Goldman Sachs And Risky Business
Goldman Sachs And Risky Business – By William D. Cohan | Foreign Policy.
Financial markets dealing out justice which government can’t?
With Europe on the verge of a financial meltdown and many of Wall Street’s biggest banks trading at or near their 52-week lows and at a fraction of their book value — take for instance, Goldman Sachs, which is trading at about 75 percent of its book value, staring down a rare quarterly loss, cutting compensation, and firing thousands of employees — is it possible that the turmoil in the global financial markets is finally accomplishing what regulators the world over have not been willing or able to do: force these financial beasts to rein in their excessive risk-taking and act more like the dull, boring utilities we need them to be for our own safety?
The roots & consequences of Wall Street excess:
First, by going public, the firms were able to have regular, steady access to a nearly bottomless supply of inexpensive capital with which to expand their products and offices around the world. This capital allowed them to make big, proprietary trading bets knowing that if the bets worked out they would make a financial windfall — and if they didn’t, the chances were low that the losses would sink their firms, because losses would be absorbed by the corporate till rather than by the individual partners whose capital was formerly at risk.
But with the capital spigot turned on full blast, risk-taking knew no bounds. What’s more, Wall Street’s partnership culture — in which partners were paid from firms’ pretax profits and were liable for their entire net worth for losses — was replaced by a bonus culture in which their risk-taking was rewarded with large, multimillion-dollar bonuses while losses were absorbed by public shareholders — or as we discovered in 2008, by taxpayers, the poor saps.
Indeed, it is fairly safe to conclude that each and every one of the financial crises that the world has suffered through in the past generation — from the crash of 1987 and the credit freeze that followed, to the Asian, Russian, and Mexican crises, to the collapse of hedge fund Long-Term Capital Management in 1998, to the puncturing of the Internet bubble in 2000 — has in one way or another been caused by an incentive system on Wall Street that encouraged bankers and traders to take large risks with other people’s money and where the rewards were in the millions of dollars of annual compensation and the penalties were far and few between.
Money can buy immunity:
The promise of the recent wave of regulatory theatrics in Washington, London, and Basel has been to try to break this dangerous cycle in which bankers and traders get very rich while the rest of us suffer from their mistakes. The so-called Volcker Rule, introduced with much fanfare by former Federal Reserve Chairman Paul Volcker in January 2010 and quickly endorsed by President Barack Obama, became one of the cornerstones of the Dodd-Frank law, the 2,200-page Wall Street reform legislation, and was supposed to prevent Wall Street firms from engaging in large proprietary trades and other risky bets with their own capital.
The latest draft of the rule, according to observers cited in the Wall Street Journal, “opens the door for banks to make all manner of bets on the market … because a bank might define the risk to its portfolio broadly, such as the risk of a U.S. recession. If the language is confirmed in the final rule, expected by late October, it would be a victory for Wall Street firms that have lobbied to relax the ban on proprietary trading.”
Similar efforts by Wall Street lobbyists are under way to weaken other still-to-be-written regulations mandated by Dodd-Frank.
Deadlines keep getting postponed. As a result, some derivatives at the heart of the mortgage mess, such as credit-default swaps — the infamous bets that certain debt securities will or won’t retain their value — still trade by appointment and in secret, meaning nothing has changed some three years after the most acute moment in the financial crisis.
Some 40 years after the first Wall Street firm went public through an IPO, the big Wall Street banks might finally be getting the message that in order to restore the mutual trust they have so utterly squandered, they may have to return to a simpler time when their focus was on their clients’ needs, their pay was far more modest, and rock stars were people who made music — not pushed paper around.
NeilS — Although the “Occupy Wall Street” movement is an amorphous social protest targeting everything from Wall Street greed to climate change, the name of and chosen place of gathering is certainly fitting. It is good to see that people haven’t so quickly forgotten how and why we are in the predicament we are in. In the aftermath of the Lehman collapse, banks were saved by taxpayer dollars but under the assumption that it was necessary to stave of a second Great Depression, and that banks would be carefully regulated in the future so as to prevent catastrophe striking again.
Years have passed, and the U.S. and world economy continue to clunk along at an anemic pace. Government is fraught with conflicting ideological battles that seem, for the most part, perpetual. And now the general public is taking a cue from the uprisings happening all around the world. To the casual observer, Wall Street has won the battle and is no worse for the wear despite a near financial meltdown, and certainly they are fairing better than the average working Joe. Surely an uprising among the youth, which are suffering the worst unemployment rates in 60 years, was simply inevitable.