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 FT.com 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, BusinessWeek.com 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.April 12, 2010 Investors in 401(k) plans who are frustrated by proprietary funds, opaque high fees, revenue sharing and sub-par performance are starting to get overtures from lawyers who are gathering investors for class action suits against 401(k) providers…. Six Choice Pieces of Fiduciary Misinformation March 18, 2010 There is a great deal of chatter surrounding the fiduciary movement that is just plain incorrect–as in, not fact–whether from ignorance or deliberate obfuscation. Why Shouldn’t Investors’ Best Interests Come First? February 25, 2010 Are Senators strong enough–and do they have enough integrity–to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide advice to retail investors?… Greater Good: The Unintended Consequences of Repaying TARP January 29, 2010 Did the requirement to repay TARP funds in order to pay bonuses for 2009 prompt some banks to repay the bailout funds too early? … Smart Money January 19, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, “…we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors.” … Ever Hopeful December 29, 2009 As we emerge from a challenging economic crisis, there is reason to hope that changes and opportunities we will see in this new year–some as a direct result of the economic crisis–will be positive…. Schapiro’s Call for Fiduciary Standard Reflects SEC’s Original Mandate December 07, 2009 “I believe that all securities professionals should be subject to the same fiduciary duty,” says SEC Chair Mary L. Schapiro…. Mr. Dodd’s Message from Washington November 16, 2009 Now that we have heard from both the House and Senate committees on finance and banking about investor protection, let’s not misinterpret what they are saying. Can the DJIA at 10,000 Inspire “Animal Spirits?” October 16, 2009 The Dow Jones Industrial Average hit a year-to-date high and jumped above 10,000 on Oct. 14, and the next day hit another high of 10,062.94. Unless you are short, this is good news for you and for your clients. “Federal” versus “Authentic” Fiduciary Duty October 08, 2009 Both investment advisors and broker/dealer registered representatives routinely give financial and investment advice to clients. What is still different is the rules that protect those investors…. Are you Ready? September 22, 2009 Financial reform is around the corner. How will it affect you and your clients? The Capital is abuzz with discussions regarding re-regulation of financial services, something that the Administration wants to see passed by year-end…. “Trust Doesn’t Come and Go”
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.