THE BLOG
02/04/2009 05:12 am ET Updated May 25, 2011

No You Can't -- Why Wall Street Management Refused to Question Good Results

Satan's little helpers are alive and well. Their names are Greed and Avarice and their sins have proven deadly. Every financial institution sucked into the vortex of the economic crisis walked precisely the same road - they put unchecked and unadulterated greed ahead the interests of depositors, shareholders and the stability of the global economy. Wall Street truly turned to the dark side.

As President Elect Obama prepares to take office, global financial stability continues to go to hell in a hand basket. Jump starting the economy will only help if the financial system is properly restructured. Some say the definition of insanity is making the same mistake over and over while expecting a different result. If Obama doesn't fix what is broken in our regulatory system, it won't matter what kind of stimulus package is launched. All we will have is economic Groundhog Day over and over again.

The most important question the new administration must ask is a philosophical one - why was Wall Street management so completely unwilling to question good results? This is a misleadingly sophomoric question to ask and seductively easy to answer too quickly.

Pressure to make more money, increase shareholder value, and feed the bubble is part of the explanation. Money managers around the world violated all sense of responsible investment strategy and stayed top heavy with mortgage-backed securities because of the collective chant that the real estate market would shoot to the moon forever.

Why else was management so unwilling to question good results?

1. Because no one truly understood the devilish details of how money was being made except for the geeks making rubber band balls while they created these products.
2. Because the thinkers advising our fearless leaders were too self interested to reveal what was really going on.
3. Because regulators weren't equipped to handle the volume of new product complexity which left them unable to ask management salient questions.
4. Because Wall Street management wasn't forced to.
5. Because everyone was afraid to ask, "What if?" out loud.

How could Bernie Madoff engage in such massive criminal behavior for so long without being exposed? Let's face it, investors had plenty of warnings that his returns were too good to be true. This occurrence demonstrates that Satan's little helpers worked overtime to feed the investor's appetite for toxic products that yielded "good" returns. In this case, the toxic product was presented with the illusion of safety and security. Madoff's track record was unrealistically steady and investors went with him anyway, directly as a result of management's unwillingness to question good results.

Did due diligence red flags wave? You bet they did. Here, due diligence would have meant to verify Madoff's success using sources outside of the country club gossip flow. It would have meant analyzing historical returns by requiring independent verification apart from Madoff. It would have meant that the watchers on Wall Street would have examined the investment thesis to see if it made any legitimate business sense once it was being questionably launched on "sophisticated" investors. It would have meant that management and regulators would not have been afraid to carefully scrutinize such good results.

Responsibility for due diligence doesn't stop after the cash is invested or historical returns are tallied. Due diligence requires an ongoing, careful analysis of not only what you are investing in, but what you are hawking, depending on which side of the Street you play.

Despite national exhaustion, we face this new administration with gritty determination to keep going, even though teams of economists have analyzed the ugly data to let us know that we should be depressed for a very long time.

Do we really believe anything that anyone says anymore? Nicholas Chamfort got it right when he said, "An economist is a surgeon with an excellent scalpel and a rough-edged lancet, who operates beautifully on the dead and tortures the living." But real time economics is people. Now we have new people with new ideas saying, "Yes we can." Well, maybe, but only if you take the proper steps to say, "No you can't " first.

Obama must restore faith in our nation's financial institutions by requiring them to start lending again or face loss of bailout funds.

Fannie and Freddie must be cleaned up, restructured and carefully monitored. If they don't function properly, nothing else will. Our unregulated, shadow banking system must be held accountable if it is to continue have such a strong hold on our economy.

Obama can help hedge funds rehabilitate themselves by strongly advising them to walk and talk like regulated entities unless and until a proper regulatory structure can be implemented. New life can be given to the capital markets if those seeking capital voluntarily include bona fide transparency and welcome scrutiny.

Technology must be used to oversee products, whether exchange traded or not, that are tied to the economy. Regulators can face the new world order if given the technological tools to monitor complex products. Obama can further empower regulators by ensuring them that funding for technologically sophisticated oversight will be a priority.

Finally, President Elect Obama should add the one phrase to his lexicon that really needs to be there -- "No you can't."