Peter Ressler, Monika Mitchell
Co-authors Peter Ressler and Monika Mitchell have been 20-year Wall Street insiders as partners in an executive search firm. Their book is a page-turning account of the 2007-8 meltdown and continuing unsolved issues that will inevitably lead to the next crises. Woven throughout their analysis are conversations with dozens of top executives from Lehman, Goldman Sachs, Morgan Stanley, AIG, Deutsche Bank, UBS, Citibank, Bank of America, Wells Fargo and many hedge funds and private equity firms.
Only the executives’ first names are used (for obvious reasons), which makes their recorded interviews with the authors more revealing, with all the vivid expletives un-redacted. We hear first-hand of how Wall Street’s culture actually worked based on the “buyer beware” treatment of sophisticated clients. Pension funds were considered “big boys” who should do their own due diligence and against whom it was OK to bet that the securities sold to them would blow up. These were the market makers who, unlike the partnerships of yore, regularly took both sides of deals with their often unsuspecting customers while pushing ratings agencies to stamp these toxic products as triple-A. The prevailing culture is reflected in their language: “eat what you kill,” “ripping the face off” clients and the jungle rule of “survival of the fittest” (often incorrectly associated with Charles Darwin rather than originally coined by Herbert Spencer, a British economist of that era who wrote for The Economist).
Many interviewees talked of how the rot began and Wall Street’s culture changed beginning in the 1970s, 1980s and gathering speed in the 1990s. Now, most Wall Street firms are publicly traded or aspire to IPOs. Thus, there was now little skin in the game and the velocity of money-making, the rise in compensation and bonuses followed apace. Several of the executives interviewed spoke of their alarm and how they had tried to warn top management at their firms of the excessive risk-taking and the financial “arms race” under way between firms and “star” traders. We see the latest as high-frequency trading takes off, along with offshore finance (Global Finance Lost in Cyberspace!).
In the pre-IPO partnership models, the principle executives stood to lose their own fortunes along with their customers and this kept risk-taking and leverage at safer levels. Specialists actually stood firm in stressful conditions and made markets in the stock in which they specialized. We saw the results of this in the May 2010 “flash crash” where liquidity dried up exactly when it was needed, i.e., “faux liquidity”! None of the old obligations assumed by specialists now exist an some 60% of trades are by computer algorithms rather than humans.
The authors recount the fateful repealing of Glass-Steagall under the lobbying of Citibank (C) and its desire to buy Travelers Insurance. They recall the tragic passage of the Commodity Futures Trading “Modernization” Act in 1999 at the behest of Ken Lay, Enron, by Larry Summers and Phil Gramm, which opened the floodgates to the unsustainably huge derivatives markets with notional positions of over $600 trillion – while global GDP in 2009 was a mere $65 trillion (BIS).
A further revelation was that of former Goldman boss and Treasury Secretary Hank Paulson’s 2004 gutting of the SEC’s rule which had kept leverage below 12 to one since 1975: the Net Capital Rule. The authors remind us that Paulson’s testimony in 2000 to the SEC, while CEO of Goldman Sachs, claimed that self-regulation of risk levels would allow the large investment banks to “remain competitive and allow for more efficient use of capital.” Leverage shot up after the rule’s repeal in April 2004 and was a major contributor to the collapse. Bank analyst Mike Mayo’s “Exile on Wall Street” corroborates the evidence and how big banks including Citi obstructed his research and took advantage of accounting gimmicks, including tax credits posted as “deferred tax assets.”
The authors conclude that wholesale reforms are still needed – well beyond the Dodd-Frank Act of 2010. Restoring Glass-Steagall, fixing the still-worsening housing crisis, curbing and regulating naked CDSs and derivatives, naked short-selling, high-frequency algorithmic trading seem only basic. Ressler reminds us of how un-repayable debt burdens much less serious than those of today were written off in history in general forgiveness as “Jubilees.” The authors also point out the problems of Federal Reserve secrecy and the way most of US money supply is created by banks as loans in our fractional reserve system.
Ethical Markets supports the reforms proposed by the American Monetary Institute to reform our money-creation process. Congressman Ron Paul of Texas proposes similar reforms in his book “End the Fed.” After the revelations by Bloomberg of the Fed’s $7.7 trillion of discount window lending to Wall Street and European banks, as well as its support of the ECB in recent swap lines, as well as the New York Fed’s giving its primary dealer status to MF Global – surely fundamental reforms are needed. The complicity of Washington politicians is documented in horrifying detail by Peter Schweizer in “Throw Them All Out,” detailing the insider trading, IPO deals, earmarks that would land the 99% in prison.
This book’s last chapter lists many specific reforms, which we fully support. We would add the need to downsize today’s global casino finance with a below 1% financial transaction tax (FTT) to curb high-frequency, speculative trading while protecting real investors. We support the Harkin-DeFazio bill in Congress and cite the testimony of John Fullerton of the Capital Institute (a member of our Advisory Board) as well as the 1989 arguments of Larry Summers in favor to “throwing some sand in the gears.” Our Transforming Finance initiative continues with our TV series (available for colleges and libraries at www.films.com) and we invite other experts to join our world-class signers of our Statement at www.transformingfinance.net.
Ressler and Mitchell have written a shocking account of how most Wall Streeters think and warn us that if this “public be damned” culture does not change, we had better brace ourselves for more crises. As a personal investor, I was burned by MF Global and its reckless bets in European bonds while $1.2 billion in customer segregated accounts went missing. No wonder retail investors are fleeing and finding ways to bypass Wall Street.
– Hazel Henderson