Currency Trading

By
William Cohan

(Bloomberg) — On what remains of Wall Street these days, the past year was filled with one opportunity after another to fix the myriad fundamental structural deficiencies—revealed all too painfully by the financial crisis—that continue to plague the country’s large securities firms.

At year’s end, not a single one had been adequately addressed, let alone resolved.

This ongoing failure to act in the face of the worst economic downturn since the Great Depression is especially disappointing since President Barack Obama was elected, in part, on a promise to bring constructive and lasting change to the canyons of Wall Street.

A few weeks after the 2008 presidential election, Rahm Emanuel, newly appointed as Obama’s chief of staff, spoke at a Wall Street Journal conference and reflected on the numerous crises—financial, energy-related and in foreign policy—that the Bush administration had left for Obama to clean up.

“You never want a serious crisis to go to waste,” Emanuel said, “and what I mean by that, it’s an opportunity to do things that you think you could not do before.” The coming changes to the financial regulatory system, he added, should be based upon the principles of “transparency and accountability.”

Emanuel had it exactly right. So did Obama, 10 months later on the one-year anniversary of the collapse of Lehman Brothers, when he addressed business leaders at Federal Hall at the corner of Wall and Broad streets.

Quick Kills

“We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,” he said.

He went on to demand “strong rules of the road to guard against the kind of systemic risks we have seen” and asked Wall Street to join in rewriting the regulations for a new post-crash epoch.

Alas, we still await the reforms that are so desperately needed to prevent the recurrence of the speculative bubbles—and their vicious unwinding—that have become all too prevalent during the last 25 years of laissez-faire regulations and unalloyed hubris and greed among many finance professionals.

Not surprisingly, as Congress dallies, Wall Street has been only too happy to return with all deliberate speed to business as usual. Only now, things are better than ever for it.

Unimaginable Profits

The Wall Street firms that were bailed out thanks to taxpayer largesse—especially Goldman Sachs (GS), Morgan Stanley (MS) and JPMorgan Chase (JPM)—have the best of all possible worlds: little or no regulatory reform, far fewer serious competitors and an absurdly low interest-rate environment that allows them to obtain financing for close to nothing, from the Fed or from the public markets. Through arbitrage, they can then take advantage of widening spreads to reap levels of profitability unimaginable a year ago.

Hard to imagine that in September 2008, Goldman was on its way to following Morgan Stanley down the tubes. Now Goldman is expected to rack up record pretax earnings of around $17 billion in 2009 and to pay out close to $23 billion in employee bonuses, according to The New York Times.

This surely could not have been the intent of Henry Paulson, Ben Bernanke, Timothy Geithner, Larry Summers, Christina Romer et al. as they constructed the various rescue financings and capital infusions that pulled capitalism back from the brink of the abyss. Or was it?

True, some baby steps of regulatory reform are inching their way through Congress.

Not Really

House Democrats, without a single Republican vote, passed a reform bill that would create a new Financial Services Oversight Council to more closely monitor Wall Street behavior, a $150 billion fund to help wind down any large firms that fail, and a watered-down version of a requirement that derivatives trading be done in public. Proclaimed House Speaker Nancy Pelosi, “The legislation says very clearly to Wall Street: the party is over.”

Hardly. No one on Wall Street—save for perhaps the forlorn employees of Citigroup, the last major U.S. financial services firm still owned in part by the government—believes anything remotely close to this. What’s more, the Senate’s version of a financial reform bill is quite different from the House version, and any meaningful reconciliation of the two bills is not likely to happen until well into this year. Party on, Garth.

Light Touch

What is most remarkable about both pieces of legislation is just how light a touch they seem to put on the powers-that-be on Wall Street. On one hand, this is entirely predictable: Wall Street remains superb at lining the pockets of its chief congressional overseers. On the other hand, it is a bitter disappointment.

As but one example, the House bill has a provision requiring the comptroller general of the U.S. to “carry out a study to determine whether there is a correlation between compensation structures and excessive risk taking”—as if there is even the slightest doubt about that fact.

The comptroller general’s report isn’t due until one year after the legislation passes. Oh yes, there is also a provision for a non-binding shareholder vote on the compensation paid to the top five executives of financial institutions of a certain size. Brutal.

What the events of the past two years have made abundantly clear is that we have become a nation of slitherers, adept at blaming others and acts of God for our own stupid mistakes and repugnant behaviors.

Still Waiting

Will 2010 be the year Wall Street takes responsibility for what it did to cause the financial crisis? The American people are still waiting for Wall Street CEOs to explain what happened and why.

Will it be the year when Wall Street’s 40-year love affair with taking outsized risks with other people’s money for its own benefit—begun when Donaldson Lufkin & Jenrette went public in 1970—is once and for all snuffed out? Not likely.

But maybe 2010 will be the year that we finally listen to Paul Volcker, the 82-year-old Obama economic adviser and a former chairman of the Federal Reserve. “I’m very interested in using this crisis as a way to avoid the next one,” he said Dec. 12 in a speech in Berlin echoing his boss. “This isn’t any time to go back to business as usual.”

William Cohan, a Bloomberg Television contributing editor, is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street” and “The Last Tycoons: The Secret History of Lazard Freres & Co.” The opinions expressed are his own.