When historians look back at the financial crisis of 2008 and the Great Recession that followed, they will fix their blame, in part, on the invention of complicated financial products that hid massive risks and spread them throughout the economy. They will record how Wall Street chased short-term gains at the expense of functioning markets, long-term economic stability and the well-being of the financial institutions themselves.
Those future historians will also look at how the government responded to the mess. They will examine whether members of Congress took the serious steps needed to avoid another crisis. The votes taken in the Senate this week will be crucial in determining the answer.
The high-risk trading of these complex and opaque instruments with a firm's own money -- and not on behalf of a client or investor -- is known as "proprietary trading." This trading became an increasingly large share of the business of Wall Street in the last decade. But when those gambles went south, the financial fortresses on Wall Street crumbled, and taxpayers were stuck paying a $700 billion bailout for the bad bets because pension funds, educational institutions, endowments and other institutions would have been severely damaged in the process.
It was no accident that these firms have increasingly focused on trading for their own account instead of serving their clients. The huge amounts of information and capital they control gives them advantages in betting on market trends. There is a lot more money to make if those bets pan out than by simply serving their clients. Of course, as we all have learned, the bets don't always pan out and this strategy carries huge risk.
The increasing reliance on high-risk trading to drive profits also creates enormous conflicts of interest between a big firm and its own clients. As the Senate Permanent Subcommittee on Investigations uncovered, Goldman Sachs traders made huge sums betting on the collapse of mortgage-backed securities that Goldman itself had created and sold to its customers. It's as if Goldman built and sold a car with no brakes and then took out life insurance on the new owner.
Even in the absence of a spectacular collapse, the focus on proprietary trading damages families and businesses. Every dollar spent on trading is a dollar not lent on Main Street. We need our banks to return to the primary business of making loans to businesses and consumers who can get our economy rolling, not operating their own trading desks.
This week we have the chance to address the problems caused by these hazardous investments in three ways. The Merkley-Levin amendment restores the wall that keeps high-risk investing out of commercial lending banks. It requires greater capital requirements at investment banks to protect against losses. And finally, it eliminates conflicts of interest, such as those we saw with Goldman Sachs, in which bankers package and sell a security, and then bet against it.
We can enact these common-sense rules of the road, while preserving the flexibility that financial firms need to conduct business. But we can only do it if Americans tell their senators loud and clear that it is time for a change.
Wall Street opposition to reform is no surprise -- the old system worked out pretty well for them. In the short-term, they made profits through risky bets. When those bets went bad, they were bailed out.
Thus, there is little downside for banks in keeping the existing rules on Wall Street.
But there is huge downside for Americans. We have barely begun to recover the jobs and savings that were lost. History can't be allowed to repeat itself.
The vote this week will answer a critical question: is Congress on the side of the American worker who lost so much in the Great Recession or is it on the side of the Wall Street firms that put all of us at risk?
We need every American to make their voice heard and send a message loud and clear: the days of Wall Street recklessly betting against our futures are over.
Follow Sen. Jeff Merkley on Twitter: www.twitter.com/SenJeffMerkley
Proprietary trading - Wikipedia, the free encyclopedia
Proprietary Trading Firms - Prop Trading Firms - Traders Log
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Best analogy I've seen.
It isn't gambling, it's fraud. Put them all in jail. WS and all the rest of the corporations have turned into big, government protected monopolies with no competition. They want to pig out on their profits, no taxes please; and they want taxpayers and consumers to eat their losses. Too big to fail has become as American as apple pie. It is time for real reform on WS and in Washington. Either two-faced Obama and the Democrats step up, or they will get shown the door. We will primary you from the left until there is no place left to hide. Too bad we missed Lincoln by an inch.
I say:
Effem! Make them bring in the cots. Make the GOP (and a few Dems!) explain why they are choosing wall st over the American people with an all nighter!!!!
Unfortunately, hidden in the message is still the central theme that deflation is a bad word. The idea that we can, or should, prevent deflation from occuring because it causes "damage" to our society is an absurdity. Investments have risk. Some investments will go down in value. If all investments go down in value because of wide spread fraud that is not a failure of capitalism or free markets, but instead a government that will not enforce the Rule of Law.
Senator Merkley needs to take it step further. Demand the closure of the banks that went bankrupt in September 2008. Demand that the Rule of Law be enforced ... even if those rules also apply to wealthy campaign donors, important corporations, or bloated public employee unions. Until we restore the Rule of Law ... those so willing to violate it will continue to abuse the system.
Think about the financial crises and the excessive, irresponsible risk taking that caused it. Now consider the oil spill in the Gulf of Mexico, which also reflects a good deal of irresponsible risk taking at its root cause. Finally, think of the recent mine explosion in West Virginia. Again, abysmal risk management was at fault.
To address that which led to all these instances of poor risk management, one needs to look at the lack of commitment at the very top of the Executive Branch during this and previous Administrations dating back to Reagan.
The concept of "deregulation" meant more than merely failing to promulgate rules, it meant failing to enforce the rules we already have on the books.
Arguably, none of the three instances cited above, nor even the passage of Arizona's immigration law, would have taken place if vigorous, effective, even aggressive law enforcement had been in place.
It is time for the Federal government to do its job and enforce the law. Merely passing legislation and promulgating regulations do not of themselves create the deterrence against misconduct or irresponsible risk management that lies at the root of many of our most serious problems.
Kill the big banks? We should be so lucky.
1. Alan Greenspan (and his accomplice Ben Bernanke) having the Federal Reserve pumping too much money into the economy. This drove interest rates too low and asset prices (i.e., housing) too high (can you say "bubble"?).
2. Barney Frank and Christopher Dodd foolishly pushing their Brave New World of universal housing through the two disasters known as Fannie Mae and Freddie Mac which have now cost taxpayers $145 billion. This is the same Christopher Dodd who refuses to disclose his own sweetheart Countrywide mortgage deals. This is the same Countrywide which made piles of money selling mortgages to Fannie Mae and Freddie Mac.
Question for the distinguished senators: Why doesn't your "reform" deal with the Fannie Mae and Freddie Mac disasters, preferably by liquidating them and turning this business over to the private sector? Could it be because these two taxpayer-supported over-leveraged hedge funds were and may yet again be campaign cash ATM's for prominent Congressional Democrats?
Congress must implement crisis economy formation measures now, or this great nation is doomed.
What will reform look like?
There is no ability "to drive up stocks and dump them", you drive it up when you buy and drive the price down when you sell. You would get killed if you tried to do this. The more you have, thw worse the effect would be.