Saturday, May 1, 2010

Wall Street's Culture

The Securities and Exchange Commission (SEC) case against Goldman Sachs is an interesting one. And there should be other cases to follow...Morgan Stanley, JP Morgan and Merrill Lynch did things similar to Goldman, involving even more money.

What did Goldman do? In layman's terms, Goldman did what any good snake-oil salesman would do. It sold worthless, well-packaged “fakes”.

The “fakes” were securities which were doomed to fail. Goldman knew that since they were deeply involved in putting the securities packages together, bet heavily the securities would fail, and made a bundle of money when they did fail.

I'm sure Goldman's CEO Lloyd Blankfein probably said in executive meetings that they “were doing God's work”. That “work” being defined as separating the “suckers” from their money. The only problem is that the “suckers” in this case were quite often the pension plans and retirement funds of tens of millions of people from all over the world.

And like the snake-oil salesmen of old, Wall Street had “shills” in the crowd who would say how great the snake-oil was. The “shills” in this case were the rating agencies such as Standard & Poor's and Moody's. In exchange for many millions of dollars, these ratings agencies gave the highest ratings – AAA – to any piece of garbage Goldman or others were selling.

The situation with the ratings agencies is one reason the so-called financial reform package, that Congress is currently debating, falls far short of what needs to be done. It does nothing about the obvious conflict of interest for the ratings agencies which are being paid by Wall Street to give their securities the highest possible rating.

A Change in Culture

This latest scandal is just an example of how the culture in the financial sector of our economy has changed over the past 30 years.

Years ago, the financial sector and its professionals believed in long-term relationships. That meant nurturing the economy and the companies and people in it.

Now the financial sector does very little of that. Instead, the sector puts its efforts into creating economic waste – products, like derivatives, whose sole function seems to be transferring wealth from a large group of citizens to a small group of already rich individuals.

Today the financial sector is no longer concerned with the long-term. It is controlled by traders. With a trader, the focus is solely on the very short-term. The focus for traders for every minute of every day is to make money.

So if running the economy off a cliff makes you money, traders will do it every day of every week. Traders are in the business to get rich and care little about the long-term hazards they may create.

Goldman Sachs is an example of the change on Wall Street. In 1998, just 28% of its revenue came from 2009, it was 76% and climbing rapidly.

The solution? It's actually quite simple. It is an idea that originated in the UK and is called the Tobin Tax.

It is a tax on every financial transaction in the banking and investment industry. It would probably cause a short-term drop in the stock market as the traders sold out, but so what?

If the tax is high enough (1%), the traders would be gone and maybe we would have a semblance of a financial industry that is once again concerned about the long-term and the economy, and the people it affects, at large.

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