One Year Later: Five reasons to still hate Wall Street
Filed under: Goldman Sachs , One Year Later
Not much has changed since August 2008, when I first described five ways in which Wall Street wreaks havoc. On September 10, 2008, I was on CNBC's Power Lunch discussing whether Goldman Sachs Group (GS) would rescue Lehman Brothers from its perilous condition. Dennis Kneale thought that was a good idea. As for Goldman, not so much. What we didn't know then was that the same doom loop that caused Lehman to perish was working at Goldman as well -- so it was in no condition to do any rescuing.
But thanks to government inaction in the wake of unprecedented costs to society, the five reasons to hate Wall Street are still as true today as they were 13 months ago. Here's how:
1. Rewards employees, not shareholders: Thirteen months ago I objected because the now defunct Merrill Lynch paid 76 percent of its revenues to the people who work there (e.g., in 2006 Merrill paid $17 billion in compensation and its revenue totaled $22.4 billion). As I said then, that pay is linked to revenue, not how much money their deals make for customers. This encourages them to close big deals fast rather than paying attention to quality. It still is -- and Goldman is on track to pay record bonuses in 2009.
2. Puts its own interests ahead of its clients': One need look no further than how firms pushed their toxic Auction Rate Securities (ARS) off their books and into the accounts of individual investors. This $330 billion scam has robbed people of their savings and Wall Street still has not resolved this situation after 19 months.
3. Absorbs talent that could solve more important problems: As I said back then, Wall Street's money sucks up too many of the world's brightest minds. Those MIT PhDs could have been inventing ways to lessen our dependence on oil and gas instead of Collateralized Debt Obligations (CDOs). And this is still true.
4. Too highly leveraged: Wall Street can't make money without borrowing $31 for every dollar of capital it holds. This is great when bets go the right way but it wipes out capital quickly when they lose. And if you look at how Goldman earned its profits in 2009, it's still borrowing huge amount of money to trade, boosting its value at risk by 20 percent.
5. Gets taxpayers to bailout its mistakes: A year ago I was complaining that the Fed had used $29 billion of taxpayer money to bail out Bear Stearns for its poor management. But that turned out to be the tip of the iceberg -- now up to $23.7 trillion has been put at risk to bail out Wall Street.
I believe that politicians protect Wall Street because it provides so much cash for their reelections -- $5 billion in the last decade alone. But if voters still have any influence in politics, they will recognize that the societal costs of Wall Street exceed its benefits. Only then will change become possible.
Peter Cohan is a management consultant, Babson professor and author of eight books, including You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 2)
9-15-2009 @ 3:17PM
JJMartin said...
The sad thing is that Wall Street has learned only one lesson from the past year's events....that they can continue to be reckless and greedy and the government will always bail them out. Only when several of these fat-cat bankers and brokers have their fraudulently-gained millions taken from them and are sent to prison for their crimes will Wall Street change. Otherwise they have no motivation to change their ways.
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9-15-2009 @ 9:14PM
ij70 said...
Vote with your wallet. Pull your money out and put them into something else. Index funds come to mind, CD. Make the banksters come to you for the money instead of going to them and asking them to take your money.
9-15-2009 @ 6:25PM
Ceckel said...
They not only get away with being reckless, they also get away with behind the scenes manipulation and secrecy that puts investors in jeopardy and makes it impossible to know what the market will do tomorrow, in one month, in one year. Even the media doesn't know who to believe anymore, check it out: http://www.newsy.com/videos/market_manipulation
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9-15-2009 @ 6:54PM
Bill said...
Reason # 3---People should be allowed to chose their own profession. They are not property of the state to be sent to the salt mines to perform the bidding of the ruler.
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9-15-2009 @ 6:58PM
Bill said...
The only reason we have a problem with Wall Street is that the politicians that we vote for bailed them out. Washington (Frank and Dodd) supported the "no doc" home loans that caused the mess. The only way to purge a system is to let it complete be flushed out. Yes, we would face the fall out today but our children and grandchildren would not have to pay for our failings.
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9-16-2009 @ 10:10AM
james said...
Perfect example of why tbaggers and town hall wingnuts are ignorant.
Deregulation is the problem. And that is the religion of the wingnut. It's not God. It's the almighty dollar that drives this evil people.
You can't have strong regulation and small government at the same time. You have to choose one or the other.
9-24-2009 @ 3:08AM
Cotton said...
You can't have strong regulations without big Govt.? That is the strangest statement I have heard lately James. It depends on what those regulations are. The regulations of Barney Frank and company to force lending institutions to make loans to people who could not afford them resulted in big Govt. Its the Govt. responsibility to make regulations to keep business honest and ethical and then get out of the way and let free enterprize run its course. Anything else results in bailouts and big Govt. America does not think like you do James. We do not want Govt. running anything but we do need them to set the rules so business is fair to everyone. This does not result in big Govt. Big Govt. comes from the Govt. taking charge of private enterprize say like health care, lending institutions and car makers just to name a few. Our current Govt. is out of control but it is because they want to be not because they have to be.
