governor’s allure to financial practitioners reeling from all the new rules imposed on them since the financial crisis. Perry is well known for his anti-regulatory fervor. It was the highlight of his failed presidential run four years ago, though largely because during a live televised debate he couldn’t remember the name of the third federal agency he intended to abolish.

That “Governor Oops” has been replaced by a new and improved Perry, with a set of smart-looking glasses and better schooling all around. But he’s still railing against the intervention of government in industry, and against regulation – notably calling for the abolition of the Dodd-Frank Act that became law five years ago.

So it is no surprise that he managed to pack financiers like sardines into the ballroom of the Yale Club in Manhattan to tell them his plan to save Wall Street. What he told them, though, was not what one would usually expect to hear from a laissez-faire markets guy.

For all his free-market huffing and puffing – and despite a host of logical inconsistencies – Perry’s plan to end the possibility that banks are too big to fail reflects an emerging international consensus that crosses party lines and geographies. Even bankers are on board, at least in part: Perry had them cheering uproariously when he promised he’d never bail out a big bank.

Set aside the sheer unlikelihood that Perry will become the next occupant of the Oval Office. It’s also worth putting a caveat on much of the noise spilling forth from the tiresomely long U.S. campaign trail, where 17 Republicans and half a dozen Democrats have thrown their hats into the ring. But the fact that how to regulate still figures so prominently in the conversation suggests there is much unfinished business for Wall Street to consider.

Take Perry’s ingredients for putting an end to the taxpayer rescues that characterized the 2008 crisis. He wants the Federal Reserve and Congress to consider strengthening rules requiring global systemically important banks to harbor additional capital and to consider forcing banks to separate their commercial lending and investment banking practices.

The latter is effectively advocating for a return to the Glass-Steagall Act, the Depression-era law that was dismantled under President Bill Clinton in the 1990s. It echoes what several of Perry’s Republican adversaries have called for, and part of the recipe for reform put forward by Bernie Sanders, the Vermont senator who is the candidate furthest to the left in the Democratic slate. In that sense, Perry’s merely channeling the populist zeitgeist.

But Perry took his argument a step further in his Yale Club speech. After ticking through his plans to tighten the screws on the big Wall Street banks, he said: “Who knows, these banks’ shareholders just might convince them to break up into smaller units – in other words be able to own and unlock the value of their distinct parts.”

This explicit linkage of government regulatory policy and industrial redesign may be novel coming from the man who wanted to get rid of the Department of Commerce (Energy was the third agency he couldn’t remember during the 2011 debate). But it is in keeping with the thinking of many of the regulators deciding the fate of the global financial system.

Martin Taylor, the former Barclays boss who served on the Independent Commission on Banking chaired by John Vickers that drafted Britain’s version of Dodd-Frank, summed up this thinking in a May speech. Though the so-called Vickers Report stopped short of recommending that the banks should be broken up, “we certainly understood that the new rules would force banks to examine their business models,” Taylor said.

Taylor, now a member of the Bank of England’s Financial Policy Committee, acknowledged that these reforms “will inevitably require violence to be done to established ways.” But he argued that the risks were worth taking, “Even if some of the little frigates that eventually emerge from the industry reshaping turn out to be individually riskier – because less diversified – than some of the aircraft carriers, the consequences of their sinking are unlikely to be as serious.”

It’s difficult to imagine Perry, a West Texan and “Yell Leader” at Texas A&M University, hashing out global banking policy with Eton- and Oxford-educated Taylor. Yet Taylor’s views about frigates, and Perry’s disdain for Wall Street, coupled with a call to exempt community banks from Dodd-Frank, are basically one and the same – a form of state-sponsored industrial re-engineering.

Whatever the merits of the argument, it’s the kind of fervor to be expected from the country’s top banking regulator. Given Perry’s chances at winning the White House, he might reconsider his career prospects.

 

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