Going for the Jugular
Not long ago I wrote a piece entitled "New Yorkers...and the Rest of "The Rich Financiers" Under Attack" predicting that nascent movements to taxing Wall Street bonuses and even financial transactions were an indication of a growing backlash against the street that had potentially negative implications for the financial industry and New York City economy. Initially, not a lot of new movement came on this front, although the U.K. government did go through with its rather onerous tax on banker bonuses.
However, in just a few short weeks since that time, the CEOs of several of the largest banks/brokers were invited to Washington for a second proctological exam and the already controversial "Bank Tax" was proposed. I personally was privy to an anecdote which underscores the very real issues behind the attacks on Wall Street. A trader I know recently lost their job due to the closure of a significant Wall Street hedge fund, where illegal activities have been suggested. Contrary to any fears of radioactivity, this trader was almost instantly hired by a previously bailed out bank to trade for customers and run a proprietary trading book (doing both these activities at once seems problematical to me, but apparently not to many investment banks). The trader was given a large bonus guarantee, which I joked, must not have been reviewed by the pay czar. It gets better. When this trader arrived on the trading desk of this large previously bailed out institution, he discovered a total lack of risk management. To wit, when the desk lost money, the policy was to simply sack the youngest guy there - I am not making this up. My understanding is that the newly hired trader was viewed as a risk management guru for implementing risk management policies generally followed by legitimate hedge funds.
Meanwhile the banks have begun to report results for the fourth quarter and full year 2009. It probably doesn't help their case that Goldman clocked in this morning with a monster quarter putting up a headline number of $8.20 per share vs. street expectations of $5.20.
As if on cue, Bloomberg reports that at 11:40 today, the President will propose new rules to limit financial institutions proprietary trading operations. This after a meeting with Paul Volker, the revered ex-Federal Reserve Chairman I quoted in my original piece railing against the inadequate changes to the financial system made thus far post crisis. According to Bloomberg, the Senate seat lost by the Democrats in Massachusetts yesterday, has woken the President up to the fact that the populous could give a grape about paying for universal healthcare, but is currently much more concerned with the economy, jobs and punishing Wall Street for its roll in the downturn.
In case anyone wants to shrug off the potential impacts of restrictions on proprietary trading, I would note that in its quarter reported this morning Goldman's trading and principal investments netted the firm $6.41 billion versus the rather paltry sums of $1.64 billion from I-banking and $1.57 billion from asset management and securities services. (Note that Goldman, which does not need customer deposits to run its business is least susceptible to government imposed prop trading limitations.) Other banks that have reported results in the last couple of days have also revealed that a significant part of their profitability came from fixed income trading, which more than offset the woeful performances in such normal bank activities as lending to consumers, businesses and the real estate market.)
As in my last piece I won't get into a discussion of the economic validity of government intervention into the workings of banks or the financial markets or whether banks should be gambling with depositors money on their proprietary trading desks (or front-running their customers orders for that matter). My purpose here is only to warn you that the backlash is real, re-regulation is highly likely and it will not be good for Wall Street business levels, compensation, or employment. This will be a distinct negative for Manhattan real estate. WE ARE NOT GOING BACK TO 2006.
Posted by wall street
Thu Jan 21st, 2010 02:37 PM
the government messed up. they should've nationalized these banks when they had the chance. the disincentive for outlandish risk taking is failure. instead the government backstops the industry -- a decision that was good for the short term.....but clearly bad in the long term. Now they want to regulate change. Idiots. they should've let the street feel the pain and self correct. this is scary and embarrasing.
Posted by Noah
Thu Jan 21st, 2010 03:48 PM
Jeff,
"It gets better. When this trader arrived on the trading desk of this large previously bailed out institution, he discovered a total lack of risk management. To wit, when the desk lost money, the policy was to simply sack the youngest guy there - I am not making this up. My understanding is that the newly hired trader was viewed as a risk management guru for implementing risk management policies generally followed by legitimate hedge funds."
