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David Weidner's Writing on the Wall
May 21, 2010, 10:48 a.m. EDT · Recommend (8) · Post:
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Big deals, big returns? Don't bet on it
First Take "º
Dow back at 'flash crash' lows
By David Weidner, MarketWatch
NEW YORK (MarketWatch) -- Wall Street, with all of its proud qualitative and quantatative prowess, has blown the biggest trade of the last 65 years.
The Senate's approval Thursday of its own version of the financial reform bill already approved by the house is the biggest defeat to the industry since the fallout of the stock market crash in 1929. If it becomes law, and it most certainly should, it will turn 20 years of banking philosophy -- the drive to integrate securities with consumer banking --on its head. Read full story on Senate bill and vote.
The Senate approved the most extensive overhaul of financial-sector regulation since the 1930s, hoping to avoid a repeat of the crisis that hit the U.S. economy starting in 2007. Rex Nutting, Dennis Berman and Evan Newmark discuss.
Wall Street has only itself to blame. Having shown the inability to manage risk and its appetites, Washington will now oversee the industry. It will decide what kind of trading is prudent, what firms manage investments well and, ultimately, what banks will live and die.
Whether or not the accumulated brain power inside the beltway is sufficient is critical to reform's final success. But the red tape is cast: firms such as Bank of America Corp. /quotes/comstock/13*!bac/quotes/nls/bac (BAC 15.87, +0.57, +3.73%) , Citigroup Inc. /quotes/comstock/13*!c/quotes/nls/c (C 3.77, +0.14, +3.80%) and Goldman Sachs Group Inc. /quotes/comstock/13*!gs/quotes/nls/gs (GS 141.65, +5.55, +4.08%) are about to find the task of business as usual about as easy as deciphering their Escher-esque schematics for mortgage derivatives.
Banking used to be a simple business. A bank would take a deposit, pay an interest rate. It would then make a loan at a higher interest rate, pocketing the difference. Investing used to be simple too. You'd buy a stock or security that you believed would accumulate a return. If it did, you made money, if you didn't, well, the risks were spelled out.
But in the last two decades banks and brokerages decided the money was greener on the other side of the fence. Brokerages liked the stability of traditional banking. Banks liked the big, albeit fluctuating, profits offered by the brokerages. They stared into each others' eyes, found love and a million ways to create the garbage that's ruined the global economy and sell it to "sophisticated" customers.
The marriage made the new breed of banks rich, but that wasn't enough. They kept pumping more risk into the machine, piling new derivatives upon old and you know how the story ends: $1.2 trillion in committed taxpayer money.
Given the devastation, the high unemployment, the lost retirement and college funds, the huge government deficits; it may be most remarkable that Wall Street is getting off this easy.
The bill provides for consumer protection, but under the Federal Reserve, a regulator that has a history as a bank patsy and accomplice to fueling the credit bubble. The bill creates a system for dealing with too-big-to-fail institutions, but again, these are the same regulators who failed to see the crisis coming.
It's got a few head scratchers. An investor advocate post at the Securities and Exchange Commission? Isn't that Mary Schapiro's job?
There are good ideas too. Issuers will have to hold part of their securitizations, sharing the risk with investors. Derivatives will be traded on exchanges. Credit ratings agencies will finally get direct supervision. Hedge funds will have to register with the SEC.
All in all though, the legislation ignores the simplest, tried-and-true approach to banking: bringing back Glass-Steagall. Separating the investment banking casino from the money system only worked for 50 years. But you know how we are as a society, we think those lawmakers in the 1930s were such simpletons. Things are so much more complicated today. They must have just been lucky.
So, here we are with a half-measure, imperfect bill that's only assurance is to make life miserable for Wall Street as it tries to sort it all out. The lawyers will get rich, but then again, they always do. Investors win a little, banks lose a little, our financial system isn't by any means safe now, but it's not anarchy. Had the banks shown a little restraint, remorse or acknowledgement they contributed to the disaster, Washington probably would have gone lighter.
They didn't. The trade went bad. And it's time to pay.
David Weidner covers Wall Street for MarketWatch.
David Weidner is the Wall Street columnist for MarketWatch. He formerly covered M&A and financial services at The Daily Deal, American Banker and Dow Jones. He writes the Writing on the Wall column which appears Tuesday on MarketWatch and Thursdays on WSJ.com. He also is a regular contributor to the News Hub.
Was the so-called flash crash a fluke, or not? Fifteen days later, it's a matter of perspective.
10:17 a.m. Today10:17 a.m. May 21, 2010 | Comments: 29
- Einai | 9:52 a.m. Today9:52 a.m. May 21, 2010
"David Weidner's Writing on the Wall: Don't blame Washington for Wall St. reform: Wall Street, with all of its prou... http://bit.ly/d6MamD" 10:30 a.m. EDT, May 21, 2010 from davidweidner
"Investors win a little, banks lose a little, our financial system isn't by any means safe now, but it's not anarchy. http://bit.ly/aKcRVr" 10:06 a.m. EDT, May 21, 2010 from davidweidner
"Watch as Wall Street blames Congress, Obama, idiot populists for wrecking their business -- everyone except themselves. #writedown" 6:40 a.m. EDT, May 21, 2010 from davidweidner
"I didn't think they do it -- and to be accurate they still haven't -- but they're close and I'm amazed and a little proud of Washington." 6:07 a.m. EDT, May 21, 2010 from davidweidner
"The Chancellor isn't wearing any clothes. http://bit.ly/anXIoO" 5:20 a.m. EDT, May 20, 2010 from davidweidner
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