Wall Street Seen as Casino for Rich Insiders. The Only Real Solution Is To Breakup the Banks.
Enough already! Enough with celebrity SPACs, exploding ETFs, and kamikaze Reddit hordes. Enough of high frequency trading and dark pools. Enough of brokers selling retail order flow. Enough please God of carbon spewing cryptocurrencies. Enough of gargantuan hyper-complex banks incapable of managing their risk or preventing staff from manipulating markets, getting a privileged, insider role in the management of themselves and the American economy. Enough of a stock market that looks less like “a market” and more like the former Yugoslavia in its patchwork of warring territories. Enough of a system where derivatives and derivatives of derivatives are spawned with reckless abandon and sold in vast quantities like packs of chewing gum. Enough of private equity funds “optimizing” chunks of our health care system. Enough of Silicon Valley cowboys getting rich off addiction machines and labor arbitrage and calling it “innovation”. Enough of hit and run activist hedge funds forcing companies to lever up and buy back shares then selling after a short-term pop. Enough of an SEC that invariably responds to trendy useless new products, with “cool, go for it!” Enough of the nation’s top regulators selling themselves to the highest bidder after their term ends. Enough of members of Congress trading on inside information. Enough of financial professionals on TV pretending they can forecast short term price movements to dupe people into trading for no reason. Enough of financial markets so vast and complex and rapidly changing that few, even among professionals, would profess to fully understand how it all works. Enough of a financial system which, just 12 years after nearly incinerating itself in the Global Financial Crisis and causing the Great Recession, despite today’s much higher capital ratios, seems just as capable as ever of blowing themselves up and taking us with it!
The smoking crater that is Archegos, the $8 billion they lost in a week, the $7 billion (and counting) that the banks lost – are just another in a long line of “unexpected” and “shocking” dumpster fires that routinely erupt on Wall Street, shocks that invariably relate to some out of control speculative activity that no one knew anything about (except the risk manager with tire marks on his face) until it exploded. Here’s a bold prediction: these “shocks” and systemic accidents will continue — with absolute certainty — unless there is drastic reform. Enough! It is long past time to clamp down on the Wall Street Casino and break-up the Mega Banks.
Welcome, readers, to this week’s unhinged rant!
It seems to me that much of what goes on on Wall Street these days has little to do with the economic purpose of capital markets — which I would define as:
- Enable individuals, companies and governments to efficiently finance their activities and to hedge big risks;
- Enable individuals and institutions to efficiently invest their savings;
- And as a result of #1 and #2, enable optimal capital allocation for the American economy.
However, it’s become obvious to most Americans (except for Ken Griffin) that the financial markets of 2021 are less a servant of Main Street and more a giant hyper-complex casino catering to rich insiders where non-insiders get fleeced. The overnight incineration of $8 billion of Archegos’ wealth makes this impossible to ignore. Markets today are dominated by a handful of gigantic lumbering global banks who’s billion-dollar settlements for criminal acts by renegade employees are an annual expense item. Market manipulation is common and conflicts of interest endemic. Oceans of mostly hidden leverage bring quick riches or instant catastrophe. Most of the trading is done by algorithms which grow steadily more complex and opaque. New and unexpected sources of systemic risk regularly appear like whales coming up for air. The average American has a better chance of getting a fair deal on a carpet in the trading dens of Marrakesh than in the US stock market.
I know what you’re thinking. I’m just a cranky old man. I just don’t get it. I’m like the uptight father in the Broadway musical, Bye Bye Birdie who sings, “What’s the matter with kids today!” Geezers on Wall Street have been complaining about new-fangled innovations since the days of trading under the Buttonwood tree. Today’s Wall Street razzmatazz doesn’t hurt anyone, you say, and so — because we live in a country where personal freedom is more important than life itself — why not have billionaires make up shit on TV about SPAC targets to enrich themselves? Why not have more flavors of ETFs than lipstick shades? So what if they accomplish nothing except harming investors and supersizing Larry Fink’s bonus? Buyer beware, dude! Why not have financial markets that resemble part Cirque Du Soleil act, part horror movie? Why not have KKR buyout funds in 401k accounts charging outlandish fees at all-time rich absolute and relative valuations for private equity? What could possibly go wrong?
