Lending and capital raising are going to get more regulated and complicated than we had all hoped. In New York the new AG, Schneiderman, is on a initiative to investigate and regulate the financial services industry. He is new, politically motivated, and a long time friend of Cuomo. Translation, he is out to make a name and that means he is out to get big name lenders on some charge and to create new regulations. He has now opened a new investigation of mortgage lending and CDO’s etc. As though we need another such party doing the same investigation. Schneiderman will want to p[rove he is better at getting the “bad guys” than the feds and others so it is likely he will dig to find anything to get in front of the media. This could be Spitzer revisited. Cuomo will be a big supporter of this effort as it makes good populist media attention. The worst part of the NY laws know as the Martin Act, is that there is no requirement that the prosecutor prove any intent to defraud as there is under federal statute. That gives state prosecutors a lot of running room.
Just in case this is not enough, Cuomo has appointed a long time chief of staff, Ben Lawsky to be the head of the NY State agency just formed to control and investigate financial services institutions. In short a fishing license supported by the governor and the AG. This new agency will consolidate all NY State regulators in one agency and it will have huge abilities to regulate any financial services company doing business in New York. Just imagine in this time of get the big bad banks and Wall St what this will lead to. Lawsky was the one behind many of Cuomo’s headline grabbing investigations on his way to be governor.
The lenders are buried in the huge federal investigation backed by Elizabeth Warren and the various state AG’s demanding a $20 billion fine and discounting of home mortgages. Then there is the SEC and other investigations of CDO’s.
The legal bills for the major banks are now in the billions. Huge amounts of senior executive time is being devoted to fending off these attacks. This diversion of capital and productive executive time and energy is debilitating to the economy in that it saps those same things from being devoted to actually making loans and putting capital into the economy. It is not that I think the lenders did not commit fraud or do other things that deserve punishment or fines. It is that these issues will now be way over played by the politically opportune, as they have been in Washington. Instead of being handled in the normal course, and in a consolidated single jurisdiction, instead we have the various federal regulators, Congress and now dual New York agencies all headed by aggressive political people. They will all compete to make the biggest splash headline. To show they are the toughest. In short it will be a contest which will do nothing good, and a lot bad by consuming capital and time of the banks.
We do need a lot of better regulation and control to prevent the sort of blatant bad acts I and all of you witnessed in the mid decade, but between the nightmare of parts of Dodd Frank and Elizabeth Warren out to prove how mean she can be, and all these new regulators looking for a cause, I fear the banking and CMBS markets will be hobbled far more than is good for the markets and the country. As is typical in these matters, the pendulum swung way too far to bad acts and now it is swinging way too far with the politically motivated, especially with a presidential election and other major elections next year. The lobbyists and industry organizations never had so much to do to try to bring some level of reality and fairness to what is happening. If they fail then the damage caused by the collapse of the markets in 2008 will get extended and exaggerated for several more years.
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