It Could Be Argued that the Financial Industry Occupation Started in 1970

 PART ONE OF A TWO PART VERY GENERALIZED VIEWPOINT ON HOW THE FINANCIAL INDUSTRY WAS ALLOWED TO DETERMINE THE DIRECTION OF AMERICA



Prior to 1970 the New York Stock Exchange prohibited investment banks from going public.  They were  either partnerships or closely held private corporations.  The NYSE relaxed this rule in 1970.  This opened the floodgates for investment bank IPOs beginning in the 70s and 80s.  It allowed them to raise huge amounts of capital against which to borrow for investing with leverage.  It assuredly also spurred the business model of massive reward for short term performance.  The new standard of  setting aside nearly 50% of earnings for salaries and bonuses for non-partners germinated here.  The need for rather conservative stewardship of partner's fortunes was over, replaced by adventurous risk taking  Of course, the later proven-faulty risk management provisions were also established to control it.  The latter part of the 20th century spawned the growth of all kinds of financial products and instruments that torture us today.  Created the chance-taking trader in search of great riches with little to lose if it didn't work out (or if fired - come out well ahead).

By 1999 all the now-despised Wall Street heavyweights had gone public - Morgan Stanley (1998) and Goldman Sachs (1999) being the last.  I'm sure the decisions made by these last two holdouts were based on the forthcoming change in the US from fractional to a decimal based trading system.  This required substantial investment in computerization to provide the required instantaneous bid/quote spread and speed to profitably address it.  It fostered the growth and need for technical talent, financial engineering, computer programs with resultant algorithms - generally a new type of skill set to compete in the new information age driven by the internet.

This profound transformation was accompanied by the ascension to power of two of the most destructive individuals in the history of finance/government.  Federal Reserve Chairman Alan Greenspan and Treasury Secretary Robert Rubin.  Greenspan tumbled from a widely respected Fed Chief to a tragically misguided clown at the end of his tenure.  His legacy was to intensify the Fed's subservience to Banks, implement misguided monetary policy feeding bubbles (lastly the disastrous real estate bubble), to ultimately encourage recklessness and then proceed to not even recognize the bubbles he so greatly helped create.  He also formed a tag team with Rubin to promote deregulation of derivatives and other dangerous products in the mistaken belief that markets can be effectively self governed.  (Rubin's successor Larry Summers also lent his support and influence).  These three, along with Bank lobby-bought politicians such as Phil Gramm were greatly responsible for shepherding through perhaps the most damaging financial related legislation in history.  The Glass-Steagall Act so important to the stability of markets was repealed in 1999.  (Thanks Congress - good work).  No longer were the Investment Banks required to be separate from commercial banking operations.  The Gramm-Leach-Bliley Act became law.

Like the ability for Investment Banks to go public, the Investment Houses jumped all over this.  They all changed to bank holding company status.  J.P. Morgan Chase, Bank Of America, Lehman Brothers, Bear Stearns, Citigroup, etc - followed by Morgan Stanley and Goldman Sachs to complete the foul mess by 2008  Their dream had come true.  Their control and influence had  become fully solidified.  They got permanent access to the discount window and associated access to liquidity and funding.  The public was then subject to their cynically comical stated reasons for pursuing the change in status.  The "stability, flexibility and opportunity to better serve clients under regulatory supervision that the Fed provides with its full prudential supervision" etc.  What a blasphemous way to describe the creation of moral hazard and the term "To Big To Fail".  The only member of this august group to actually be allowed to fail was Lehman Brothers - and a 600 page book could be written to cover all the true reasons for that.   Needless to say, Hank Paulson, Ben Bernanke and Timothy Geithner later took Congress hostage by deciding that should never happen again.  And Congress continued on with its record of subservience to the Banking Elite.  A situation still existing today.


PART TWO OF THIS PIECE WILL BE FORTHCOMING SHORTLY