Well, maybe you’re right. Or maybe… we’ve all just become accustomed to it. Maybe we’ve been sitting in the middle of this Fellini movie for so long that it’s been normalized. I freely admit to being old and cranky but I retain a modicum of common sense. And my common sense plus three decades in the investment business tells me that Wall Street is out of control and hazardous to the American people.
Some may argue that much of the current circus-like atmosphere is simply a function of a prolonged period of zero real rates and decent growth with an added buzz from pandemic related stuff — and I think there’s a lot to that argument. However, it would be quite wrong to dismiss this as simply a function of the current market environment. A picture of the size of the industry over time tells a very different story. It reveals a clear, decades-long trend of becoming a bigger and bigger part of the economy without, in my mind, providing better outcomes for customers at the same or lower prices.
What do the numbers say? What evidence do we have for the proposition that Wall Street either provides a critical competitive advantage for the US – or that it’s an opaque, expensive, highly risky tax on the economy? The evidence shows firstly that the size of the American finance and insurance industry in terms of its “gross output” (i.e., revenues) relative to GDP has grown from just over 4% in 1947, to 15% today (see Chart A). 
We could look at the finance industry separately from insurance, or we could with some justification look at both of those plus the real estate industry (talk about cartels!). There is no right definition of what is Wall Street and what is not. Thankfully, the numbers for each of the three segments all go up with more per less the same slope and, in my view, all three deserve increased scrutiny and skepticism. Another measure, “value-add” (i.e., income) for finance plus insurance has also increased dramatically, though less rapidly than gross output.
So it is indisputable that “Wall Street”, (however you define it) has become a much larger portion of the US economy. Since 1980, the relative size of the industry has essentially doubled. Okay, that’s clear, but what are we “getting for it”? Is Wall Street providing enhanced services at lower cost? In other words, has there been any increase in industry efficiency, as there has been in virtually every other American industry? The answer, according to a leading academic studying the industry, is no, clearly not. Thomas Philippon of NYU’s Stern School of Business, in his paper, “Has the US Finance Industry Become Less Efficient?”, published in the American Economic Review in 2015, showed that the “unit cost” of financial services has been quite stable over the last 75 years (see Chart B) at between 1.5 to 2% of “intermediated assets”. He writes,
I find that the unit cost of intermediation is about as high today as it was at the turn of the twentieth century. Improvements in information technologies do not appear to have led to a significant decrease in the unit cost of intermediation. Explaining this puzzle is an active area of research…
Is anyone embarrassed by these numbers? No improvement in 120 years! What would Gordon Moore say? The bottom line here is that Wall Street has become much larger and more powerful but has hardly changed at all in terms of its productivity. “Much bigger but not really any better” should be Wall Street’s tag line.
Related Posts on American Carnage:
Some readers may agree with my assessment of the industry but view the possibility of reform as pie in the sky. “Dream on”, they say – Glass Steagall 2.0 is a pipe dream, a fantasy. The odds of real reform and restructuring are infinitesimal. Well, things that seem impossible come to seem possible when the context changes. And change it has, radically. We’re only a dozen years removed from the deepest recession since the 1930s when 6 million Americans lost their homes and millions permanently dropped out of the labor force. We appear to have (barely) made it through a pandemic which killed two million people and impoverished millions of low wage American service industry workers (those that didn’t die bagging groceries).
These body blows to middle and lower income Americans should be seen within the context of a long term trend of middle class shrinkage. According to Pew, from 1970 to 2018, the share of aggregate private household income going to middle-class households (those with income from 50% to 200% of the median) fell from 62% to 43%. In other words, a majority of Americans are no longer in the middle class.
As a result, the political ground has shifted. Suddenly, much looks possible that didn’t even a year ago. The Biden Administration is giving key regulatory jobs to anti-trust warriors who are coming after the grossly amoral money machines of Big Tech. Since Facebook is now despised by both left and right in Congress, big change suddenly seems possible. Congress just passed a law which will increase Federal debt by 9% of GDP in the next few years in order to — at long last — give a few bucks to the great American Precariat. As a result, debt to GDP will soon blow past 100% but we’ve heard barely a peep from conservatives (still embarrassed as having voted for Trump’s $2 trillion debt-funded corporate tax cut)!
