Regulatory Perimeter

Everybody got shoved in the tent

Brian Moynihan's account of the 2008 financial crisis places the failures mostly outside the core banking system: Lehman and Bear Stearns, Countrywide, and Washington Mutual, which was nominally a bank but regulated under a wholly different regime. "If you think through the financial crisis, the issues with companies were actually outside the core banking system by and large... everybody got shoved in the tent. So the one good thing is everybody has a common set of rules."¹ The reform that mattered, in this telling, was not a new rule but a boundary redraw, pulling investment banks under bank holding company supervision and unifying the rule set with stress tests and liquidity requirements attached.

Generalized, the idea is that writing rules for a set of licensed entities does not reduce the total amount of leverage or credit risk an economy wants to run, it relocates that risk to whoever sits nearest the boundary and least constrained by it. A regime has to choose between regulating entities, who you are, or regulating activities, what you do, and entity-based regimes leak by construction. The perimeter also cannot simply be drawn as tight as possible, since activity that finds a jurisdiction too restrictive relative to its peers does not disappear, it moves offshore or into unregulated capital instead.

The view from outside the fence

Marc Rowan sits on the receiving end of the migration Moynihan's account leaves unaddressed, and his read inverts it: pushing risk out of the regulated perimeter was not a leak, it was the point, and it worked. His history traces levered lending from bank balance sheets in 2008, through collateralized structures that moved senior exposure to investment-grade buyers and junior exposure to high-yield buyers, into business development companies that kept banks only in the safest tranche, and finally to funding from private, retail, and institutional investors directly.² His verdict: "that's what in some ways we can say the post regulatory reform of the global financial crisis worked. It's doing exactly what it was supposed to have done. It has socialized this risk... and it has moved it out of the levered, government-guaranteed portion of our economy." And the policy preference stated plainly: if you are worried about a given risk, you do not want it in the banking system, you want it in an investment marketplace where people can price it.

Asked directly when his firm would be fully regulated, Rowan answers with a definition rather than a defense: "why would we be fully regulated? Why would BlackRock not be fully regulated?... do we take deposits? No. Do we do maturity transformation? No. Do we have access to the treasury? No."³ The move draws the perimeter by funding structure rather than by size or activity, insured and maturity-transforming institutions supervised tightly, unlevered long-duration pools left to hold credit risk and absorb its losses, the same distinction underneath Credit Mindset vs Equity Mindset. He puts a figure on the asymmetry elsewhere in the same conversation: a bank is levered twelve to fourteen times, while, in his words, "an investor is generally not levered at all."³

Open question

The two men invert each other on the same fact without either stating the reconciliation directly: Moynihan treats risk outside the perimeter as a hazard the reform pulled inward, Rowan treats it as the objective the reform pushed outward, and both cannot be the general principle at once. What survives from either account is that risk genuinely does relocate rather than disappear, which leaves the open question not whether it moved but whether its new home is actually unlevered, since Rowan's own description still keeps banks in the structure at what he calls a very safe tranche, the identical phrase used about senior mortgage exposure before 2008.