The stunning reality is that five years into the financial meltdown, it’s business as usual on Wall Street – outlandish rewards for insiders with downside for almost everyone else. Occupy Wall Street protesters are right – something is wrong – but they’re not sure what. Here’s what I say: A rigged game affects not just the 99 percent, but everyone, and with global repercussions.
For capitalism to work, people who assume risk should reap the rewards of success, but they also must suffer when losses occur.
If you’re unconvinced, let’s revisit the latest debacle – the implosion of yet another Wall Street darling, MF Global. The fallout of its bad bets on European bonds is hitting home hard, even in rural America, where many of its agricultural customers work. As the eighth-largest bankruptcy filing in U.S. history, MF Global represents just about everything that is wrong on Wall Street.
1. The cult of a Wall Street superstar: In 2010, Jon Corzine, the former chairman of Goldman Sachs and former governor of New Jersey, became CEO of MF Global. His goal was to transform the little-known futures broker into a powerhouse investment bank. It took him only 19 months to blow up an institution that dates back to 1793.
2. Gambling disguised as investing: Speculation ruled, once Corzine got going. MF was not after long-term returns but an immediate killing. In the midst of the euro crisis, it made an astonishing $6.3 billion bet on European bonds. But the bonds declined, putting the company’s very existence on the line and taking down its customers too.
3. The bail-me-out syndrome: MF’s management must have thought there was no way it could lose because surely the Europeans would bail out the weaker countries so they wouldn’t default on the bonds. Imagine MF’s shock when the huge bailouts didn’t materialize.
4. Enormous conflicts of interest: The Commodity Futures Trading Commission, chaired by a former Corzine colleague at Goldman Sachs, was supposed to ensure that MF kept customer funds segregated from the firm’s own investments. But apparently, the commission didn’t act when signs of trouble first appeared or start enforcing restrictions until $1.2 billion had vanished from customer accounts.
5. Leverage on a grand scale: Some investment banks scaled back their borrowing after the financial meltdown, but not MF Global. It continued leveraged investments at pre-2008 levels – reportedly at a rate of 40 to 1. Excessive borrowing allowed management to go for the big score, but proved fatal when the markets moved against MF’s bets, requiring more collateral.
6. Failure of regulators and the reform law: Where was the oversight by the Securities and Exchange Commission, the CFTC and FINRA, the largest independent regulator of security firms? Reforms such as the Sarbanes-Oxley and Dodd-Frank protection laws had no effect.
7. Misappropriation of client funds: Investigators want to know how MF tapped clients’ segregated accounts for $1.2 billion to cover its financial losses. After it declared bankruptcy, 33,000 clients found their accounts frozen. How would you like that in today’s volatile markets? Shouldn’t someone do jail time instead of getting a slap-on-the-wrist fine?
8. Worthless rating agencies: Post-meltdown, it’s the same old game – investment firms hire rating agencies to rate their own debt. In August, MF was rated a good investment. Within 60 days, the firm declared bankruptcy.
9. Golden parachutes soaring high: Corzine didn’t risk much of his money on MF stock, but he received lots of stock options. Later, after taking home compensation of $14.25 million in 2010, he voluntarily declined his $12 million golden parachute. Why is he entitled to anything extra for leadership that resulted directly in bankruptcy?
10. Breakdown of morality: Even if something is legal, that doesn’t mean it is right. MF’s management crossed the line for their own potential gain – putting personal interest ahead of protecting shareholders and customers.
Wall Street will keep sucking huge sums out of our economy and putting 100 percent of us at risk unless the rules change. Stiff jail time if you cheat or steal. Whopping personal fines paid by wrongdoers, not their corporations. Fireproof walls that protect customers from a firm’s risky bets. Most important, we must stop gambling and start investing again to build valuable companies. Unless we take back Wall Street and restore true capitalism, we’re living with a time bomb. The next crisis will make 2008 look like a warm-up.
via Wall Street – a raw deal for the 100 percent.