In Alice in Wonderland, The Queen urged Alice to give her imagination a workout, telling her that her skill set in this area was pathetic. “Why I’ve believed as many as six impossible things before breakfast.” Well, here’s one impossible thing it’s time to believe in and vote for: radical reform of the Wall Street Casino and break-up of the Mega Banks.
Let’s take a walk down Bad Memories Lane and see how we got here. Today’s Wall Street is the result of 40 years of financial market and financial industry deregulation, consistently promoted and supported by the Republican Party. All the “innovations” that have been born (like mutating viruses), the seven thousand different ETFs, shitcoins, moving from Defined Benefit pensions to 401k accounts, CDS on CDO, (and a blizzard of other acronyms for “structuring” one guy’s cash flows into another guy’s bond) all have been assumed to cause greater and greater economic efficiency and lower and lower cost of capital for the American economy. Thus benefiting the average American. No kidding, that’s what many conservatives actually think. I know, I used to be one. You saw the effect it had on finance industry GDP and profits in Chart 1. The GOP has been awesome for Wall Street compensation. Anytime anyone in Congress has taken a serious run at taxing PE carry as personal income, Leon and Steve’s K Street Special Forces team up with Mitch and company and that’s the last we hear of it. And of course it’s such a great thing for average Trump supporters that Leon Black and Steve Schwartzman get to keep an extra couple hundred million of their “earnings”. No wonder they attacked Congress.
When Donald Trump became President, my moral complacency was shattered. For me and for many former Republicans, the election of a world champion grifter — and the fact that the entire Republican Party lay down grovelling at his feet — demanded a wholesale rethinking of the entire conservative project. If the GOP was happy to jettison most of their “core principles” to support King Con, I was happy to jettison the GOP. And I’ve come to believe that the fiscal/economic pendulum has swung so far in favor of corporations, rich folks, and highly educated “knowledge workers” that basic decency argues for it to swing at least a ways back in the direction of, well, people who don’t have tax lawyers. Tom Steyer is dead right. When it comes to Wall Street, where I spent my working life, the idea that the speculation, promotion, self-dealing, and sleaze has a beneficial net impact on the average American is a sick joke.
The Democrats are guilty too. In thrall to the neo-liberal fantasies of Robert Rubin and Larry Summers, (and embarrassed for having majored in Art History and for not knowing what a bond is) Democrats went along for the ride like bumpkins in awe of fast-talking (Goldman) snake oil salesmen. Today, the dust has fallen from the eyes of moderates and progressives alike. Democrats have learned just enough economics to understand that the American people are serving Wall Street, not the other way around. So now it’s only Republicans in Congress, with their knee-jerk support of anything labelled “deregulation” who cheer loudly for the epic carnival of excess to continue.
As an aside, I find it hilarious that Republicans cite deregulation as one of Trump’s great accomplishments while not having the slightest idea of what was actually being deregulated! Would Michigan soccer moms vote for “growth enhancing deregulation” if they knew, that by a large margin, the two industries which benefited the most from Trump’s deregulatory actions were, wait for it, oil and gas extraction and Wall Street! Ask those moms to explain why they’re in favor of lifting caps on methane emissions and making it easier for oil and gas firms to avoid paying to repair the land they’ve scarred — oh and making life easier for Goldman Sachs.
Now that the Democrats are A. in power (for a few minutes, barely) and B. able to see through Larry’s bullshit, significant reform is at least conceivable. But what of Republicans? Thanks to Trump’s “vision”, there is supposedly a major shift in the conservative agenda. After four decades of viewing “workers” as nothing but units of potential consumption we are told that conservatives now care about the common folk and whether they have jobs that can provide for their families. Okay, good. Now explain how that concern aligns with protecting the paychecks and perks of the billionaires’ bouncy castle that is Wall Street. Trickle down?
