Wall Street's Fishbowl

By Gross, Daniel | Newsweek, February 8, 2010 | Go to article overview

Wall Street's Fishbowl


Gross, Daniel, Newsweek


Byline: Daniel Gross

How banks brought on the scrutiny.

The surviving investment banks are bristling at efforts aimed at recouping taxpayer losses and forestalling a repeat of the panic of 2008: congressional proposals to tax bonuses, President Obama's planned tax on large banks' liabilities, and his suggestion that banks be prohibited from using taxpayer-insured funds for proprietary trading. The latter proposal "will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs," says Steve Bartlett, CEO of the Financial Services Roundtable, the trade group for megabanks.

But if the banks want us out of their business, they should get out of our business first. We've (barely) lived through a 40-year period in which investment banks, which had their origins in partnerships, have imposed themselves on us. They effectively moved into our house, raided our fridge, and set the joint on fire. Now they're complaining that our renovation efforts are cramping their style.

The process began when Merrill Lynch went public in 1971. It was followed by the four other horsemen of the 2008 credit apocalypse: Morgan Stanley (1986), Bear Stearns (1985), Lehman Brothers (1994), and Goldman Sachs (1999). The Gang of Five went public so they could compete with the international banking giants that were encroaching on their core business of underwriting stock offerings and advising firms, and in order to boost their activities in risky, capital-intensive businesses like proprietary trading. "In order to have a capital base that would support the funding they needed, they had to be public," says Roy Smith, a former Goldman Sachs partner and a professor of finance at New York University.

Going public allowed investment banks to get bigger, which gave them the heft to mold the regulatory system to their liking. Perhaps the most disastrous decision of the past decade was the Securities and Exchange Commission's 2004 rule change allowing them to increase the amount of debt they could take on their books--a move made at the request of the Gang of Five's CEOs. Before it went down, Lehman had amassed more than $600 billion in debt. No partnership or private corporation could have accomplished that feat. …

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