RebelCapitalist: Financial Information for the Rest of Us

Just a Pause

Mar 14, 2011 | By: Mr_Blue | Tags: wall street, financial regulation, too big to fail, tbtf, #finreg

The Great Recession, that was instigated by Wall Street, caused great pain for millions of American. But for Wall Street it was just a pause from standard operating procedure. There were no real changes or reforms as a result of the Great Recession. Wall Street is back to its old ways and leading us to the next crisis.

The deepest economic crisis since the Great Depression and one would think that significant changes or reforms would result. Nay. Too big to fail banks are still around and searching for new ways to rip off customers. Wall Street took that $13 TRILLION bailout rebuilt their balance sheets and off they went to create the next crisis. They got theirs and screw everybody else while the rest of us suffer from high unemployment, negative home equity and higher food and gas prices:

Wall Street Profits Rebound. According to report by New York State Comptroller: In 2009, benefiting from bailouts and low interest rates, Wall Street made a record $61.4 Billion profit. In 2010, it is estimated that Wall Street will make approximately $19 Billion in profits more in line with Pre-crisis profits.

More disturbing than the profit situation is that the behavior that lead to the crisis hasn’t changed. Here are three recent examples:

1) Move to ‘Synthetic’ US Junk Bonds - basically what is happening is that Wall Street is using similar derivative schemes used in the mortgage market (that blew up) and applying them to the corporate junk bond market.

2) Invesco Sells Mortgage Swaps as Banks Seek Capital Relief - That’s right Invesco is selling credit default swaps. The same ‘weapons of mass destruction’ that AIG sold in mass. Sure, some experts and Wall Street talking heads would say this is a good sign that risk taking is returning. I say that Wall Street never learned its lesson regarding risk taking and pricing risk. Nothing is stopping Invesco or any other company from issuing several trillion dollars in credit default swaps again. As long as they can make a quick buck before the house of cards comes crashing down again what do they care?

3) Risky loans stage comeback [registration require] - the first paragraph of this story says it all:

Controversial lending practices that proliferated ahead of the financial crisis have made a comeback this year as investors flock to corporate debt that offers either higher yields or the promise of being pegged to potentially rising central bank interest rates.

The problem is that we are still dealing with a massive sector in terms of assets and profits and the return of this risky behavior is far from a good thing. With this size comes two very dangerous things: 1) the ability and motivation to outsmart regulators; and 2) the influence over politicians in both parties. Right now nothing is stopping Wall Street from using both to maintain its position in our economy.

There are things we could do to prevent Wall Street from creating the next crisis. We could break up Too Big to Fail Banks. We could treat basic banking services as a highly regulated public utility. We could impose a transaction tax on financial transactions. We could continue to move our money to credit unions and community banks. We could do a lot more but won’t because of Wall Street’s influence over both political parties.

Good luck.