I’m mad as hell and I’m not gonna take it anymore! (shakes fist out window)
Which brings us to Archegos. Archegos is the “family office” of Bill Hwang. A family office is something that billionaires form to manage their money so that it doesn’t have to touch other people’s money. They hire top Wall Street talent to do the vitally important work of making rich people richer. Hwang got his start working for King Midas himself, Julian Robertson, at Tiger Capital, then launched his own fund, Tiger Asia in 2001. Tiger Asia was a long/short equity hedge fund, focused on stocks in Japan, China, and Korea. Bill always liked to swing for the fences and take big concentrated bets, especially on the short side. Tiger Asia, like many hedge funds, did quite well until it’s excellent performance attracted a big increase in assets. At which point they still delivered awesome volatility but without the good returns. Then in 2012, Hwang was punished by regulators in Hong Kong and the US for trading on insider information and manipulating stock prices related to his positions in Chinese bank stocks (irony overload!). That ended Bill’s career managing money for other people. Casual observers lost sight of him after that until two weeks ago when Bill burst back on the scene like a drunken teen soaring off the Alpine Slide at Action Park.
We still don’t know many details but as of now, these are the salient facts of the Archegos immolation:
Tiger Asia Insider Trading Case
- The SEC complaint in January 2013 alleged that Hwang was given advance warning of three impending bank stock secondary issues by three different banks who were the underwriters. In each case, Hwang signed an agreement not to trade on this information but in each case he did, immediately shorting the three stocks. Hwang was also accused, on four separate occasions, of placing trades near month end in order to manipulate their prices to increase Tiger Asia’s month end NAV (and hence get paid higher fees).
- Takeaways: not just one incident, or one questionable action, Hwang committed multiple different crimes. He lied and shafted the same investment banks in 2008-2010 that he screwed and shafted last month. The decision by the banks to do business again with Bill Hwang after he had repeatedly lied and screwed them, is almost as pathetic and moronic as the decision by Deutsche Bank to keep lending to Deadbeat Donald.
Archegos
- Pre-implosion, Archegos is reported to have had a net assets of approximately $8 billion. No one knows for certain but it appears as though their current NAV is estimated to be approximately nothing.
- Using single stock total return swaps to hide disclosure, they controlled total assets of as much as $50B ( i.e., aggregate leverage of ~ 6x) invested in highly concentrated long positions in ViacomCBS, Discovery, a Chinese stock called GSX Techedu and a handful of other names. I haven’t seen anyone’s estimation but it seems clear Bill Hwang controlled well north of 10% of Viacom’s stock and perhaps a good deal more — without this fact being known to another soul in the world except Bill himself.
- On March 22nd, ViacomCBS announced a $3 billion capital raise which caused the stock to drop sharply. This, combined with recent declines in other Archegos holdings, triggered margin calls by the banks who’d provided the leverage. Selling begat selling as it always does when people talk and the Street smells blood and the first bids are hit — and so the stocks owned by Archegos were crushed as those who owned shares dumped them (flashbacks to 2007 anyone?) and those who didn’t own shares borrowed some and shorted them. As the chart below shows, it happened in minutes.
- Several years ago, the SEC recognized that they had no visibility into Family Offices and so issued regulations to require FOs to declare their holdings but… compliance was voluntary. Archegos chose not to comply. Hence, until Friday, no one knew much of anything about Hwang’s family office, including the greedy fools who lent him billions.
- Today, Archegos is a smoking crater and a training manual for how to lose 8 billion dollars in a week.
Their bankers
- Credit Suisse, Nomura, UBS, Goldman Sachs, Morgan Stanley, and a few others acted as “Prime Brokers” for Archegos. Given that most bank research is worthless, being a PB primarily means providing cheap leverage (and, one assumes, the odd tip off of impending stock rating changes or secondary share issues). None of the banks knew what Archegos was doing with other PBs, so they had no effective way to manage the risk. And, shock and surprise, they went ahead anyway. Goldman was reportedly the last bank to “get comfortable” with doing business with Archegos (i.e., Goldman’s risk manager was the last one pushed off the roof).
