Greg Smith for Time: Viewpoint: How Wall Street Rigs the Game

October 22nd, 2012

October 22, 2012
By Greg Smith




If you watched the recent presidential debates or the Republican and Democratic conventions, you might have gotten the impression that the practices of Wall Street that led to the worst financial crisis since the Great Depression have been fixed. None of the candidates are talking about it. Aside from Massachusetts Senate candidate Elizabeth Warren, politicians are noticeably silent on an issue that still poses a real risk to people’s economic futures: a financial system that is rigged against the ordinary citizen in favor of the banks — and allows the gains to be privatized to an elite few, even as the losses are socialized to everyone in America.

The truth is that the problem has not been fixed. Did you know that four years after the crisis, and more than two years after the passage of “landmark financial reform,” fewer than one-third of the new laws have been implemented and more than three-quarters of the required deadlines have been missed by the regulators? Did you know that the Wall Street lobby has spent more than $300 million trying to kill — or insert loopholes into — key rules that would ensure greater transparency in derivatives and forbid banks from betting against their own customers? Did you know that the nation’s five largest banks are even bigger than they were before the financial meltdown? Unfortunately, the politicians and regulators are buckling. There is a leaking dam, and what lawmakers and regulators have done so far is put a Band-Aid over it.

Who gets hurt when the revolving door between Washington and Wall Street starts turning and both the former chairman of the SEC, Arthur Levitt, and Jake Siewert, former aide to Treasury Secretary Tim Geithner, go work for Goldman Sachs? Or when Governor Tim Pawlenty leaves politics to head up the most powerful Wall Street lobby in the country? Or when big banks like JPMorgan and Goldman Sachs are overwhelmingly funding the campaigns of the very people who are supposed to be making laws to regulate them? The answer is that you get hurt, because your lawmakers get influenced, their objectivity gets compromised, and they lose their ability to ask the hard questions and fix the problem. Witness the recent case of JPMorgan’s losing $6 billion on reckless trades, claiming it was a “hedge” and allowing the executives who ran the group to leave with millions of dollars’ worth of golden parachutes.

(MORE25 Years Later: In the Crash of 1987, the Seeds of the Great Recession)

When Wall Street CEOs are hauled in front of Congress, as Lloyd Blankfein was amid the SEC fraud charges against Goldman that ultimately resulted in a half-billion-dollar settlement with the government in 2010, they tend to make the “we’re all big boys” argument: essentially that because they are dealing with sophisticated investors, they don’t have an obligation to tell their clients when they are getting themselves into trouble.

But whose money are we talking about here? There is a misconception that Wall Street is composed of rich people gambling with other rich people’s money, but this couldn’t be further from the truth. The secret that Wall Street doesn’t want anyone to know is that hedge funds comprise less than 5% of assets in the stock market. The real big players in the market are individual households and the pension funds, mutual funds, university endowments, charities and foundations that are entrusted with your savings, donations, retirement funds and 401(k)s. They are the owners of trillions and trillions of dollars invested with Wall Street banks. So, in effect, you are the big player in the market. And when a Wall Street bank overcharges a teacher’s retirement fund or a charity on a complex product, or misprices the Facebook IPO, causing billions of dollars of wealth destruction, or helps the governments of Greece and Italy cover up their debt, or rigs interest rates affecting trillions of dollars of loans, it ultimately affects you directly and comes out of your pocket.

But how does Wall Street make so much money anyway? Surely there are times when it must lose? Actually, not as often as you might think. Consider this: There are certain quarters when a Wall Street bank makes money every single day of that quarter in its trading business. Yes: 90 days in a row. One hundred percent of the time, it generates a profit. Bank of America has pulled off this amazing feat. That is like batting 1.000. A perfect record. How is this even possible?