Reading Michael Lewisâ€™s latest book, The Big Short, provides not only a fabulous story, well told, but also should put fear into the minds of investors everywhere. The bothersome question that remains is one of just how much trust should anyone place in investment banks and brokers?
Reading The Big Short leaves the impression that nothing coming out of Wall Street should be trusted. Firms like Goldman Sachs were selling their investors investments in subprime mortgages while at the same time shorting them in the belief that the values would plunge. Investment banks were creating pools of subprime mortgages and Collateral Debt Obligations in an apparent reckless manner because the rating agencies were willing to give these securities a high rating. And, the rating agencies were acting irresponsibly in both the manner of investigating the securities and issuing ratings because they were earning substantial profits by providing the ratings. What is astounding is the fact that relatively few people in the investment banks appeared to recognize the level of risk being foisted on the investors through this process. Obviously, the investors were all fools in permitting themselves to be duped by the ratings rather than questioning the composition of the securities they were buying. But that is hindsight. However, the investment bankers should have known better and should have applied the brakes very early on. Why didnâ€™t they? It would seem that the reason was strictly attributable to the tremendous profits they were making from the activity. Despite the big losses suffered by investors and others who held the paper sold by the Wall Street firms, the movers and shakers got their bonuses and continue to get bonuses. The former CEO of Citicorp said in testimony before congress that they continued with the activity because to have discontinued it might have cost market share and/or the loss of key employees. So, is the Wall Street message one of engaging in a foolish activity just because it is so rewarding to some employees or because it raises market share?
Whether or not there was fraud or conspiracy involved in the subprime debacle remains for the regulators and courts to determine. Regardless of the outcome of investigations, the plain fact is that the greed of Wall Street almost caused a total collapse of the U S financial system and systems worldwide. What is curious is the fact that amid continued cries for fewer regulations, the Citicorp executives that testified before congress were quick to point the finger of blame at the regulators for their failure to see the crisis coming and stop the activity causing the crisis.
Stockholders should be completely skeptical of any notion that Wall Street or public companies will regulate or police themselves. That notion defies logic and lacks rational thinking. The motivation of greed can be counted on to take over behavior, particularly when it is other peopleâ€™s money they are betting with. Sadly, all of the traders who contributed to the subprime mess earned big money and monstrous bonuses whether they were ultimately fired or kept their jobs. Only the investors and the public at large paid the price of their folly.