Below is a quick take on the context of the Goldman bruhaha and financial regulatory reform.
The “factors that moved Wall Street from the old model to the new” don’t get talked about much …
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IBD: Goldman Case Marks Shift On Wall Street, 04/21/2010
Once upon a time, Wall Street’s leaders saw themselves as arbiters of capital, helping allocate society’s savings to productive uses.
By contrast, Wall Street’s major firms now see themselves as captains of “the market,” navigating it — for themselves and sometimes their clients — for maximum gain.
This is a distinction with a difference.
As arbiters of capital, Wall Street was paid to make judgments. It tutored investors on which stocks to buy, advised companies on which mergers and acquisitions to pursue. It decided which companies deserved capital through the sale (“underwriting”) of new stocks and bonds to investors. Wall Street made money through fees and commissions.
Now the prevailing model is different. Wall Street firms still give advice — and earn fees. But their main business is trading for their own accounts and creating trading opportunities for clients.
About 80% of Goldman’s $12.8 billion in Q1 revenues came from its trading and proprietary investment accounts. The rest represented underwriting, financial advice and management.
Greed and shortsightedness didn’t originate yesterday. Wall Street’s old model bred abuses. Brokers “churned” clients’ accounts to generate commissions. Investment bankers earned fees by rubber-stamping dubious mergers. Underwriters blessed poorly managed firms or companies with no real businesses (remember the dot-com bubble). And there were swindles.
Many factors moved Wall Street from the old model to the new:
- the end of fixed commissions on trades, which squeezed revenues;
- computer technology, which made rapid trading and exotic financial instruments possible;
- the replacement of partnerships with publicly held firms. When partners were individually responsible for a firm’s losses and mistakes, they restrained excessive risk-taking.
These changes won’t be reversed. But if Wall Street can’t control itself, someone else will.
Full article:
http://www.investors.com/NewsAndAnalysis/Article.aspx?id=530938
The Homa Files 