Michael Hirsch’s recent story “Wall Street Digs In,” in Newsweek, is unsettling, to say the least. He warns that Wall Street has not learned their lesson from the economic debacle last year which continues this Spring amid a stock market rebound of sorts – if you can call leveling off at a mark some 40% below the highs of several years ago, a “rebound.” Specifically, he reports that some of the Wall Street Heavyweights have banded together in a new lobbying effort under one of those charming newspeak names that usually mean the opposite of the title: “Coalition for Business Finance Reform.”
Hirsch says this new lobby with the misleading name, comprised of Citigroup (whose stock has finally cleared 4 iTunes’ songs in value per share and who announced a profit, based on some accounting tricks), Goldman Sachs and JP Morgan, has now dedicated itself to the mission of opposing the kind of regulation that would corral, reign in and tame, for once and for all, those dangerous and wholly inscrutable collateralized debt obligations and credit default swaps which swamped and crashed the world’s economies in the first place. In Hirsch’s words: “Its goal: to stand against heavy regulation of ‘over-the-counter’ derivatives, in other words customized contracts that are traded off an exchange,” which, if achieved, virtually insures a repeat of the nightmare we have all been living through.
I suppose you can hardly blame the surviving Kings of Wall Street who still stand, so awash in Federal BailOut bucks provided by your and my tax dollars, that they can now announce pretend-profits. They made bloody fortunes selling these things that very few, including, obviously, the buyers, can truly understand. Now they want to keep them off balance sheets, off exchanges, and away from any threat of transparency or regulation. Right where they can do the most harm in seducing brokers to play with leverage, leverage and more leverage, because, the road of fantastic leveraging is what delivers King’s Ransom Profits.
It was de-regulation since the 80’s (blame both parties – nobody has a monopoly on either stupidity or greed!), which made this kind of leveraging outside of the spotlight and under the radar possible and, therefore, so profitable. Despite the fact that we have all now read articles and books and watched documentaries where they interview the people who invested whoever’s money they represented in these Financial Weapons of Mass Destruction (in the words of the Oracle of Omaha), and listened to them, glassy-eyed, explain that they really did not understand what they were investing in, but, it was the AAA ratings and the brokers’ sales puffery telling them that these things were risk-free, that made them invest and lose scads of OPM (Other People’s Money).
The only thing in this world that is “risk-free” is the bet that we are all going to die some day: you, me, and everybody else who reads this, and everybody who doesn’t read this. Insurance companies and gambling casinos have made fortunes on bets like these, literally playing the numbers because so many people live in Walter Mitty fantasy worlds and indulge in what psychologists call ‘magical thinking;’ another charming name for self-delusion. In the financial world, the concept that something is “risk-free” should not exist at all and yet, according to Hirsch’s Newsweek piece, we are cycling (behind the scenes, of course; it’s always behind the scenes) right back to this very same madness again.
Albert Einstein said, famously, that insanity is when you keep doing the same thing over and over again, expecting a different result. One would have hoped that Wall Street and the American Public would have learned their lesson from this exercise in mass delusion earlier in this decade already. Computing power increases exponentially and there will be the capacity to create even more exotic and sophisticated investment vehicles now and in the future. If we don’t take serious steps right now to regulate derivatives, credit default swaps, collateralized debt obligations, and regulate them meaningfully, not just for show, we are doomed to repeat an exercise of driving our economy, with the rest of the world’s economies closely following, right off a financial cliff like marching so many sheep, and into oblivion. Wall Street and its lobbyists are apparently salivating at the opportunity to do it yet again.
We need to go back to a much humbler and more modest investment landscape where we don’t swing for grand slam home runs every time but, instead, for singles and maybe even doubles, that are healthy and do not pose systemic risks to our financial system. The trouble is that the American Public is very impatient and does not spend much time analyzing things that are hard to understand – not when there are so many easy distractions and people to blame. Somehow, the members of Congress who are not under the spell of the new financial lobby of the Coalition for Business Finance Reform, but, whose goal is to achieve anything but . . . must be made to understand that these new snake oil salesmen and women are selling the same old wine in new bottles and that deregulation, combined with ingenuity and computing power and greed, equal systemic financial disaster – not once, but, every time.