There is a regional subplot playing out in the debate for financial reform. Here are some clues: White House Chief of Staff Rahm Emanuel just flew up to New York to meet with investors. Senate Minority Leader Mitch McConnell spent part of his recess meeting with big financiers in New York. President Obama will head Thursday to New York to address Wall Street. See a pattern?
A few weeks back, I asked Sen. Ted Kaufman, a Democrat from Delaware, whether he had received any blow back from the banking community in his home state for his advocacy of a new law to break up big banks. “Remember most of the people who work for the banks in Delaware they are not involved in any of the things that went on,” he explained. “None of the banks in Delaware did Credit Default Swaps. None of the banks in Delaware did any kind of derivatives.” Then he continued with an observation that still defines the landscape.
After September 11, I found, traveling around the country as time went on, how much September 11 impacted people, especially after a month or two months, was directly related to how far they were New York. September 11 had been an incredible experience for people in New York. On [the financial collapse], it’s just the opposite. If you are in New York it’s all, “This is just populism. It’s pitchforks in the streets and all the bad guys are gone. Not to worry.” And you go to L.A. and people are screaming.
It’s not that much of a stretch to say that financial reform in the U.S. is to a large extent New York reform. (London will take its hit from the E.U.; Connecticut may will take a bit of a hit too.) Almost all of the big banks and financial firms are either based in New York, or conduct a major share of their business in New York. So what will become of New York? Mayor Michael Bloomberg, who made billions in the private sector servicing the New York financiers, was warning as far back as January that attempts to improve regulation of Wall Street could lead to lost profits, lost tax revenue and layoffs. On Monday, White House Press Secretary Robert Gibbs was asked by a New York newspaper, “What do you say to criticism that financial reforms actually could hurt the local economy in New York City?”
He answered by saying that financial crises are not good for New York either. But I am pretty sure this is not the whole story. Financial reform, done right, should lead, at least in the short term, to less profits and less leverage at big Wall Street banks. This is good for the system, as these two charts, from Simon Johnson and James Kwak’s new book, 13 Bankers, suggest:
In other words, there is a national interest in bringing New York down a peg. All this said, I don’t for a minute think that financial regulatory reforms of big Wall Street banks will do any serious long-term damage to New York, even if it does return the banking sector to more normal levels of profitability. Maybe a few less bottle-service clubs. Maybe some empty tables at the hottest restaurants. But New York is far too complex an organism, overflowing with ambition and know-how, to go the way of derivatives trading bonuses. As Alicia Keys belts it on Jay-Z’s Empire State of Mind, “No place in the world that could compare.” That ain’t gonna change.