There is a news item at the NYTimes that confirms in no uncertain terms what has become abundantly obvious – Wall Street will not regulate itself. Not only that but Wall Street cannot rescue itself when it gets into trouble. The whole reason the banking system is failing now is that a)no financial institution trusts any other; b)no financial institution has been able to make known in an unambiguous and irrefutable way it is clear of any “toxic” liabilities; and c)no financial institution has been able to determine with certainty the exact status and worth of the many derivative instruments making up huge portions of its asset base. And by huge I mean there worth is a significant fraction of the financial institution’s capital base
So we have the current sub-Prime Fiasco as a repeat performance of the Saving and Loans Debacle stretching from the late 1980’s to the mid 1990’s. These incompetencies are important because of two reasons. First, Wall Street says it deserves the huge returns it makes because it delivers on fiduciary trust to clients. But fiduciary trust implies a good deal of self-regulation and an ability to recover of itself which the Street has proven time and again that it is incapable of doing. Second, Wall Street says it deserves the huge annual pay packets amounting to hundreds of millions of dollars if not billions accorded to a few private equity managers because it manages risks better than anybody. But we have a mess that Wall Streeters, who are paying themselves as if they are near nigh infallible in their financial and risk managing astuteness, have blundered full greedy guts into and now leave taxpayers to clean the upchuck. “Oh and when you get it cleaned up don’t think of regulating or prosecuting us…. regulation is bad, prosecution is impossible.”
So of even greater import is the matter of how well Wall Street has managed risk.Wall Street from Investment Bankers through Private Equity to Hedge Funds has proven not just inept but totally incompetent at managing risk. Wall Street Financial Institutions are running at leverage ratios of debt to capital of not ten times but for the past 6-10 years of 30-50++ times. These are very risk prone levels. Wall Street has been relying on CDS, CDOs, and a host of other derivative instruments that a)are hard and complex to understand and value(just ask the rating agencies), b) are subject to “boundary value problems” that make their behaviour in extreme conditions hard to predict and c)simply have not been tested for all possible market conditions and exigencies; c)Wall Street has been using computerized automated trading that has increased the variability in the market place and creating dangerous fluctuations and trading seize-ups; and d)Wall Street has bent the rules in its favor. Due its riches and huge lobbying power, Wall Street has managed to deflect, water down and utterly dismiss regulatory safeguards and oversight. Even worse with private equity and huge unregulated derivative instrument markets, Wall Street has managed to create literally secret financial enclaves for which the rles of the road are set by contractual agreements among the players themselves. The Economist has warned of the problems with theDark Markets.
Yet for delivering not less but increased risks and ever greater financial bubbles, Wall Street demands outsize returns on investment and pay for their top officers that are not just 30-40 times but stretch to 300-400 times the average pay in their organization . <u>Six Sigma says that when you achieve 99.9999% operating effectiveness, you are making virtually no mistakes whatsoever</u>. That is to say that you are operating at 6 standard deviations better than the average. Such an operation deserves 6 times the return or equivalently 6 times the average pay – so how in the world does Wall Street and its executives deserve the returns and compensation they are currently granting to themselves?</u>
In the current crisis, Wall Street has degenerated into rapacious, dog-eat-dog Darwinian-survival-of-the-fittest world=> Bear Sterns goes for $2/share. WaMu for not much more. Merrill shotgunned into merger. Lehman left to capital wither and fail. And fortunes made short selling bailouts of Fannie Mae and Freddie Mac. Do these gals and guys deserve outsize returns, pay-packets, no regulations and a bailout ??? Please a fifth of sense should be applied here.