Game Change

It's been over 18 months since the Crisis hit us full force in September 2008. At that point, when the government had to step in and prevent a crisis by injecting liquidity into the major financial institutions in the US (which is not the way the financial institutions would recount the story, by the way), many of us said this is surely going to change things. How could it not? Secretary Paulson and his Treasury staff went to inordinate lengths to prevent a complete meltdown of the markets, which looked imminent in that first week of September, and indeed, not many days later, the credit markets completely locked up. Money was not flowing from anywhere except the Treasury. Trust in our markets had been shaken to its roots, and not only here at home, but around the world. It was pretty scary, even to those who had spent their lives in the financial world.

Discussions I had with my friends around that time and several months thereafter focused on thoughts of how things were going to change: "Wall Street will have to change the way it's been doing business" and "this will force people to take another look at the way they live their lives - pursuing the almighty dollar." Many of us were hopeful that finally the Naked Emperor that was Wall Street would be seen for what it was - simply a source of money, not a producer of goods. Why should the financial markets be nearly half of our economy - it didn't make sense. What, as Paul Volker has argued, had financial firms done to help the economy since creating the ATM?

After reading and learning about exotic derivative instruments that helped bring down the markets, I and many others (including Warren Buffet) questioned that these instruments did anything for anyone other than make money for the investment banks that created and sold them (and made money more than one way in the same transaction). The investors (as has been painfully evident) did not benefit (at least in the same way) most of the time.

But it seems apparent that Wall Street hasn't gotten it, and is vehemently opposed to change. At least that's what you'd have to take from the hordes of lobbyists on Capitol Hill at the moment, trying to subvert the financial reform legislation that is trying to make its way through Congress. I've heard people say, You can't rush this kind of thing through. Look at what we did after Enron! They are referring, of course, to Sarbanes-Oxley, the financial reform legislation that, heaven forbid, made chief financial officers of public companies annually review their internal controls and attest to the effectiveness of the internal control structure and procedures of their company for financial reporting. That's the kind of legislation I am in favor of.

One could argue that SOX, as it's commonly known, created an annuity for accounting firms, but I would argue, accounting firms already had an annuity in that public companies needed to have audited opinions to be listed and traded on an exchange. As an investor and long-term shareholder, I think SOX made things better. And I refuse to listen to the complaints of how much SOX cost and continues to cost companies - I am very happy to have my company spend a few million making sure that their internal controls work, and that people are being held responsible for the financial health of the company.

But I digress. To counter the critics: The financial reform legislation now in Congress arrived TWO YEARS AFTER the Crisis. That's not really rushing something through. The National Institute of Finance group of volunteers who developed an idea for an Office of Financial Research, to help try and identify systemic risk issues ahead of the next crisis, spent a good year working on their proposal before it was included in the Dodd legislation now before Congress. There is some criticism that the reform legislation is trying to fix something for which the cause of the problem is not known. I think that's fair criticism, but on the other hand, as my co-blogger and I have written, there is some pretty decent evidence that the shadow banking market was largely to blame for the regulators having no idea of what was going on from a transactional point of view in the financial world in the lead up to the meltdown. But wouldn't you know, it is the legislation that tries to bring transparency to that shadow market of over-the-counter derivatives, that is the piece of legislation that is getting the most attention from lobbyists, who are all trying to create loopholes in that particular legislation for their clients.

Is there any hope to change the game of Wall Street? I like to be optimistic, but at the moment, I'm finding it hard to find the sun shining anywhere on Capitol Hill.