Still, the outrageous swindling and chicanery of Wall Street financial companies, coupled with obscene compensation given out to executives who wrecked their own companies, ruined investors and drove the economies of the world to the brink of disaster was (it seems too little to say) hard to deny or defend. The fact is a bunch of rat finks made themselves filthy rich by exploiting a system which allowed them—no begged them—to pass the risk to others and keep the benefits for themselves.
In Margin Call, a fictional movie about the same subject, the head of an investment firm—played with elegant ruthlessness by Jeremy Irons—sagely notes, "There are three ways to win in this business: Be first, be smarter, or cheat." In the 2000s Wall Street cheated. Risk, as I once wrote, is the price investors pay for seeking profit. Risk can be controlled; but the only way it can be eliminated is to cheat. Wall Street sought to make high profits at little risk. So, being the greedy but craven bunch they were, they cheated.
They were able to cheat because of wrong-headed deregulation, lack of enforcement of laws which did exist, obscurely complex investment creations, perverted incentives, and failure at the highest levels of government to do anything to challenge the problem, including turning off the flow of cheap money that fueled the binge.
It is jaw-dropping, given the abuse of deregulation by Wall Street, that their lobbyists are still to this day chirping the free market song in brazen resistance any to real reform.
Now, I believe in free markets, until they start sending us over the brink of oblivion. But the problem isn't really markets per se. In a pure sense a market is a good thing: An open arena of up-front, transparent buying and selling where deals and profits are sought and the shrewdest traders and investors win. Nothing is wrong with that.
Wall Street, at least as practiced by these major investment banks in the 2000s, wasn't really a market anymore. It was casino where the odds were so slanted to the house that the game wasn't even fair anymore. Here were the rules of the game: Investment firms sought profit by engaging in risky investments. If the investments succeeded, they won. If they lost, they still won because someone else got stuck with the risk. And even if the risk did come home to roost the top players had already pocketed their bonuses and deployed their golden parachutes. Heads I win, tails you lose. These rules have not changed much yet.
A lot of outrage is expressed over the compensation of financial executives. But that compensation doesn't bother me except to the extent that it motivates those getting it to indulge in practices which threaten the rest of us. I don't care how rich someone gets. It's no skin off my nose unless what he does is destructive Unfortunately, it's more than clear it is. There is so much money lying around that the feeding frenzy threatens to destroy the whole food chain. If that's not a situation that begs for common-sense regulation I don't know what is.
Markets are self-regulating in the sense that if something is a bad investment, eventually investors figure it out and stop pouring money into it. No human organization could manage the millions of actions and reactions which automatically set prices in the market place. The Soviet Union tried, and collapsed under the burden. The beauty of a free market is that much of it actually is self-regulating.
But market participants aren't self-regulating. I'm a trader and I know. There is nothing more unhinged than the average trader or investor wide-eyed with greed or hysterical with fear. The most basic, raw, selfish human emotions can consume those who engage in the financial game. Forget for a moment about regulation to protect the rest of us. They need it to protect themselves.
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