...can you give a timeframe as to how long ago this story happened?
Posted by Noah
Thu Jan 21st, 2010 03:59 PM
wall street - Im torn on the whole issues. Part of me agrees totally with you and part of me doesnt. If Lehman was the smallest of the Big Boyz, that really was an atom test of sorts and if a CITI or a BAC went the same route, it could have got real real ugly.
But your right. Then the system would be cleansed, the pain felt, mgmt fired, boards wiped out, shareholders losing, bondholders taking haircuts, etc..and we would have seen prepackaged bankruptcies and the biggies put into conservatorship. But where we would have been in that scenario?
Clearly they chose to act now and worry later. Which is the part of me that worries about the things you mention and what Jeff talks about. Talk about moral hazard! In my opinion, with everything guaranteed and a huge carry trade on, at some point another problem will come up if that gravy train derails. where does that leave us?
I think the powers thta be got scared into doing what they did. And a lot of bad decisions were made, under severe pressures that became global with everything interconnected. There will always be second guessing, but the route they took will present unintended consequences that will last years, as Jeff discusses. i dont like how they picked and chose who succeeded and who failed, but in the end, I guess they had more info than me; of course they did. But letting counterparties be made whole, tweaking accounting to allow banks to extend and pretend, suspending mark to market, all that garbage to fudge over the crap is ultimately going to delay the healing process. The quick painful route was not taken. So we might be in for a loooong, unsustainable period of recoveries, double dips and flat markets
Posted by jeff
Thu Jan 21st, 2010 04:44 PM
Noah,
The trader story happened in the last couple of months - post labor day.
Posted by wall street
Thu Jan 21st, 2010 04:56 PM
i'm not going complete Jim Rogers...but just a nationalization where the government wipes out the equity holders and explicitly backstops the debt. i just think that would've given them the explicit control over some of the populist issues they are now attempting to address.....and it would've eliminated all the moral hazard stuff you mention. That said, this is coming from someone who received 100% of my 2008 bonus in cash. i am sure i wouldn't have this strong a view if i got a donut for 2008. Great blog. Thank you!
Posted by lars
Thu Jan 21st, 2010 11:59 PM
All I can say it is about time the White House showed some teeth. And I say this as a retired Investment Banker from a bulge bracket firm.
The Street needs to be overhauled... full stop.
Posted by Thisson
Fri Jan 22nd, 2010 01:36 PM
Coop maintenance fees are going up sharply.
Mine just went up 12%, entirely due to increased property taxes.
This will be another drag on valuations going forward.
Posted by Somewhere Else
Fri Jan 22nd, 2010 01:48 PM
I just heard a whimper. SteveF, you ok?
Great piece, Noah. As usual, I think you nailed it.
Posted by Noah
Fri Jan 22nd, 2010 01:55 PM
well this was Jeff Bernstein that wrote it, Ill pass on your thanks to him!
Posted by anderson
Mon Jan 25th, 2010 09:41 PM
wall streeters are a fraud.
their intellect is subpar, the herd mentality is rampant, their arrogance is beyond belief (i was flying first class next to a overweight hedge fund manager yesterday: the poor soul has to fly to south beach to fool wannabe models)and their complete lack of ethics is appaling.
Let's take the bonuses away thru taxation, the money is ours anyway, they pretend to produce it (fees for alpha)but in reality it is stolen.
this will not in any way alter the NYC real estate bear market.
Posted by coach handbags
Thu Aug 12th, 2010 09:43 PM
As in my last piece I won't get into a discussion of the economic validity of government intervention into the workings of banks or the financial markets or whether banks should be gambling with depositors money on their proprietary trading desks (or front-running their customers orders for that matter). My purpose here is only to warn you that the backlash is real, re-regulation is highly likely and it will not be good for Wall Street business levels, compensation, or employment. This will be a distinct negative for Manhattan real estate. WE ARE NOT GOING BACK TO 2006.