William D. Cohan's article in Foreign Policy internet magazine discusses why investment banks, which were once partnerships, became public entities; the incentive system of Wall Street that leads to ever greater risk taking; and Goldman's desire to water down regulations on bank reform.
The CFTC has yet to complete the rules governing derivatives and Basel III capital requirements are viewed with skepticism by the banks.
Risky BusinessRead the full article here
By William D. Cohan - Foreign Policy. . . .
The consequence of these public offerings on recent financial history has been nothing short of profound. Goldman, for instance, which had capital of around $45 million in 1970, when DLJ went public, has capital of around $75 billion today. When capital at these firms was limited and scarce, tough choices needed to be made about how and when to use it. Much care was taken to analyze the associated risks of a large trade or underwriting. Partners were prudent with risk-taking.
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. Worse, there has been little or no financial or legal accountability for the Wall Street bankers and traders who brought the Great Recession to the world's doorstep.
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. There is no getting around this fact. Because this aspect of the finance life remains virtually unchanged in the wake of the collapse of the housing bubble, chances are high that Wall Street will have a heavy hand in causing the next financial crisis, too, notwithstanding the fact that the losses many firms are suffering these days should make them more cautious.
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The vacuum created by the lack of regulatory reform on Wall Street seems to be getting filled by the prevailing sluggishness in global markets. The persistent lack of demand for Wall Street's services -- from trading (at Goldman, for instance, revenue from this business line is down one-third from 2010 through the first six months of this year) to underwriting to providing M&A and investment advice -- is forcing Wall Street's executives to do what they should have done long ago. Risk-taking is being greatly curtailed, underwriting standards are getting more exacting, superfluous employees are being axed, and those who remain are finally going to have to make do with far less of the obscene compensation that they have been accustomed to receiving.
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3 COMMENTS:
U.S. States Seek to Break Financial Connection with Federal Government
These adverse trends have been exacerbated by domestic politics. The rich have used their wealth to strengthen their grip on power. They pay for the expensive campaigns of presidents and congressmen, so presidents and congressmen help the rich – often at the expense of the rest of society. The same syndrome – in which the rich have gained control of the political system (or strengthened their control of it) – now afflicts many other countries.
Yet there are some important signs around the world that people are fed up with governments that cater to the rich while ignoring everyone else. Start with the growing calls for greater social justice. The upheavals in Tunis and Cairo were first called the Arab Spring, because they seemed to be contained to the Arab world. But then we saw protests in Tel Aviv, Santiago, London, and now even in the US. These protests have called first and foremost for more inclusive politics, rather than the corrupt politics of oligarchy.
5. The worsening condition of the real U.S. economy outside of large banks, multinational corporations, and Wall Street firms, where federal government bailouts and Federal Reserve monetary easing (money printing) transfer wealth from proverbial Main Street to literal Wall Street;
6. The rapidly escalating polarization of the distribution of wealth, which threatens not only the economic stability of the United States but also its social and political stability; and
7. The current, highly inflationary monetary system is plainly unfair and fundamentally immoral.
The morally and literally bankrupt nature of the current U.S. financial system is transforming America into a dog-eat-dog society where every person seeks to live at the expense of someone else rather than by producing wealth, because production is systematically stolen by the federal government and by banks through the clever device of an inflationary monetary system. The monetary system operates by exchanging fictitious “wealth” (debt based money created out of thin air by private banks) for the real wealth of borrowers, i.e., the proceeds of their labor. In effect, the monetary system is a massive scam purported to be legal but lacking any demonstrable legal authority. Specifically, there is no Constitutional or other legal basis upon which the federal government can force a private monetary monopoly on the states. In fact, the Constitution of the United States explicitly establishes the exact opposite.
The oversized banking system and federal government have grown in an unholy alliance in lock-step and now consume so much of the U.S. economy that, together, they not only pillage the real economy but threaten to kill, once and for all, what is left of the free country founded by the Declaration of Independence. The moral precedent and example set at the highest levels of the federal government and of the banking cartel is that profit, fame, success and wealth are (either directly or indirectly) rewards for immoral acts rather than for honesty in business. Moral corruption at the top–embedded in the very structure of the monetary system–has slowly spread its gangrenous effect, undermining totally the founding principles of the United States of America, enshrined in the Constitution of the United States and in the Bill of Rights. Rather than liberty, America’s legacy is fast becoming one of moral turpitude enshrined in financial injustice and oppression.
http://www.jsmineset.com/2011/09/30/u-s-states-seek-to-break-financial-connection-with-federal-government/
Guest (below), what an interesting concept! Ellen Brown also has done a lot of work on States having their own bank so that the money is not misused as Wall Street tends to do. Ellen pointed out that North Dakota is the only state with its own bank and that state did not suffer the financial losses that other states did during the meltdown.
http://www.youtube.com/watch?v=yeB-2x7Yy0c
The video describes how to get off the federal banking system.
Mark Ames: Koch, Hayek & “Ideas for Sale”
http://www.dylanratigan.com/2011/09/30/mark-ames-koch-hayek-ideas-for-sale/
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