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Howard Gold's No-Nonsense Investing Archives | Email alerts
March 23, 2012, 12:01 a.m. EDT
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By Howard Gold
NEW YORK (MarketWatch) "” Stocks are hitting post-crisis highs, unemployment is falling and even housing sales are putting up their best numbers in years.
On Wall Street, however, it's still the winter of their discontent. The giant firms that were instrumental in causing the financial crisis (they had plenty of help, of course) were saved from themselves by taxpayers' money and zero interest rates, courtesy of Federal Reserve chairman Ben Bernanke.
They had spectacular years in 2009 and 2010 and paid out huge bonuses to their undeserving minions, just as if nothing had happened. The public, suffering through the worst recession since the 1930s, was understandably outraged.
But, oh ye of little faith, justice and retribution are at hand. Market forces and a regulatory tidal wave are bearing down on these Masters of the Universe. The big firms are slashing bonuses, laying off workers and getting out of markets they had no business being in in the first place.
In coming years, these firms will earn less and shareholders may put more pressure on managements to improve profitability "” the same kind of heat Wall Street puts on everyone else.
It all points to a secular bear market for Wall Street, no matter how the rest of the economy does. In financial speak, secular means caused by structural forces rather than the normal ebbs and flows of the market cycle.
Last week's public resignation by Goldman Sachs Group /quotes/zigman/188479/quotes/nls/gs GS +1.15% vice president Greg Smith in the New York Times was more than just a take-this-job-and-shove-it message. It was a symptom. These things happen in bear markets, when rats jump off sinking ships. In this case, the rat ratted out his employer.
The former Goldman employee called the environment at the firm "toxic and destructive" and wrote, "It makes me ill how callously people talk about ripping their clients off."
Read Howard Gold's previous take on conflicts of interest at Goldman Sachs on MoneyShow.com.
Roy Smith, a former Goldman partner who now teaches finance at New York University's Stern School of Business, isn't sympathetic to Greg Smith because "he made it seem like Goldman Sachs could and did rip clients off all the time." But "the clients Goldman serves"¦have the opportunity and do shop their business around," he said in an interview.
That aside, Prof. Smith acknowledges there have been big changes at Goldman and throughout Wall Street as "seat of the pants" traders were replaced by quants and Ph.Ds brandishing sophisticated mathematical models. Competition has intensified across all businesses.
After the dot-com bust and the Eliot Spitzer investigations, Wall Street appeared chastened. But then the Fed's low interest rates under Alan Greenspan sparked the blow-off stage of the decade-long housing boom.
Firms like Goldman, Morgan Stanley /quotes/zigman/182639/quotes/nls/ms MS +3.78% , Merrill Lynch "” now owned by Bank of America /quotes/zigman/190927/quotes/nls/bac BAC +2.60% "” and others, like the late and unlamented Lehman Brothers and Bear Stearns, jumped in to package, sell and trade AAA-rated securities backed by rotten mortgages. And with regulators' complaisance, these firms levered up those bets by 30 or 40 to 1.
Result: Financial firms' earnings catapulted from 19% of all U.S. corporate profits in 1986 to a whopping 41% in 2006. It was all based on funny money, though, so when the inevitable crash came it almost took the rest of us with it.
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