Has Dodd-Frank already gutted Wall Street?

New York magazine’s Gabe Sherman paints a portrait of the brave new world facing post-bubble Wall Street, mostly as described by the bankers themselves. He points to falling profits at the biggest banks and plummeting bonuses as concrete signs that boom times are over.
Jamie Dimon, chief executive of J.P. Morgan Chase. (Bloomberg News )

J.P. Morgan Chase’s chief executive, Jamie Dimon, paints a rather dramatic portrait of a fundamentally changed Wall Street. “Certain products are gone forever,” Dimon tells Sherman. “Fancy derivatives are mostly gone. Prop trading is gone. There’s less leverage everywhere.” The story goes on to attribute this sea change to the Dodd-Frank Wall Street reform act, which Sherman argues has “taken a pickax to the Wall Street business model.”

But Dimon’s words, at least, overstate reality: Although J.P. Morgan Chase and Citibank have spun off their arms for proprietary trading — speculative bets that firms make for their own benefit, rather than their clients’ — many others are still pressing federal regulators to reconsider the ban, potentially adding exceptions to those already in the Volcker rule, the part of the act designed to prohibit proprietary trading. MF Global’s meltdown last year made it clear that there are still risky, complex derivatives that escaped the scrutiny of Dodd-Frank. Although banks are better capitalized and less leveraged than they were before the crisis, they’ve done so independent of the Federal Reserve’s new capital requirements, which were announced just in December. What’s more, having better capitalized banks has also been a firewall to protect the U.S. financial system from the turbulence that has racked Europe, whose debt crisis roiled the global financial system.

But Europe only gets a single, passing mention in the story. “No doubt the economy itself — the crisis in Europe, the effects of the tsunami in Japan, America’s sputtering recovery — has played a large part in the financial industry’s struggles. But even the most stubborn economies improve eventually. The bigger issues are structural,” Sherman writes. This is indisputably true. But Europe’s troubles are still casting a big cloud over financial firms in the United States and elsewhere: They were at the heart of the MF Global bankruptcy, for example. And it’s impossible to evaluate the current, post-crisis health of Wall Street independent of such looming realities.

In fact, most of the rules surrounding Dodd-Frank haven’t even been written, much less gone into effect. Sherman writes that the “act won’t be completely in effect till the ­Volcker Rule kicks in this July,” with more minor elements being phased in later on. But there’s still enormous uncertainty as to the fate of the Volcker rule, which has been delayed significantly due to mounting concerns about its impact, with some skeptical that it will survive. And regulators are even farther behind when it comes to the new rules for derivative trading.

Sherman argues that banks have preemptively made these changes in anticipation of the regulations going into effect, and there’s evidence to support that view. But given the uncertainty surrounding some of the biggest changes under Dodd-Frank, it also might be a bit early to tell how fundamental and lasting these changes on Wall Street will be.