Karma Strikes Investment Banks

Last Updated Sep 18, 2008 2:48 PM EDT

karma.JPGFinally, proof that Karma exists. Wall Street's investment banks have had a sweet deal, a free ride, for decades. Now they're finally getting what's coming to them.

In every major corporate fraud story --- Enron, WorldCom, Refco, you name it --- at least one investment bank was complicit. Ten banks were named in the settlement with federal and N.Y. state prosecutors over the conflict of interest between analysts and investment bankers in the dot-com era.

Sure, the banks have paid some fines, but they were peanuts compared with annual profits. And nobody went to jail.

When there's money to be made, Wall Street's venerable investment banks --- the ultimate bastions of capitalism --- are there. And the subprime fiasco proves once and for all that, if the federal government lets them, these 100+ year-old institutions will eventually collapse under the weight of their own unfettered, insatiable greed.

Well, that's one way of looking at it.

But is that really it? Is that the entire story? If so, we're done here. Fannie Mae and Freddie Mac were corrupt, lending institutions like Countrywide Financial unscrupulously preyed on Americans' hopes and dreams, investment banks underwrote the whole thing, and the Feds let it all happen. What more is there to say?

Oh right, I almost forgot. The answer, of course, is regulation. More government. End of story.

While I hate to burst this beautiful bubble of neat and tidy finger-pointing simplicity, I'm just not buying it. It strikes me as too convenient, too open and shut. It doesn't pass the smell test. It sounds like venting, like children acting out their anger and frustration over losing their precious toys.

Moreover, it reeks of a pendulum about to swing way too far in the opposite direction. Sure, it has the virtue of being simple, and all things being equal, the simplest answer is typically the right one. But let's not go overboard here.

Before we irrevocably alter the way we lend money in this great land, perhaps we should take a closer look at this. Let me start by asking a few somewhat pointed questions:

  1. Are we equating greed and capitalism? Of course not. Capitalism is good, greed is bad, right? Okay, well if we're saying they're not the same, then what's the difference? Where do you draw the line? That's the rub. It's a slippery slope and it's incredibly difficult and risky to legislate on a slippery slope.
  2. The casualties so far are Bear Stearns, Lehman, Merrill Lynch, and now AIG. How about the other dozen or so big banks? Maybe this is a sort of natural selection, weeding out the greedy ones so the others can thrive. Is that such a bad thing?
  3. And how about federal regulation? The last time there was a major fraud uproar, Congress's answer was the Sarbanes-Oxley Act of 2002. While some aspects made sense, this piece of legislative magic managed to tax every company in America's public markets â€" good or bad â€" at a time when they could least afford it due to globalization. And guess who pays for it? That's right, investors. What's most troubling is that SOX doesn't necessarily prevent big corporate fraud.
  4. It's only a matter of time before folks start to ask, where were the boards of directors when all this was going down? Were they all just sitting around with their thumbs up their you-know-whats while their appointed CEOs were out self-destructing and destroying our economy? Well, I only have two things to say about that. First, corporate governance is a myth. Second, SOX didn't stop it. Hmmm...
  5. We can't ignore the political aspects of this, either. It's too convenient to say that it proves we need more government, that Bush politics let the banks run wild. Didn't the Clinton administration start the lending deregulation process? Or did they? You know, that was so long ago, I can't remember. Anyway, the truth is that there's good and bad in every system. I don't care if you lean left or right.
  6. I think the most interesting question is this: lately, are we seeing more fraud and bubbles than we used to see? Does that mean we're accelerating toward some sort of capitalist Armageddon or something. Is it "what goes around comes around" for the greatest economy on Earth? Did we exceed some sort of Karmic limit and now we're all going to be reincarnated as head lice or something?

If you're getting the feeling that I'm complicating matters instead of clarifying them, if you feel like your head's about to explode from all these inane questions, then my job here is done.

The point is this. If you're looking for a quick fix to this mess, just keep right on looking, because you won't find it here-- or anywhere else, for that matter. Why? Because, there is no simple solution to this crisis. It simply is what it is and, when it runs its course, we'll be stronger and better off for it. I know that may be hard for you to hear, but that's reality.

The truth is that no system is perfect. I don't care if it's republican versus democrat, capitalist versus socialist, or PC versus Mac. Every system on Earth is flawed and this is just capitalism's natural way of pulling back when it gets too far ahead of itself. Sure, it's painful, but if it wasn't, nothing would change.

The sky isn't falling and the nation's not going to plunge into a deep dark depression. Go ahead and stuff all your money into a mattress and sleep on it, if you like. But that won't change a thing, except that you'll probably wake up stiff and cranky.

We'll get through this. Not with overbearing legislation and regulation, but with a more clearly defined Fannie Mae and Freddy Mac that aren't "pseudo" government agencies, fewer investment banks that are sufficiently chastened so they realize they're mortal after all, and hopefully, wiser consumers.

That's the way our system works. Don't try to short-circuit it with perceived quick fixes that won't work in the long run. Don't panic and try not to point fingers. And most of all, don't support over-the-top congressional overreaction. You see, politicians are simply incapable of resisting the urge to use any crisis as an opportunity to appear as if they're doing something for constituents. Don't blame them; just be thankful you work in the private sector and are above all that.

(Image by moonwire via Flickr, CC 2.0)