Will Financial Reform Change Wall Street? Yeah, Right
It's easy to forget, as delirium sets in from poring over the minutiae of financial reform, why the banking industry needs an overhaul. Then someone like Alan "Ace" Greenberg comes along to remind us. In an interview, the former Bear Stearns CEO captures -- if unwittingly -- why Wall Street is a very dangerous place in a way no policy wonk or consumer advocate ever could:
I'm curious to hear your thoughts on financial reform as it works its way through the conference committee this week. Do you think the bills, as they stand now, will be effective?
You mean, do I think it's necessary? None of us know what will happen, but some of what will happen is absolutely ridiculous. I don't know of one bank that got in trouble with credit default swaps or trading with their own account....My favorite part is when Greenberg, asked if the financial crisis has taught him anything, answers: "Nothing that I didn't know before." Says the guy whose investment bank went up in a puff of CDOs. A close second is when he compares the risks of derivatives to falling in a bathtub. He adds:And derivatives? The banks made money on derivatives. The banks made money in credit default swaps, so why penalize them? If you took a highly intelligent businessman -- who had no exposure to the banks -- and said, "Look you're a bright guy, read the report by Paul Volcker." He'd come to the conclusion that the businesses should stay in trading, derivatives, and credit default swaps and stop lending. Now, we know the banks won't do that, but to me, they've just gone crazy. The public is fed this line about the fat cats on Wall Street. There are no fat cats on Wall Street.
Derivatives were great for the banks, and they were great for the people who bought them.There you have it, ladies and gents. Hubris, of course, along with the monumental selfishness and myopia that lies at the heart of so much of what Wall Street passes off as a "business model." But something else shows through his comments that bears directly on the reform debate -- the sneering bluster of a poker sharp who knows the game is rigged.
Lest we forget, Bear Stearns was the first domino to tip under the weight of its mortgage bets. After two of its highly leveraged hedge funds collapsed, the firm turned to the U.S. government for a massive loan. Largely as a result of the company's woes, the Federal Reserve made the unprecedented move of opening its discount window to investment banks. Under Hank Paulson, the regulator subsequently bequeathed Bear Stearns to JPMorgan Chase (JPM).
That deal pushed the issue of "too big to fail" to center stage. Moral hazard, which had long bubbled beneath the surface of the U.S. financial system, streaked onto the scene, did a handstand and waggled its tongue. Where it remains today, as companies like JPMorgan and Goldman Sachs (GS) lean on their enhanced borrowing power and government backstop.
I take Greenberg at his word when he says learned nothing. Wall Street's chieftains knew taxpayers would come to their rescue before the meltdown; there's no reason to assume that thinking has changed. Derivatives were, as he says, "great" for Bear Stearns because they fattened the bonuses awarded to Greenberg, former CEO Jimmy Cayne and other top execs. That they were something very far from great for other parties -- homeowners, taxpayers, the global economy, even Bear Stearns itself -- is, to his ilk, beside the point.
Whatever else it accomplishes, financial reform won't -- and can't -- change that mindset.
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