The former headquarters of Lehman Brothers, the US investment bank, the failure of which ignited a financial firestorm two years ago, is a strange looking building. On its squat facade for six stories up, three enormous horizontal screens used to show sweeping landscapes drifting by. The words "Lehman Brothers" scrolled past at regular intervals alongside the phrase: "Where vision gets built." These days the building on the south-east corner of 7th Avenue and 50th Street hardly looks different. Barclays, the British bank, bought it for US$1.5 billion (Dh5.5bn) in September of 2008, just days after Lehman failed. It was included in a deal in which Barclays took over all of Lehman's core business. Now Lehman's logo has been replaced by that of Barclays Capital, which has soaring vistas and a scrolling tagline of its own: "We live by one simple measure of success. Yours."
The US economy is good at recycling itself, a fact illustrated by the ease with which companies find new uses for the detritus of failed institutions. At the same time, the fact that Barclays's new trophy in New York looks almost the same as it did under Lehman's watch is unnerving. It's as if the banks want to believe nothing has changed but their names. Internally, of course, things have changed a bit more. Leaders of the world's financial institutions know they are going to have to adapt to a new financial order. Last year US Banker, an industry magazine, asked bankers how they thought the landscape might evolve.
"We're all trying to figure out what 'normal' will be going forward," one of them said. "All we know is that things will be very different." Another complained that it "isn't going to be as much fun". Those were executives at regular banks, not investment banking powerhouses such as Citigroup, JP Morgan Chase, Merrill Lynch, Morgan Stanley and Goldman Sachs - the big boys who rode on a rainbow of easy profits before it was revealed as a mirage with a pot of coal at the end. Their leaders have been a touch more skittish on what change they want to see, probably because they don't want to see too much of it. In a letter to shareholders in April, Jamie Dimon, the JP Morgan Chase chairman and chief executive, lamented the "demonisation" of large financial institutions and suggested that "if we rewrite the rules of banks out of anger or populism, we'll end up with the wrong solutions and put barriers in the way of future economic growth".
It is true that US institutions might lose an edge if regulation makes them less competitive with those in other jurisdictions. And yet in the post-financial-crisis world, it seems more likely that investors will reward those banks and other companies in places where regulation is strongest. Investors want to take risk because risk correlates with reward but they do not want to take systemic risk, counterparty risk, or any other risks that fall outside those embedded in their investments themselves. A bank depositor would rather get a lower return on his money in a country where he knows the bank won't fail than take a higher return from a bank in a politically unstable and poorly regulated place where the system itself could crumble.
Therein lies the delicate balance regulation must strike. Bank executives, including Mr Dimon, Vikram Pandit of Citigroup and Lloyd Blankfein of Goldman Sachs, want reform. They earnestly do. Few of them are opposed to new curbs on short selling, a super-regulator that would monitor systemic risk, supervision of derivatives trading and even oversight of employees' compensation incentives. The main concern appears to be that all banks are given the same set of regulations to abide by. As Mr Pandit said in March, it was important for regulation to be "co-ordinated globally and applied uniformly to all participants in the financial sector. We need a level playing field on which market participants can compete…"
What banks desperately do not want, though, is a full reinstatement of the Glass-Steagall Act, a Depression-era law that separated commercial and investment banking. The repeal of Glass-Steagall in 1999 was partly responsible for the financial crisis; commercial banks jumped headfirst into investment banking, bringing huge pools of capital to derivative markets and securitised mortgage assets that collapsed in 2007. Barack Obama, the US president, is pushing for passage of a financial reform bill by the beginning of next month. It incorporates many of the suggestions bank executives have made in recent months: a "Financial Stability Oversight Council" and new regulation of swap markets and hedge funds. It does not go so far as to reinstate Glass-Steagall.
That is a shame. Glass-Steagall worked for so long because it eliminated conflicts of interest between commercial banks, which lend money to big businesses to help them grow, and investment banks, which help big businesses secure money to help them grow. Allowing banks to perform both functions invites collusion. Disallowing the practice does not inhibit economic growth. There is no evidence that fewer loans and investments would be made if they were not transacted by the same big companies.
Banks will not separate commercial and investment banking functions on their own due to market forces alone. They've made too much money combining them not to think less-dramatic regulation is enough. Their lobbying will probably prove successful and Glass-Steagall won't be reinstated except perhaps in a superficial way. In pursuing a strategy of tweaks in favour of fundamental reform, though, banks are making a bold and potentially dangerous bet.