- At the end of the week as it became clear the PBs needed to sell $40 billion worth of a handful of names, the banks held a call together to discuss how they could best collude and rig the market to minimize their losses when secretely dumping Hwang’s positions. Cartels are illegal in every industry but on Wall Street, this is called “ensuring orderly markets”. I’m surprised Jay Powell wasn’t invited. But Goldman and Morgan wouldn’t go along with the scheme because it
was illegalwouldn’t work, everything always leaks. - ViacomCBS raised several billion in new common stock at a price of $85/share and two of the six underwriters were Goldman and Morgan Stanley. The new shares were sold on March 24th at $85/share. Today, the stock is at $42. This is why even Goldman’s clients assume they’re getting raped — even if they don’t always know exactly how.
- Goldman showed once again why they live when others die by being first off the mark to dump blocks of Archegos’ major positions and (as far as we know) prevent taking a large loss. Would anyone be surprised if it was learned that a different group of Goldman traders made a few hundred million shorting Viacom? Credit Suisse on the other hand, proved the old adage that if you’re in a poker game and you don’t know who the patsy is, it’s probably the Swiss Banker. Credit Suisse is the biggest loser having announced a ~ $5 billion hit. The loss for Nomura will be ~ $2B. $7 billion in counterparty losses from a family office no one but the PBs had heard of a week ago. Just another day in the Wall Street Cesspool.
Their regulators
- The staff lawyers at the SEC, mostly former or future partners at Wall Street firms or their favorite law firms, woke up from their multi-decade slumber and asked “what’s a family office?”
- Readers of American Carnage will recall that Trump’s SEC Chief, Jay Clayton, after seeing and hearing no evil throughout his term, decided to swap his reputation for cash. Clayton will serve a very important and wholly ornamental role as Chairman of Apollo — as part of Apollo’s efforts to get their investors to forget that Leon Black was BFFs with one of the world’s worst sex traffickers and child rapists. And that the $500 million Leon paid to his cool pal Jeff was NOT for the honeymoon suite on Rape Island but for… tax advice.
- Biden’s newly confirmed SEC Chief, Gary Gensler, although a native of the same Goldman/Treasury revolving door swamp as Robert Rubin et. al., did useful work as head of the CFTC post-GFC to bring some transparency and operational sanity to the derivatives markets. Pro-reform advocates believe there is reason to be optimistic about his term. We await Gensler’s response to the Archegos detonation.
What’s to be done?
I don’t pretend to have the ideal solution. Understanding our nation’s financial markets and determining how best to restructure them is a full time job for a team of bright analysts and I’m just a cranky part-time blogger. My objective here is not to lay out a comprehensive program of reform. Rather it is simply to state an ineluctable point: the status quo is ridiculous and hurts lots of people — and piece-meal tinkering won’t change it. If you agree, radical reform becomes the only viable option, regardless of whether it seems possible or not. (If you don’t agree, congratulations on having made it this far through enemy territory.) Below, I offer several Wall Street reform suggestions that make sense to me:
Family Offices and Secret Societies
- If it is necessary for the functioning and regulation of American equity markets that the positions of large investment advisors be disclosed (as they must be), who was the clever boy at the SEC who decided family office registration and disclosure should be voluntary? Was that to show their sense of humor? Fixing this should be a no-brainer. Let’s see if it happens.
Crime and Not Punishment
- Bill Hwang paid a $44 million fine for multiple counts of insider trading and stock manipulation. Why then, is it acceptable — to the SEC, to the banks, or to you and I — that he be free to run a highly concentrated $50 billion book of stocks levered 6x, with no regulatory oversight whatsoever? Is it the purpose and function of our capital markets to enable billionaires to engage in what can accurately be described as batshit crazy speculation?
- I wouldn’t be surprised if there’s still Americans rotting in jail for possessing a vial of crack in 1990. White collar criminals should go to prison. And not a prison for rich white guys with squash courts and drama clubs but a regular old fashioned prison (ideally wearing striped suits and hats). For decades, Republicans have promulgated minimum sentencing guidelines for repeat felons. I support minimum sentences for all white collar criminals and I support strict limits on the ability of lazy or corrupt regulators to cut sweetheart settlement deals instead of taking the banks and their managers to trial.
