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A 12-Step Program for Wall Street?

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When Goldman exec Michael Swenson told a Senate investigations committee on April 27, “we did not cause the financial crisis,” he was correct in that they were not the only reason for the crisis. But they are horrifically wrong when they say they did not cause it–that it wasn’t their fault. The depth and breadth of this crisis was made dramatically worse because of human actions–in other words, manmade.

I am not singling out Goldman Sachs by any means. But there is a case to be made that the depression we are in is deeper and broader–and longer lasting–in part because of the leveraged bets that big financial services companies including Goldman Sachs, AIG, Lehman Brothers, Bank of America, Merrill Lynch, Morgan Stanley, Citi, JPMorgan and others made, essentially against each other. That all Americans are paying dearly for.

And because of the shadowy structured securities that brought massive fees into these firms even as some of the firms were betting against them. The Wall Street Journal reported on May 12 that U.S. prosecutors and regulators are “conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals,” in “Wall Street Probe Widens, J.P. Morgan, Citigroup, Deutsche Bank and UBS Also Face Prosecutors’ Scrutiny.”

And a May 13 article in The New York Times, “Prosecutors Ask if 8 Banks Duped Rating Agencies,” notes that New York Attorney General Andrew Cuomo is investigating “Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Cr?dit Agricole and Merrill Lynch, which is now owned by Bank of America,” to see if “they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities.”

And in fact, Goldman Sachs is still–(is it too cynical to say not unexpectedly?) lobbying to gut proposed reforms, according to a May 12 report, “Goldman lobbies against fiduciary reform.”

All of this is sure to help rebuild investors’ trust in Wall Street, banks, and financial services.

Money–taxpayers’ money–that went to bail out these financial firms was money not spent elsewhere in the economy. Because the situation was so horrific, consumers stopped spending. Goods sat in inventory. Advertisers threw up their hands and stopped advertising to a public that wasn’t spending. People lost jobs and then even more people, fearing the worst, stopped spending. Houses that people with jobs tried to sell sat on the market for a long time with houses that were on the market because of foreclosures. Prices of homes fell. In the spiral down more people lost jobs–and some more of them lost homes. The spiral continued downward.

The Gordian Knot of many of the troubled mortgage backed securities is still tightly glued. Some try to blame it on Greenspan and the low rates that were present for part of the past decade–but even if rates were low, someone had to make the decision to borrow and borrow and borrow. I don’t recall Greenspan twisting anyone’s arm to borrow. What happened to corporate responsibility, accountability and fidelity to shareholders?

Bring back Glass-Steagall?

It’s interesting that the week after Goldman Sachs execs testified before the Senate, published an article, “Ex-Merrill CEO Komansky Regrets Backing Glass-Steagall’s Repeal,” on May 5. It says that Merrill Lynch’s former CEO, David Komansky, “said he regrets promoting the 1999 repeal of the Glass-Steagall Act that separated commercial and investment banks.” The article also mentions that John Reed, Citigroup’s former CEO, said much the same thing in January: “U.S. lawmakers were wrong to repeal Glass-Steagall.” Interesting.

And of course, the article mentions how Paul Volcker, the former Federal Reserve Chairman, is in favor of making banks “exit the business of trading for their own account.” Which is a modern-day version of Glass-Steagall.

Reaching further than doctrine

A close friend recently reminded me about the interlinked nature of geopolitics and finance–something that is even more important to remember as we continue to see a tighter global circle of correlation and sentiment for many investments.

The fall of the Berlin Wall on November 9, 1989 had no less financial impact than ideological or political impact, bringing capitalism to once-communist regions and creating a powerhouse Germany that is the largest national economy in Europe–and a key player in the rescue of Greece and other potentially teetering Euro countries.

The fall of Glass-Steagall was, in some ways, similarly monumental, one decade and three days later. The Gramm-Leach-Bliley Act of 1999, signed into law on November 12, 1999, by then-President Bill Clinton, led us to where we are today.

Will we be better off re-instituting Glass-Steagall tomorrow? What do you think?

Comments? Please send them to [email protected]. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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Once an advisor has that trusted relationship with a client, how can the advisor “go back” to a non-fiduciary relationship? The answer is they can’t.


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