9-15-2009 @ 10:29PM
jake said...
I purchased AIG in the low 30's after analysts statements said it was sound ... I lost $18,000 in my 401k and not a sinlge analysts went to prison and x CEO Greenberg has an offshore account with $4.2 billion and keeps it ... WTF ?
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9-15-2009 @ 10:45PM
Jenny said...
First off, no one is holding a gun to anyone's head to keep their money with any of these companies. But there are many, many who do, most likely because they're receiving big returns. Second, as soon as a budding investment banker is showing signs of success, they are scooped up. It takes smarts, and a strong work ethic to be an investment banker. They log an AVERAGE of 90-100 hours per week. The rewards will always go to those who do well in school and work the hardest!
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9-15-2009 @ 11:12PM
Jeff said...
For more on this subject I recommend The Squandering of America by Robert Kuttner.
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9-15-2009 @ 11:22PM
astroboy said...
Now this is what those dumb Tea Parties' demonstrations should be focused on! Stop the corporate ripoff of the average joe and jane, and no more big-corporate spending on themselves!
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9-16-2009 @ 10:59AM
Mike said...
I guess I'm a tea bagger, I believe in Choice, Freedom, and Personal Responsibly.
Either you are young and have had everything giving to you or you are just lazy and want someone else to be responsible for your choices and existence.
9-17-2009 @ 11:01PM
akai said...
You are absolutely right astro. The other guy is wrong on both counts. The 'everything given to you' and 'being lazy' actually describes the corporations engaged in these greedy practices. People like him obviously don't mind allowing big corporations to rake in those billions of windfall profit dollars while the average person languishes.
9-16-2009 @ 12:20AM
kenodave said...
The jews at Goldman Sachs are in it for themselves. They care not what happens to the world economy or individuals whose life savings have been decimated. Thank Henry Paulson for that. Paulson was to Goldman Sachs as Dick Cheney was to Haliburton. Both were CEO's of the benefitting companies. How they were allowed to manipulate the government into helping their ex employers is a crime. The SEC should investigate these conflicts of interest.
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9-16-2009 @ 1:48AM
CDNJoe2 said...
They say in war that if you want to change a disfunctional society, you first have to destroy all of the old influences of power. Wall street wasn't allowed to learn this lesson. Their attitude of entitlement was allowed to stay strong on taxpayer dollars. "To big to fail" is a crock! Tell that to the Incas, Romans, etc, etc.
Reagonomics and the "trickle down effect" is flawed. It doesn't take into account human greed and the want of power and influence. Wall street doesn't promote a better society. In it's present form, it feeds off society. Capitalism works, but it needs a tune up.
Say what you like about Obama. At least he's trieing to change attitudes on Wall Street. Too many want to keep the status quo and follow the same path. A path that obviously does not work.
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9-16-2009 @ 10:59AM
Mike said...
I was at the 9/12 DC rally with about a 1,000(haha) others that happen to believe in Choice, Freedom, and Personal Responsibly. I did not come across anyone that wanted the status quo. The change they want is a smaller less controlling government. I was also at last years Bailout protest, nothing is too big to fail and failing must be part of Capitalism.
The only ones that may not believe in Capitalism are the young that have had everything giving to them or they are just lazy and want someone else to be responsible for their existence.
9-16-2009 @ 12:32AM
Dave1 said...
I got completely OUT of stocks years ago and am so GLAD I did. While everyone else was losing in the stock market, I was MAKING money and I still am. Now Fed Chairman Ben Bernanke says recession 'very likely over', what a REDICULOUS statement. The country is STILL BLEEDING financially. I hate to call someone an idiot, but I'm awfully close. The stock market is rigged and always has been. I lost almost $50,000 in the 2000 downturn, but earned it all back in BONDS and CDs. No more stocks.
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9-16-2009 @ 3:17AM
Daniel Lovejoy said...
The roller coaster isn't over yet. We still have another fall ahead of us, and it's going to hurt.
Wall street is still doing business the exact same way they have always done it. They did not learn any lessons a year ago.
They get to keep their bonuses. The Federal Reserve will make sure it tries to protect them. Next time thought, there won't be enough money to save any except the biggest - who will get MUCH bigger.
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9-16-2009 @ 11:21AM
Betty said...
Those 1000 or so people controlling this country in Washington had better watch out........ this is a country FOR the people, OF the people and BY the people and we plan in the next 6 years of elections to take it back and prove it.
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9-16-2009 @ 3:51PM
cherAz said...
Go Green! Recycle Congress!
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