"Wall Street Versus America"

[TJ_98370]

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I'm currently reading Wall Street Versus America, written by Gary Weiss. It's a fairly palatable and funny read that provides a perspective of how Wall Street rips off investors. Among other things, it may make you think that investing in anything but index funds is an act of sheer idiocy.
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In chapter eleven of the book entitled How to Stuff a Wild Hedge Fund, the author recounts the story of David J. Askin and his Granite Partners hedge fund that specialized in Collaterized Mortgage Obligations (CMO's). Granite Partners crashed in 1994. Mr. Weiss then summarizes the story of Long Term Capital Management which was teetering into collapse until the Federal Reserve intervened and bailed out the fund thru the private sector in 1998 because it was threatening to take put the "financial system in jeopardy". I was surprised at the similarities between the recent Bear Stearns disaster and the catastrophes of Granite Partners and Long Term Capital Management. The similarities include the use of price modeling, severe leveraging, and hedging (betting) wrong.
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I absolutely claim no expertise in finance, and the above is probably old news to those who pay attention, but I was amazed at the fact that the current mortgage "crisis" is nothing new. And I am even more amazed to learn that these type catastrophes are apparently allowed to happen on a periodic basis.
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Wall Street Versus is America is a good read and you do not have to be a wonk to appreciate it. I would recommend it to those who are "unsophisticated", like me.
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[TJ_98370]

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[sniglet]

I agree that "Wall Street" engages in a lot of sleezy behaviour, and often acts more like a con-artist than a sound money making institution.

That said, I am reticent to put too much blame for the depression on banks, brokers, and investment banks. The credit bubble was something that ALL segments, and sectors, of society contributed to. Everyone had visions of getting rich in their eyes, and were willing to throw prudent financial thinking to the wind. I can't even count the number of family, friends, and colleagues, who over-extended themselves in debt, and real-estate they couldn't really afford because it was a sure thing.

Even the indigent were happy to get no-doc loans (what did they have to lose?). Appraisers were happy to give rosy valuations, and loan officers didn't mind cutting corners.

To a certain extent, Wall Street itself was forced into reckless behaviour. Any CEO of an investment bank who was following a risk-averse policy would have been fired by shareholders. Who wants to own shares in a bank that is vastly underperforming it's competitors?

It is very appealing to just blame incompetent regulators, or "Wall Street", for this mess because then the madness all becomes explainable, and even fixable. Unfortunately, the root cause of the crisis is much more complex and is related to long-term generational cycles. There will always be a massive bubble every 2 or 3 generations, and a resulting depression, which will once again re-teach the lessons of financial prudence and thrift.

By the way, I have written about how we should blame the "little guy" on my blog at .

[lamont]

For a historical perspective, read "Reminiscences of a Stock Operator" which gives you a window into the pre-SEC stock market.

Some of the games that were played then are now regulated by the SEC, but you can clearly see that some of it still goes on.

Back in early 2007, Goldman Sachs was pumping CDOs while they were starting to hedge and unload. Goldman also came out with a prediction of >$200/bbl oil almost right at the peak of the commodities bubble. It seems like a good indication that a bubble is going to pop is when GS comes out with hyper-bullish recommendations.