- Abolish FINRA (Financial Industry National Regulatory Authority). The very notion of a “self-regulating industry body” is a bad joke. Like having a pack of self-regulating jackals. Industries don’t regulate themselves, they protect and enrich themselves. Adam Smith wrote of “the mean rapacity, the monopolizing spirit of merchants and manufacturers” but the principle is the same: large industry players will always act in their own self-interest which is to stifle competition. All enforcement responsibilities of FINRA should go to the SEC or Fed or other regulators.
- Mandate majority non-Wall Street composition of all advisory committees sponsored by finance industry regulators. The New York Fed, SEC, and CFTC together have 23 of these “advisory committees” which ostensibly provide advice to regulators on a range of topics from individual traded markets to community banking. You will perhaps not be entirely shocked to learn that most of these committees are made up largely of folks from investment banks, asset managers, and insurance companies. One example is the Foreign Exchange Advisory Committee. All 24 members are finance industry professionals, including one from J.P. Morgan. Which is interesting given that the DOJ charged JPM in 2015 with rigging the foreign exchange market! It’s bad enough that Wall Street spends billions to fight tooth and nail against every consumer, investor, and market protection — in Congress and in the courts — against completely overmatched regulators and puny public policy non-profits. Do we really need to give them room and board inside the regulators and listen politely to all their helpful suggestions about how we can make their lives more profitable? At a minimum, none of these committees should have a majority from Wall Street. Something about foxes and hens?
Regulators and Prostitutes
- Prohibit anyone working for the SEC or another regulatory body from working on Wall Street within five years after leaving their former positions.
Systemically Important Reckless Gambling Houses
- The Mega Banks continue to wreak havoc with impressive consistency. If they aren’t manipulating markets themselves (FX, LIBOR, precious metals, etc., etc.) they’re lending money to others to do so. They lent Bill Hwang billions even though he repeatedly lied to them and they had no way to manage the risk.
- Yet these banks are able to offer federally insured deposits. Their CEOs sit on the Board of the New York Fed (Jamie Gorman, Morgan Stanley’s CEO is currently Chair of the New York Fed while Jamie Dimon of JPM was on the board of the NY Fed during the GFC!) and are routinely consulted and briefed and kowtowed to by Fed Chairs and Treasury Secretaries. They play a major role, some would say the leading role, in deciding how financial markets are structured and regulated. In what other industry do serial violators of the law receive such impressive government support and play such a leading role in the design and regulation of the very markets they’d been caught manipulating?
- US Banks have substantially increased their capital ratios such that the average common equity capital ratio is ~ 12%. This does NOT end the risk of bailouts. Yes, 12% is much better than 6% and all else being equal, going bust in a crisis is less likely. But we have already established that the banks are willing (eager) to take risk which they cannot measure and hence cannot manage. Who can say that 12% will be enough when risk managers are purely ornamental and business heads have wildly misaligned incentives? (By the way, does anyone believe that a “living will” will survive first contact with a crisis?)
- Is there anyone left on planet earth who thinks ending Glass Steagall was a good thing? Who thinks that the weird agglomeration of wildly different businesses are well managed and properly regulated? That it was good for average Americans? Who thinks that it’s even possible to efficiently and effectively regulate anything that big and complex? The problem isn’t that the banks aren’t regulated enough, there are millions of regulations and new ones coming every day! Which makes the banks even more complex and opaque. And the disasters just keep coming, almost as though what we were doing wasn’t having any effect at all.
- At what point do we accept reality: it simply isn’t possible. We could quadruple the number and budgets of regulators but if the banks themselves are too complex to manage, how can we regulate them?
- Recommendation: Glass Steagall 2.0 (GS2). Split banks into A. less regulated investment banks which by law could not be bailed out and B. tightly regulated commercial banks restricted to taking deposits and making loans, and required to hold substantially more capital. Impossible? Perhaps but please suggest a viable alternative.
The Business of America Is… Trading?
- Enact a transactions tax – an extremely low tax on most financial market transactions (perhaps 1 or 2 basis points) has several virtues: one, it’s simple and easy to understand; two, it addresses head-on one of the biggest costs of Wall Street: constantly urging everyone to trade. There’s a lot we don’t know about the future. One thing we do know with near certainty is that frequent trading is harmful to long term wealth building. Hong Kong, thought of as a model of a free market economy, has a transactions tax. The UK has had a transactions tax (stamp tax) for several centuries. The sky won’t fall, pay no attention to David Solomon.
