[R-G] [BillTottenWeblog] What's Really Bankrupt

[Bill Totten]

The Wall Street Model: Unintelligent Design

by Pam Martens

www.counterpunch.org (September 20/21 2008)


Wall Street is collapsing not because of bad mortgage debt or lack of
capital or over-leverage.  Those are merely symptoms.  Wall Street is
collapsing because it deserves to collapse; it needs to collapse in
order for America to survive.  The economist Joseph Schumpeter called it
creative destruction, a system where outdated models collapse to make
room for new innovation.

Wall Street of the past decade never really had a business model as much
as it had a business creed: greed is good; leveraged greed is even better.

The fact that Wall Street is collapsing is a given.  How it survived as
long as it did under its corrupted model is the question that will be
debated in history books for the next generation.

For example, imagine a business model that bases remuneration to brokers
on how much money they make for their Wall Street employer and not one
dime for how well their customers' portfolios perform.  A Wall Street
broker receives remuneration that rises from approximately thirty to
fifty per cent of the gross commission based on their cumulative trading
commissions with zero regard to how well the clients' accounts have
done.  There is no acknowledged internal mechanism in any of the major
Wall Street firms to gauge the overall success of the accounts the
broker is managing.

The industry has been irreconcilably incentivized to corruption just as
brokers have been socialized to silence.  The reason we are seeing a
stampede this week into US Treasury securities is that much of this
money belonged there in the first place, not in esoteric mortgage backed
securities, junk bonds, commodity funds or annuities backed by AIG.
Brokers put their clients' "safe money" in these unsuitable investments
because their Wall Street employer dangled a seductive financial
inducement.  A broker receives less than $1,000 in gross commissions
("gross" meaning before their firm takes their fifty to seventy per cent
cut) on $100,000 of longer dated Treasuries.  Putting that same $100,000
in a junk bond or mortgage-backed security or annuity could generate
$3,000 or more.  In other words, the financial incentive has created an
artificial demand.  And, as must inevitably happen, the true state of
that demand is just now catching up with the true glut of supply.

What would be the incentive for Wall Street firms to offer higher
commissions for some products over others?  Because on top of their cut
of the brokers' commissions, they receive origination and syndication
fees for the more esoteric investment products.  These firms so despised
the low-paying Treasuries that they replaced Treasuries with Freddie Mac
and Fannie Mae paper in mutual funds bearing the name "US Government
Fund".  (This misleading practice and the fact that billions of dollars
of public money resided in these misnamed funds has certainly played a
role in the government's decision to nationalize Freddie Mac and Fannie
Mae.)

Then there is the insane model of bringing flim-flam new businesses to
market.  If we look at the people who are at the helm of today's
collapsing Wall Street, they have shifted in their chairs, but they are
mostly the same conflicted individuals who brought America the NASDAQ
bust that began in March 2000 and evaporated $7 trillion of American
wealth.  There is no longer any incentive on Wall Street to bring about
initial public offerings of only companies that will stand the test of
time and create new jobs and new markets to make America strong and
globally competitive.  There is only an incentive to collect the
underwriting fee and cash out quickly on private equity stakes.

Next is the corrupted model of housing a trading desk for the firm
inside the same company that is supposed to issue unbiased research to
the public.  For example, let's say that XYZ Brokerage buys a big stake
in ABC Company on its proprietary trading desk (the desk that trades for
profits for the firm) on Wednesday afternoon.  On Thursday afternoon, it
could almost guarantee profits for itself by issuing a research report
upgrading the stock.  Conversely, it could short the stock on Wednesday
and issue a negative report to drive down the price on Thursday, also
guaranteeing itself a profit.  Other than a fictional Chinese Wall,
there is absolutely nothing to stop this type of public looting.

Now, ask yourself this.  With the multitude of other ways that Wall
Street has to make money, why are they allowed to have their own trading
desk while simultaneously issuing conflicted research to the public?
After the NASDAQ scandals that revealed Wall Street issuing biased
research for personal profit, why weren't proprietary trading desks and
public research issuance shut down at these firms?  There are plenty of
boutique research firms to fill the void.  The only conclusion to be
drawn is what Europe is calling "regulatory capture" here in the US.
That's a phrase similar to what Nancy Pelosi was calling "crony
capitalism" on Wednesday, September 17 before she decided to join the
crony capitalists at a microphone on Thursday, September 18 to promise
bipartisanship on the mother of all bailouts to Wall Street.

This unintelligent design business model would have cracked and imploded
long ago but for one saving grace:  it came with its own unintelligent
design justice system called mandatory arbitration.  Gloria Steinem once
called mandatory arbitration "McJustice".  It's really more like Burger
King; Wall Street can have it their way.   In a system designed by Wall
Street's own attorneys, arbitrators do not have to follow the law, or
legal precedent, or write a reasoned decision, or pull arbitrators from
a large unbiased pool as is done in jury selection.  Industry insiders
routinely serve over and over again.  Had there been ongoing trials in
open, public courtrooms, the magnitude of the leverage, worthless
securities, and corrupted business model would have been exposed before
it brought America to the financial brink.

That Wall Street and its Washington coterie are still embraced in
regulatory capture and unintelligent design is most keenly evidenced by
the recent merger of Merrill Lynch, the brokerage/investment firm, with
Bank of America, the commercial  bank, and ongoing discussions to merge
Morgan Stanley, the brokerage/investment firm with a commercial bank.
(Memo to Enemy Combatants Against Taxpayers aka Wall Street/Washington:
this new model is the failed model of Citigroup.  Why do you hate America?)

Make no mistake that whatever the dollar amount announced next week to
funnel into an entity to buy bad debts from banks and Wall Street firms,
it won't be enough.  It's a Band-Aid on a malignant tumor.  That tumor
is Credit Default Swaps (CDS) with over $60 trillion now owed through
secret contracts in an unregulated market created, financed and owned by
the unintelligent design masters, Wall Street firms themselves.  (See
"How Wall Street Blew Itself Up", CounterPunch, January 21 2008.)

There is no sincere plan by this administration to help America or
Americans.  There is only a plan to slow the financial collapse until
after the November elections by throwing a politically palatable amount
of money at it and a plan to continue to blame it on a housing bust.

If we, the American people, allow this to happen, we're enablers to the
unintelligent design model.  Before one more penny of our taxes are
spent on this ruse, we must demand a seat at the table (I think Ralph
Nader should occupy that seat) to discuss breaking up Wall Street,
crushing this model, innovating a sensible model that serves the
individual investor and deserving businesses, and promises our children
a future of more than a banana republic.

_____

Pam Martens worked on Wall Street for 21 years; she has no securities
position, long or short, in any company mentioned in this article. She
writes on public interest issues from New Hampshire. She can be reached
at pamk741 at aol.com

http://www.counterpunch.org/martens09202008.html


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