How to Fix Wall Street’s Woes

“Money is like seawater, the more you drink, the thirstier you get.” — Roman Proverb

On Friday, March 27 2009, the CEOs of the 13 largest banks in the U.S. visited the White House with their hands extended desperately asking for help.

After the freighting events of September 2008, “The U.S. stock market had fallen 40 percent in just seven months, while the U.S. economy had lost 4.1 million jobs. Total world output was shrinking for the first time since World War II.”

That financial aid, which came in the form of bailouts, loans, and credits from the federal government, resulted in a further concentration of power within the banking sector, leading to what we have today—six megabanks that control a vast portion of the U.S. economy. According to financial experts, these banks continue to take excessive risks and could lead the U.S. economy to another financial collapse.  Nothing has changed.  Not a single hair has been disturbed on their heads.

These six megabanks are:

1. Goldman Sachs
2. Morgan Stanley
3. J.P. Morgan Chase
4. Citigroup
5. Bank of America
6. Well Fargo

They control 63 percent of the U.S. GNP.   By comparison, in 1995, they controlled 17 percent of the U.S. GNP. In just 14 years, the Big Six had grown 270 percent. This growth is impressive and dangerous.

We now know that Wall Street megabanks raked in billions of dollars betting against the American Dream and got away with murder through loopholes deliberately embedded in the legal system.

During a recent hearing at the Senate Governmental Affairs Subcommittee on Investigations chaired by Senator Carl Levin, it was revealed that Goldman Sachs’ employees described their financial products as “crap loans”, “shitty deals”, “junk” and “making lemonade out of bad lemons.”

Goldman Sachs supervisors saw nothing wrong with this attitude, except that these comments were not appropriate to be written in internal memos. Even its CEO, Lloyd Blankfein, said he found nothing wrong with his company’s policies. I couldn’t believe my ears.

What went on inside Wall Street’s garden is so obnoxious, that it defies human rationality. The financial meltdown was foreseen at least ten years before it happened, but everybody was in a frenzy getting a free ride, until the housing bubble burst.  In 1998, Brooksley Born, the former head of the Commodity Futures Trading Commission was excoriated by Alan Greenspan, Larry Summers and Tim Geithner when she tried to regulate the derivatives market.  The banks were not to be touched.  The theory of the economy’s invisible hand or free market capitalism must prevail.

The derivatives market is so complex and mysterious that it’s referred to as the black market or the black box.  Not even the employees who market these securities know exactly what they are.  Only the High Priests of Wall Street know what lies beneath the complex computer codes responsible for designing these sophisticated financial instruments.  A decade later, not only the United States was hit by the housing bubble burst. The whole world was financially poisoned.

I read this morning that Standard & Poor’s cut the debt rating of Greece, Portugal and Spain. Their Debt to GDP Ratio is eerie (e.g., Greece 120 percent, Portugal 80 percent and Spain 54 percent).  Another storm is brewing in Europe and the euro is in the eye of the hurricane.

Countries and geographical regions are on the brink of becoming a victim of a worldwide recession caused by the 2008 Wall Street meltdown. Everybody around the globe participated in the money frenzy, and now it’s time to pay the price. Yep, this is absolutely scary.

This issue is so thorny that Democrats and Republicans at last agreed the Senate would debate on legislation that would impose the most far-reaching overhaul of the nation’s financial regulatory system since the aftermath of the Great Depression. The proposed reforms are aimed at preventing a recurrence of the crisis that knocked the nation’s financial system to its knees in 2008, but the battle now begins over crucial details. The House has already passed its version.

The legislation is intended as a comprehensive answer by Congress to the 2008 economic crisis, which required a $700 billion emergency government rescue and taxpayer-financed bailouts for Wall Street powerhouses.

I can imagine the army of lobbyists gathering at Washington with the specific goal of watering down these financial regulation. Money is no problem here, money is what Wall Street has plenty of. But the waters are murky and the banks are perceived as evil economic empires by the American public. There is anger in the streets across America as unemployment remains near the double digits territory.

These Wall Street honchos are often referred to as the “Too Big to Jail” or “To Big go Fail”.   If you want to dig further into this controversial issue, I recommend reading the book, “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown” written by Simon Johnson and James Kwak.

Simon Johnson affirms that the only fix to this mess is to downsize the size and power of Wall Street banks. All the other suggested solutions are literary illusions—cosmetics if you will. The big banks have gotten so big that they’re dangerous to society. They have become too big to fail, and even worse, too big to save.

If these gigantic financial trusts are not downsized, the financial resources of the U.S. government to bail them out in the future might not be there. This is the current problem in Greece, Portugal, Spain, Ireland, United Kingdom, and of course Iceland. All of these countries are walking on an economic tightrope as a result of the global recession.

This will be a most interesting debate to follow. Will Congress cut Wall Street banks in pieces similar to what Teddy Roosevelt did to Northern Securities Company in 1902?   The company was sued in 1902 under the Sherman Antitrust Act of 1890 by President Theodore Roosevelt; one of the first anti-trust cases filed against corporate interests instead of labor.  That’s the sixty thousand dollar question. I’ll correct that sentence. Instead I’ll say, that’s the sixty billion dollar question. Good Day.

Sources:

(1)  Simon Johnson’s presentation at the World Affairs Council regarding the subject, “Too Big to Fail-Too Big to Fall” issue.

(2)  The Book – 13 Bankers:  The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and  James Kwak.