- Here’s a thought: Schwab, BlackRock, Fido, JPM, et. al., are paid by their clients to advise them on how to invest. Legions of academics have shown that there is one thing which more than anything investors must avoid in order to achieve their investment goals: frequent trading. When was the last time you heard any of these ESG-promoting “woke” firms telling their clients not to trade so much? Given that your answer was either “I can’t remember” or “never”, why should any of these firms get good ESG scores or be regarded as anything but predatory vis a vis their least sophisticated customers. Let’s all stop piling on to Robinhood for the “gamification of investing” when Wall Street invented the game has never given sound investment advice to retail investors.
- Vanguard is the one exception and the reason is simple: it’s owned by its customers.
Complexity Bites
- One reason Americans distrust Wall Street is that it is so vast and complex, they don’t understand it. I’m reminded of John Oliver’s description of Bitcoin: “everything we don’t understand about money combined with everything we don’t understand about technology.”
- The US financial system is regulated by the Federal Reserve, NY Fed, SEC, FDIC, CFPB, CFTC, and a few others that I can’t remember. There are 13 different US stock exchanges with more on the way plus 25 or so dark pools where large investors trade in secret. I could go on and on. For days. The US financial system will never be simple and streamlined – but it seems as though it’s becoming more complex at an accelerating rate.
- There needs to be a much greater appreciation – by regulators, bankers, and politicians – of the enormous cost of complexity. Complexity – of a market, a system, a company, or a process – always and everywhere adds risk, adds costs, and reduces transparency.
- Simplification can have a powerfully positive effect on efficiency, risk management, public understanding, and hence long-term economic prosperity. KISS, baby!
Please understand, I’m not saying that everyone who works on Wall Street is a bad person who enjoys shafting their clients. I worked on Wall Street for thirty years and believe I always did what I thought was best for my clients — and I think most of the folks who work at banks or brokers or fund managers do the same. Most of us are worker bees anyway, we didn’t create the system and we don’t manage the system. Whether or not we have an obligation to try to change a system which has personally been great for us but has harmed many others is a topic for a future post.
To wrap up, it is critical that the American financial system be perceived by the average person as fair. Otherwise, more and more people become cynical and believe the system is rigged against them, making them more and more open to heavy handed government intervention or worse. In 2017, the Cato Institute did a survey which showed that:
- 77% of Americans believe “bankers would harm consumers if they could make more money and if they thought they could get away with it.”
- 66% believe “Wall Street bankers get paid huge amounts of money for essentially tricking people”.
- 75% believe “regulators care more about their own jobs and ambitions than about American’s economic well-being.”
- 64% believe “Wall Street is essential because it provides money for businesses to create jobs and innovate.”
Wow, rarely do survey results align so perfectly with my own views! Wall Street is essential for long term economic prosperity but it’s regarded as a land of treachery and deception, where the cops are either paid off or outgunned. My guess is that many readers may agree with my call for radically tougher regulation and GS2 but feel that real change just isn’t possible. It’s so big, so powerful, so opaque, so multifaceted – it feels like an impossible task. I get it but at the same time, resignation in the face of demonstrably bad outcomes is corrosive to democracy and leads to increasing numbers of Americans to reject capitalism.
I like to keep things simple. The financial industry is becoming a bigger and bigger slice of the American economy but they don’t seem to be getting noticeably better at performing their essential functions. If what we’re doing isn’t working and the industry is impervious to change, radical reform must be on the table. Even if this is not possible in the near term, what are we supposed to do, give up? Surrender? Five years ago, everyone thought Big Tech was bullet proof but today the industry is besieged on all sides, supported by no one, hence meaningful reform in the near term seems more likely than not. Recognizing Wall Street’s fundamentally abusive nature and supporting politicians who recognize this – will help prevent it from getting worse until broader public understanding and support can be built. The great glittering obscenely wealthy Wall Street TAIL is wagging the hell out of the poor abused Main Street DOG. Those who care must support politicians who get it and will change it.
Enough!
