NEW YORK — Wall Street's biggest banks, whose missteps caused a global financial crisis and economic slowdown two years ago, were more agile when it came to countering the political and regulatory response.
The federal government, promising to make the system safer, buckled under many of the financial industry's protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban derivatives. Higher capital and liquidity requirements agreed to by regulators have been delayed for years to aid economic recovery.
"We continue to listen to the same people whose errors in judgment were central to the problem," said John Reed, 71, a former co-chief executive officer of Citigroup, who estimated only 25 percent of needed changes have been enacted. "I'm astounded because we basically dropped the world's biggest economy because of an error in bank management."
The last two years have been the best ever for investment-banking and trading revenue at Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley, according to data compiled by Bloomberg. Goldman Sachs CEO Lloyd Blankfein, 56, and his top deputies are in line to collect more than $100 million in delayed 2007 bonuses — six months after paying $550 million to settle a fraud lawsuit related to the firm's behavior that year. Citigroup, the bank that needed more taxpayer support than any other, has a balance sheet 14 percent bigger than it was four years ago.
Wall Street's army of lobbyists and its history of contributions to politicians weren't the only keys to success, said lawmakers, academics and industry executives. The financial system's complexity gave bankers an advantage in controlling the narrative and dismissing the ideas of would-be reformers as infeasible or dangerous. A revolving door between government and banking offices contributed to a mind-set that what's good for Wall Street is good for Main Street.
To make their case, bankers and lobbyists characterized proposed regulations as stifling innovation, competitiveness and economic growth. They said the industry had learned its lessons and that firms were adopting changes voluntarily to be more transparent and accountable. Successful companies shouldn't be punished for the sins of those that failed, they said.
"It was very clear by February 2009 that the banks were going to get a free pass," said Simon Johnson, a former chief economist for the International Monetary Fund who is now a professor at MITs Sloan School of Management. Even when changes were advocated by people who couldn't be characterized as radical populists, their ideas were dismissed as unrealistic, misinformed, advancing ulterior motives or damaging to U.S. competitiveness.