No Place for Nice Folks

Let heaven forgive the wicked, after they have been punished.

—Joubert

This is how it is: During a bull market, Wall Street attracts young people who get so mesmerized by the money that they lose their moral compass and get sucked into a culture of sociopaths intent on getting rich by exploiting an edge. An edge is a scheme to separate suckers from their money. They succeed, wildly, because the suckers, in addition to lack of investment acumen, are normal human beings who cannot fathom the brazenness of the wise guys’ misbehavior.

No method is too egregious. Wall Street traders collude to fix prices, and gleefully “rip the faces” off the regular folks they trade against by front running  the firm’s customers’ trades and taking liberties with the laws against using inside information. Hedge fund managers leverage their investor’s capital ten to one and charge 2% management fees on the gross amount, making it a 20% fee on the investor’s money, plus 35% of profits. This is acceptable until the leverage decimates the fund in a market reversal and they fold the fund and fly off to their private islands, having had no skin in the game to start with.

And the bankers–oh, those damn bankers: They make handsome fees underwriting issues for distribution to the investing public. This is part of their job, but the higher the market goes, the more gullible the suckers and the crappier the offerings become. Additionally, they speculate hugely with the bank’s (depositors’) capital. They generate huge insurance premiums selling Credit Default Swaps (CDSs), book the premium income as profits, pay themselves obscene bonuses on the “profits” and when the debt market collapses as it did in ’08, the banks’ trillions of dollars of obligations to pay the CDS holders render the banks insolvent, laying the bailout on the taxpayer, with no claw back of the billion dollar bonuses.

There are regulations that are supposed to govern all of this. They were set up in the aftermath of the big crash of the thirties, but, over the years, Wall Street cruds have successfully lobbied to water down and all but eliminate the laws. No surprise, recent efforts to re-invigorate them have been severely contested by the banks.

Nothing new here. Ferdinand Pecora, Chief Counsel to the United States Senate Committee on Banking and Currency during its investigation of Wall Street banking and stock brokerage practices in the 1930s wrote:

“Bitterly hostile was Wall Street to the enactment of the regulatory legislation….Had there been full disclosure of what was being done in
furtherance of these schemes, they could not long have survived the
fierce light of publicity and criticism. Legal chicanery and
pitch darkness were the banker’s stoutest allies.”

—Wall Street Under Oath, by Ferdinand Pecora, 1939

We have been aware of the stench on Wall Street for some time, and wondered if the regulators would ever get off their butts and pursue the miscreants. Finally, serious investigation is underway, and several of the big banks are under indictment for both criminal and civil offenses. Will it ever come to anything? Who knows, but I agree with Matt Taibbi, the journalist who covers Wall Street for Rolling Stone, who writes, “..to me, these investigations will be meaningless unless one of two things  happens, once they reach the inevitable stage of concluding  painstakingly-crafted settlements with the inevitable teams of high-priced  lawyers for the offending firms: 1) Someone goes to jail. 2) The company is ordered to break itself up into smaller pieces.”   

It does seem to be getting tougher for them to do business as usual. A big bank trader I know recently said, “I’ll never again make the kind of money I made a few years ago.” I’m sorry, really.

This is how it’s going to be: There might not be perp walks or jail sentences, but the markets will do what the justice system may not. A bear market will disillusion the suckers. They will quit the market, and the wise guys, with no one to prey on, will be forced out of their jobs. Wall Street employment in 1929 was over a hundred thousand. By 1942, it had shrunk to five thousand. Something like that should happen again.

After the market bottoms, the suckers will be replaced with savvy investors who know the score. There will be superb values and game will necessarily become more honest. That’s worth waiting for.

Cheers,

Rod

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