Don’t Bet on Big Changes to the Financial Services Industry

Are Wall Street reforms just window dressing?

Did you think it would last, that feeling that Congress and the people were mad as hell and not going to take it anymore?

I refer to the anger over what Wall Street and the banking industry has done to the nation yet again, and the determination they will be brought under control so it can never happen again.

Not going to happen.

The stock market is rallying again. This economic crisis is over. So the need to worry about it happening again in the future, and taking steps to prevent it, has been pushed to the back burner, and will eventually die a natural death. That’s the way it’s been for a hundred years.

Perhaps it’s as Henry Ford said many decades ago, “It is well that the people of the nation do not understand our banking and monetary system, for if they did I believe there would a revolution tomorrow.”

It probably would take that serious a threat before Congress would undertake any real changes that would offend their friends and benefactors on Wall Street.

We don’t have to go back to the events that triggered Henry Ford’s remark. We’ve experienced the cycle of greed/risk/crisis in the financial industry often enough in our own times.

In the early 1980s, U.S. banks piled headlong into high-risk loans to third-world countries, which had almost no hope of being able to pay back the loans, creating the ‘Latin American’ banking crisis. The government bailed them out by issuing so-called Brady bonds (collateralized by U.S. Treasury bonds), to replace the bad loans on their books.

Subsequent investigations revealed the banks overloaded on the loans because they could charge the poor credit-risk countries high interest rates, and saw no risk “because countries don’t go bankrupt”. But to the surprise of the banks, they do fail to make payments, and default on loans.   

In the early 1990s more than 1,400 banks and savings & loans failed, the result of similar excess greed and lack of understanding of risk, piling headlong into easy-credit mortgages and construction loans that fueled the real estate bubble of the late 1980s. The cost to taxpayers of the FDIC cleaning up that mess is estimated between $180 billion and $400 billion, depending on whose numbers you want to believe.

I could go on and on.

Each time, after the damage is done, we see investigations, and assurances that regulations will be imposed to prevent a recurrence.

Only a half dozen years ago, after the damage of the 2000-2002 bear market was complete, Congress, Wall Street, and the regulators, as they always do, expressed shock and surprise at how unfairly the playing field had been tilted against public investors. They vowed they would root out the wrong-doers. Brokerage firms, banks, and individuals who had scammed or misled investors would be severely punished. New regulations would make sure it never happens again.

At the time, in March, 2003, I wrote a column titled “Are Wall Street Reforms Just Window Dressing?” and pointed out why it looked like it.

As we have seen in the current investigations into the aftermath of yet another financial crisis and bailout of the financial industry, yet another real estate bubble that caved in on consumers, yet another bear market that caved in on investors, obviously the supposed toughening of regulations and oversight after the 2000-2002 bear market was just window-dressing, as suspected.

I found it particularly disgusting after the 2000-2002 bear market to learn that analysts who were writing glowing reports on stocks that were being sold to investors, at the behest of their bosses, were calling the stocks “dogs” and “disasters” in their internal e-mails to each other.

And déjà vu all over again, last week it was revealed in a law suit (by hedge fund Pursuit Partners LLC against global financial services giant UBS), that in 2007 in internal memos to each other, UBS employees were referring to the CDO’s (mortgage-backed debt) they were trying to sell to investors as “vomit” and “crap”. The judge in the case issued a decision saying that evidence shows that UBS had an “awareness that high-grade securities on its hands would soon turn into toxic waste.”

What are the odds it will ever change?

Congress has been holding hearings and investigating what brought on the most recent financial crisis for more than a year. It’s considering a bill aimed at toughened regulations and oversight of the financial industry.

But as the Wall Street Journal reported last week “Efforts are bogged down amid infighting between federal regulators, fury among bankers, and opposition from some lawmakers who believe further expansion of government’s reach will only create more problems. Meanwhile, major U.S. banks have regained their footing, and some of their swagger. Profits are off their lows. Large compensation packages are back. And financial companies are again selling exotic financial products similar to those that felled markets and the world economy last fall.”

It seems clear that investors and consumers didn’t get mad enough, or determined enough to make Congress realize that we really won’t take it anymore. And now the market is up, the crisis is over, and they know no one will care all that much what they do.

Until next time.

Read more Stockhouse articles by Sy Harding