Have you heard the “good” news?
The End of the World is nigh. Saturday, May 21 to be precise. Uh oh—that’s today! So if you feel any rumblings while reading this—my apologies. According to the co-founder of Family Radio network, the nearly century-old Harold Camping is predicting “the Rapture” will begin this week and in five months the world as we know it will officially end. This would be a surefire way to end humanity’s problems. Oh, if it were only that easy…
In non-religious terms, the “Rapture” is the transformation from one sphere of existence to another. This very well may become the fate for Wall Street professionals and financial institutions in line for the new wave of criminal prosecutions.
Hedge Fund CEO, Raj Rajaratnam‘s conviction on 14 counts of insider trading has emboldened the federal prosecutor’s office in New York to pursue other firms. The use of wiretapping for Wall Street trials, normally reserved for mafia racketeering, reveals the place the industry has taken in the minds of the legal system and the public.
This view of the formerly esteemed financial industry is a tragic shame. Wall Street should be the partner of Main Street. In a more perfect world, both Streets would be connected through a symbiotic relationship where financial innovation supplies the citizenry with jobs and capital. Unfortunately through the past decade, Wall Street has once again become the enemy of the people.
Why? Mortgage market madness.
In the eyes of observers, Wall Street cooked up an ingenious scheme to manipulate Main Street’s financial weakness and caught unsophisticated citizens in its trap. No matter how much the industry avoids responsibility and blames ordinary homeowners for current economic struggles, few are buying it.
Articles like: Why isn’t Wall Street in Jail? are popping up all over. New books and movies continue to retell the story that the Street wants to forget. On May 23, HBO will present “Too Big To Fail” based on New York Times writer, Andrew Sorkin’s book. The film replays the events over the fateful weekend of Lehman Brothers’ collapse. A May 24 release of Reckless Endangerment, How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by journalist Gretchen Morgenson, details the regulatory failure that allowed the crisis.
With the unilateral help of the American government, Wall Street now owns Main Street – free and clear. Yet there is a high price to pay for this extreme negligence and indifference. Never underestimate the wrath of a public scorned. Enter Goldman Sachs.
Goldman is once again being called on the carpet by the U.S. Senate and the U.S. Prosecutor’s office. The once venerable investment bank Goldman Sachs no longer exists. In its place is a scorned, ridiculed bank-holding company that has come to symbolize Wall Street excess.
Rolling Stone’s Matt Taibbi has been relentless in his pursuit of the “great vampire squid wrapped around the face of humanity.” Accusing the firm of “relentlessly jamming its blood funnel into anything that smells like money,” Taibbi is probably singlehandedly responsible for inspiring public hatred of the once revered bank. New York Times writer, William Cohan describes the firm in his new book, Money & Power as a “symbol of immutable global power and unparalleled connections, which Goldman is shameless in exploiting for its own benefit, with little concern for how its success affects the rest of us.”
Recently, I mentioned to an interested colleague that Goldman (a former client) was one of the better managed firms (in terms of risk) during the mortgage market boom—all being relative of course. She winced and stared at me exclaiming, “Goldman? The Evil One?” For better or worse, Goldman has become the poster child for Wall Street “evil.”
An anonymous private equity investor says of Goldman’s business practices: “They view information gathered from their client businesses as free for them to trade on … it’s as simple as that. If they are in a client situation, working on a deal, and they’re learning everything there is to know about that business, they take all that information, pass it up through their organization, and use that information to trade against the client, against other clients…I don’t understand how that’s legal.”
It’s legal, because it is standard operating procedure for Wall Street finance. It even has a name: “The Big Boy Model.”
To understand how deeply this model is accepted in the industry, a portfolio manager at this week’s Conscious Capitalism conference at Bentley University defended the strategy and explained that “big boys” are “sophisticated investors.” His assertion proves that no matter how “conscious” a finance professional may be, they remain unconscious to the growing trend that the rip-your-face-off code behind the Big Boys of Wall Street is being challenged, and further still—prosecuted.
Behind last year’s SEC investigation of Goldman’s Abacus CDO deal was the Big Boy model. Goldman was accused of deliberately wrapping bad debt into an investment vehicle to sell to its own client, German bank, IKB. The firm was forced to pay over half a billion dollars to settle the case, while admitting no guilt. Senator Carl Levin, (D-Mich), head of the investigating subcommittee, has dug in again and released information on other Goldman deals. This time the feds want blood and an admission of “guilt.”
According to financial industry giant, Ralph Schlosstein, co-founder of BlackRock and current CEO of the investment bank Evercore, the buyer beware model that fueled the mortgage meltdown is being reexamined.
Schlosstein explained: “Traditionally, the relationship between Wall Street and its big clients has been based on the ‘big boy’ concept. You are dealing with sophisticated investors who can do their own due diligence. For example, if CALPERS (California Public Employees Retirement System) wants to buy something that a major bank is selling short, it’s not the bank’s responsibility to tell them. On Wall Street, this was the accepted way of doing business.”
In the case of public pension funds like CALPERS, if the fund manager makes a bad investment, state laws kick in and the taxpaying public picks up the bill. CALPERS represents the retirement funds of unsophisticated investors like teachers, firefighters, police, and social workers whose losses were footed by cash-strapped Californians. Big-boys are not supposed to be unsuspecting public workers or ordinary taxpayers. Yet these are ultimately the victims of Big-Boy deals.
This accepted way of doing business is also being challenged by the industry itself. One of the biggest big boys out there, pension fund PIMCO (Pacific Investment Management Co.) has joined forces with even bigger boys, the NY Fed, Blackrock, and Metlife to sue Bank of America for lack of disclosure of subprime mortgage securities sold to them by Countrywide Financial. It seems the times are changing indeed. What will Wall Street do to earn a living if it can’t “rip the face off” the rest of us?
Perhaps, it’s time to provide real value for dollar value. I know that might sound freaky to a survival-of-the-fittest culture like fixed income, but the new century is upon us. The subprime mortgage debacle that resulted in a global economic meltdown has officially signaled that the robber baron revival is dead. It is time to retool and prepare yourself for the transition toward a new way of doing business: constructive finance rather than destructive trickery.
The financial industry is the last holdout to incorporate social responsibility in its for-profit model. If the U.S. Attorney wants to pursue Goldman for criminal charges on deceiving clients and customers while betting against their interests, the entire industry is suspect.
This strategy was (and continues to be) standard procedure at all of the big firms including now defunct Lehman Brothers, Bear Stearns and Merrill Lynch. Also included in this scenario are the big commercial banks: Wells Fargo (Wachovia), JPMorgan Chase (Washington Mutual), Bank of America (Countrywide), Deutsche Bank, Barclay’s Capital, RBS, UBS, and CDO King Citigroup. Somehow Goldman rival, Morgan Stanley snuck by the regulators and let GS take the hot seat. However, the U.S. Justice Department is beginning to catch up with all of these firms. It is only a matter of time before their emails are subpoenaed as well.
The Big-Boy model is an industry-wide issue and an American problem. Not only are individual firms under fire, a light is shining on the entire U. S. financial system. The business model that deliberately entraps victims has served finance for decades. This outdated strategy is increasingly challenged by industry peers, lawmakers, litigators, and the public.
Judgment Day for the primitive 20th century Wall Street “big-boy” model has begun.
Big Boys don’t cry, do they?
Monika Mitchell is an expert on financial reform and co-author of the soon-to-be-released “Conversations With Wall Street:The Inside Story of the Financial Armageddon and How to Prevent the Next One” (Summer 2011)
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