Thursday, April 26, 2012

WALL STREET - Behaviour Change?

"After the Fall: How Has Wall Street's Behavior Changed?" (Part-2) PBS Newshour 4/25/2012

Excerpt

JEFFREY BROWN (Newshour): Next: "After the Fall." We continue our look at what's changed since the financial meltdown of 2008, our focus tonight, Wall Street in the wake of laws passed to regulate it more tightly.

The biggest change in the wake of the financial crisis, the so-called Dodd-Frank regulations, passed with mostly Democratic support and signed into law by President Obama two years ago. Intended to prevent future meltdowns, the law created new oversight agencies, including one to examine financial products for consumers and another to reduce systemic risk to the banking sector from institutions considered too big to fail.

It also imposed new capital requirements on banks to limit their exposure to debt and avoid costly bailouts, brought risky shadow banking activities onto open exchanges under the watch of government regulators, and placed restrictions on banks making bets with their own money while engaged in consumer lending, known as the Volcker rule.

But the new regulations have had critics from the start, including financial institutions that argue the restrictions are excessive and are having a negative impact on even solid banking practices, to the detriment of the overall economy.

So what's changed and what hasn't?

We hear from Lynn Stout, professor of corporate and business law at Cornell University, Mohamed El-Erian, CEO of PIMCO, a global investment management firm and the world's largest bond fund, and Peter Wallison, senior fellow for financial policy at the American Enterprise Institute. He served in the Treasury Department in the Reagan administration and as a member of the Financial Crisis Inquiry Commission.



Significant excerpt

LYNN STOUT, Professor, Cornell University: What we're dealing with here is the fact that the banking industry and the financial industry changed fairly dramatically over the past 20 or 30 years, and not in a healthy direction.

Twenty or 30 years ago, banks and investment banks were primarily involved in the capital-raising business. They helped connect up savers with entrepreneurs who were building new projects, building new companies. That was a very socially valuable activity.

But over the past '80s, '90s, and into 2000s, what happened is that the financial sector increasingly moved away from its basic and important capital-raising function, and became a trading center, where people were just passing securities back and forth, trading bits of existing businesses or even trading derivatives on businesses.

And that's not a business model that can sustain itself. It was great for a short-term party, where a lot of people got rich for a while. But at the end of the day, when you're just trading things back and forth, and you make your money by trading in an advantage relative to the other person, that's a zero-sum game. That's not a way to -- towards sustainable growth.

And, eventually, Wall Street cannibalized its own customer base. There really aren't people out there with the money to spend and the interest in trading that there used to be. And I think the Wall Street firms are having a real problem adjusting to the idea that trading isn't their lifeblood and can't be in the long run. They have to go back to their old capital-raising function. And they're having a problem doing that.

COMMENT: The REAL issue is banking ethics. Today they are taking big risks with YOUR money (corporate, retirement funds, investors in general) NOT their own. AND they were doing it in a NON-TRANSPARENT manner.

Why? GREED, they just make more money using this method. They behave as if they have no ethical prerogative to protect the money of clients, they ONLY focus on company profits.

Note this is the attitude presented by Peter Willison, American Enterprise Institute....

The world has gone from a world in which loans were made by banks or capital was raised by banks through selling shares for companies, to a world in which most companies are now accessing the capital markets to finance themselves.

....and he sees no ethical problem with that.

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