Wall Street Crash: One Year After Meltdown, Has Wall St Changed?

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Wall Street, New York, US, 14 September 2009.

Has Wall Street changed, one year after meltdown? Maybe, but it’s pretty hard to see how.

Wall Street, New York, US, 14 September 2009.

Has Wall Street changed, one year after meltdown? Maybe, but it’s pretty hard to see how.

Wall Street, New York, US, 14 September 2009.

Has Wall Street changed, one year after meltdown? Maybe, but it’s pretty hard to see how.

This week marks the first-year anniversary of the bloody mid-September 2008 weekend that saw a) the unprecedented bail-out of insurance giant AIG; b) the sale of “bullish” icon Merrill Lynch to the Bank of America; and c) the disappearance of pre-Civil War investment bank Lehman Brothers – a concatenation of events that made clear beyond a shadow of a doubt that something was deeply rotten on Wall Street.[br]

But despite the cataclysmic upheaval in the US and global financial sectors these events either initiated – or symbolized – or both, and the ensuing havoc in the “real economy” that sector is supposed to service – above all, by insuring a steady stream of credit – one year later, it’s a little hard to tell exactly, as Aretha Franklin sang, “who’s zoomin’ who”.

To be sure, around 10 per cent of jobs there have been lost – and a credit crunch of truly global proportions has resulted in massive unemployment in almost all sectors but finance, as “The Great Recession” has seized hold in nearly every “real economy” around the world.

But a disturbing litany of immediately visible facts makes it hard to avoid the conclusion that the situation on Wall Street one year later is, in the immortal words of Talking Heads’ “Once in a Lifetime,” “same as it ever was … same as it ever was … same as it ever was …”:

The category of financial institutions deemed “too big to fail” – TBTF, for short – has now become enshrined as the dominant principle of both private activity and, more importantly, government policy in both the Bush and Obama administrations.


  • In that context, the biggest banks – above all, Goldman Sachs, followed closely by JP Morgan Chase – have formally moved out of “investment banking” and now have formal protection from the Federal government – without appreciably changing the strategies that created the disaster in the first place – see this shocking piece on their latest venture, “Death Scam Derivatives”.
  • Just a few hedge funds – widely seen as the most rockin’ and rollin’ of the gamblin’ speculators – have closed, while the vast majority remain open for business in the same way they were before last September.
  • Compensation in the financial sector has surged back to pre-“bloody weekend” levels, notably, again, at Goldman Sachs, whose 30,000 employees will take down an average of $700,000 in annual salary.
  • Changes that at one point seemed inevitable – like pay caps or limits on bank size – are now barely discussed, having elicited massive resistance from the finance sector and their representatives in the US Congress.
  • A weak package of regulatory overhauls timidly advanced by the Obama administration is likewise seen as having a difficult, if not impossible, passage through that same Congress of money-, er, finance-loving politicians.
  • And perhaps most disturbingly, the financial / political complex seems to have successfully rebuffed even superficial controls over the most deeply questionable financial instruments – unregulated derivatives, which turned an entirely containable problem in the sub-prime US housing market into a world-convulsing economic disaster.

In the days that followed that shocking weekend, as the New York Times recently put it “nearly everyone agreed that Wall Street was due for fundamental change. Its ‘heads I win, tails I’m bailed out’ model could not continue. Its eight-figure paydays would end.”

But somehow that predicted revolution in Wall Street’s fundamental practices still has yet to eventuate, for reasons we’ll analyze in the next installment of our series on the “The Meltdown”.

Even now, though, the potential implications of that failure to make even minimal change in finance sector dynamics leads some acute observers to argue yet another cataclysm is now almost impossible to avoid in the short- to mid-term future.

In the view of Simon Johnson, professor at the Sloan School of Management at MIT, and former chief economist of the IMF, the seeds of another collapse have already sprouted.

According to Johnson, if major banks are allowed to keep making bets that are ultimately backed by taxpayer guarantees, they will return to the practices that led them to underwrite trillions of dollars in bad loans. “They will run up big risks, they will fail again, they will hit us for a big check again, and no one is doing anything about it,” he said.

Even some senior Wall Street executives acknowledge the lack of change surprises them, given how poorly the industry performed last fall and the degree of government support necessary to keep it from collapsing.

“There was a feeling that an enormous amount of additional regulation should be put in place to prevent what happened that weekend from happening again,” noted one “Street” insider. “So far, we haven’t seen that.”

Kenneth C. Griffin, founder and chief executive of Citadel Investment Group, a Chicago-based hedge fund, said regulators and lawmakers needed to create a process for large failing banks could be shut, just as the FDIC closes down smaller banks, rather than allowed to operate indefinitely with taxpayer support. No more TBTF in other words.

“We’ve taken a lot of steps for the worse in terms of the structural underpinnings of our capital markets,” Mr. Griffin said, who emphasised that he thinks every rescue measure makes the long term situation worse. “We have to change the rules and correct the underlying flaws our the financial system.”

But Yale economics professor Robert Shiller, who predicted the dot-com crash and housing bust, said the window for change may be closing. “People will accept change at a time of crisis, but we haven’t managed to do much, and maybe complacency is coming back,” Professor Shiller said. “We seem to be losing momentum.”

And we’ll start looking at the reasons for that in our next installment.

David Caploe PhD
Chief Political Economist, EconomyWatch.com
Minerva School / ACALAHA


About David Caploe PRO INVESTOR

Honors AB in Social Theory from Harvard and a PhD in International Political Economy from Princeton.